Nucor Corp (NUE) — Q1 2015 Earnings Call Transcript

Good afternoon. Thank you for joining us for our conference call. As always, we appreciate your interest in Nucor. With me for today’s call are the other members of Nucor’s senior management team: Chief Financial Officer, Jim Frias; and our other Executive Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Joe Stratman, Dave Sumoski, and Chad Utermark. The entire executive management team would like to thank everyone on our Nucor, Harris Steel, David J. Joseph, Duferdofin, NuMit, Steel Technologies and Skyline Steel teams for working hard, working smart, working together and most importantly working safely to take care of our customers in the first quarter of 2015. The current steel industry challenges are significant, whether it's a short-term challenge such as energy and industry turbulence or a structural challenge such as excess global steel capacity and the Nucor team always runs totally with the challenge, not away from it. We address the challenges we face head-on. Times of adversity allow us to demonstrate the strength of Nucor’s business model with our reliable competitive advantage and the adaptability Nucor grows stronger during periods of industry distress. Achieving that goal is the unrelenting focus of more than 23,000 Nucor teammates each day as they continue their excellent work implementing our company strategy for long-term profitable growth. I will now ask our CFO, Jim Frias, to review Nucor’s first quarter performance and financial position. Following Jim's comments, I will update you on current market conditions and execution of our strategy for long-term profitable growth. Jim?

Thanks, John. First quarter of 2015 earnings of $0.21 per diluted share compared favorably against fourth quarter of 2014 earnings of $0.65 per diluted share and year-ago first quarter earnings of $0.35 per diluted share. The profitability of our steel segment for the first quarter of 2015 declined approximately 46% compared to the fourth quarter of 2014. An unprecedented level of imports flooding the domestic market in late '14 and early 2015 has pressured steel selling prices, margins, and volumes for all of our steel mill products. The hard rolled sheet market is the weakest as a result of the combined impact of surging imports and severe inventory correction underway in the energy pipe and tube sector. Capacity utilization in our steelmaking operations fell to 65% in the first quarter of 2015 from the fourth quarter's rate of 76%. Not surprisingly, our sheet mills experienced the largest decline quarter-over-quarter in production and shipments. Nucor sheet mill shipments decreased 14% over this period, which compared to an 8% decline in total steel mill shipments. Steel mill profitability was also impacted by continued erosion in selling prices that outpaced decreases in raw material costs. A decline in steel selling prices exceeded the reduction in our composite scrap and scrap usage cost which were $39 per ton quarter-over-quarter. Average sales prices dropped $70 per ton per plate, $67 per ton per beams, and $49 per ton per sheet. The first quarter of 2015 performance of the raw material segment includes an operating loss of approximately $44 million, or $0.09 per diluted share, at our new DRI facility in Louisiana. That is larger than the approximately $35 million operating loss, Newport Steel, Louisiana experienced in the fourth quarter. Our Louisiana team has completed repairs and adjustments to the process gas heater that failed in November of last year. Operations resumed during the last week of the first quarter. On the positive side, our downstream product segment continues to capitalize on the slow but steady growth underway in non-residential construction markets. As expected, this segment's first quarter profitability decreased from the fourth quarter level due to typical seasonal factors. However, compared with the year ago quarter, segment pretax profitability increased to more than $32 million from less than $2 million. Particularly strong profit improvement was achieved in our joist and decking and metal building systems businesses. A quick comment about our tax rates, which can be confusing due to the impact of profits from non-controlling interests. After adjusting our profits belonging to our business partners, the effective tax rate was 33.9% for the first quarter. Nucor's financial position remains strong. Our gross debt-to-capital ratio was 36% at the close of the first quarter. Cash and short-term investments totaled $1.3 million, including our net debt-to-capital ratio at approximately 28%. Our next significant debt maturity is not until December 2017. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn and does not mature until August of 2018. Nucor is the only North American steel producer to hold an investment grade credit rating. Nucor continues to generate very robust operating cash flow throughout the cyclical ups and downs that characterize the steel business. With our highly variable cost structure, we benefit from significant reductions in working capital during downturns. That was the case again in the first quarter of 2015, with cash provided by operations of $564 million, a dramatic increase from the year-ago first quarter. Our strong cash flow will obviously increase our liquidity and retire the year-end 2014 commercial paper balance of about $150 million that was issued to fund a portion of Gallatin Steel acquisition in the fourth quarter of last year. First quarter of 2015 capital expenditures totaled $70 million. We continue to estimate full-year 2015 capital spending will be approximately $500 million. Most of our recent largest scale growth projects have been completed or are nearing completion. Depreciation and amortization for 2015 is expected to total about $700 million. John made an excellent point about the strength of Nucor's business model. It is one that enjoys competitive advantages and a degree of flexibility that cannot be matched by any of our competitors in the North American steel industry. Nucor's strong balance sheet, consistently healthy cash flow generation, and conservative financial practices are critical components of our business model. Times of adversity, such as what our industry is currently undergoing, once again highlight the strength and value of Nucor's significant competitive advantages and superior adaptability. Our focus is not on survival but on growing stronger. Earnings in the first quarter of 2015 are expected to be somewhat improved from the first quarter. The second quarter should be followed by further improvement in the second half of 2015, given the ongoing strength of non-residential construction and its impact on our steel mills and downstream businesses. Non-residential construction activity accounts for more than half of end-use demand for our products. Margin in the steel mill segment are expected to improve, although we will not realize the full benefits of lower raw material costs until there is greater stability in steel pricing. As service center destocking runs its course during this transaction period, steel prices are expected to stabilize and rebound. Second quarter performance at the raw material segment will reflect continued high losses at the Louisiana DRI facility and the impact of a nearly completed one-month maintenance outage at our DRI facility in Trinidad. The Louisiana plant has resumed production and is consuming higher-cost iron ore that was on hand when the plant suspended operations following a failure in its process gas heater in early November. Our steel product segment is expected to achieve continued improvement in profitability during the second quarter. All three major fabricated construction products—joist and decking, fabricator rebar, and metal buildings—are experiencing significant year-over-year gains in bookings backlogs and backlog margins. Over the past several months, our transits have increased at the overall U.S. non-residential construction market, which is set to deliver square footage growth in the range of at least 7% to 8% in 2015. Such a growth rate would still place the market almost 40% below the peak level of 2007. Whatever short-term economic and steel industry conditions we face for the remainder of 2015, our horizontal rival position of strength will allow our team to continue to execute on our improvement strategies for delivering profitable long-term growth in shareholder returns. We appreciate your interest in our company. John?

Thanks Jim. Nucor’s culture has always been defined by our willingness to tackle and overcome challenges. We don’t ignore problems—that's not an effective strategy for success or even survival. We have confronted challenges. We find ways to grow stronger while fixing or mitigating the problem. During the first quarter, unprecedented volumes of steel and joists continued to be a major challenge for our industry. Blatant foreign government support of their steel industries has resulted in a glut of global steel production. A brazen disregard of international trade rules has led to the dumping of steel products in our market. As a result, one in three tons of steel sold in the U.S. today is produced abroad, by less efficient, less safe, and less environmentally friendly countries. This is a real crisis for our industry. We are attacking this issue head-on and fighting back. Nucor is working on a bipartisan basis with members of Congress and with the administration to ensure that we have strong and effective tools to combat unfair trade. If Congress passes trade promotion authority legislation by authorizing the President to enter into free trade agreements, we believe the bill must be balanced with the strongest possible trade enforcement mechanisms so that steel and other industries have the tools we need to fight against this blatant disregard for international trade rules. There is substantial support from both Democrats and Republicans for doing this. Additionally, the administration must be much tougher with countries that break the law. We have a set of rules governing trades. We follow those rules while foreign countries and producers break those rules, and there must be meaningful consequences. Applying tariffs and other remedies is simply holding governments accountable for the agreements that they signed. To that end, Nucor continues to assess market conditions and will be proactive and aggressive in pursuing trade cases when and where it is appropriate. I will now update you on some of our team's organic growth initiatives underway to improve our long-term cost position and expand our product portfolios to include more value-added, higher-margin offerings that are less impacted by the tsunami of imports. After restarting operations at the end of the first quarter, Nucor Steel Louisiana is once again producing DRI at world-class quality levels that our team established prior to the equipment failure. It is important to note that the process gas heater is not part of the DRI technology utilized by Louisiana, but is ancillary industrial equipment required by the operating plants. During Louisiana's just completed shutdown, modifications to the process gas heater's original design were implemented to prevent the reoccurrence of a similar failure. One significant modification was the installation of two large dampers to enable the process gas heater to control its cooling rate, which will expand the life of the tubes that have failed in the past. Another significant modification was the addition of a nitrogen flushing line to the outlet of the heater to significantly reduce any collateral damage in the event of any future failure. Louisiana has been a challenging start; nevertheless, it is a major step forward in the implementation of our long-term strategy to optimize our iron unit process. In fact, we believe it has already provided short-term benefits. The presence of our Louisiana DRI facility, which produced 1.3 million tons last year and is preparing to resume production at the end of last quarter, was a meaningful factor supporting February's dramatic price adjustment of more than $100 per ton in scrap price. That very much supports our belief in the long-term benefit of our DRI investment. In the first quarter of 2015, our Hertford County, North Carolina plate mills, which recently added heat treating and normalizing assets, continue to run at full capacity of approximately 245,000 tons annually. The Hertford County team is capturing a growing share of value-added and higher-margin plate products. Relative to an investment of approximately $150 million, our value-added capabilities both incremental pretax profit that should average $200 per ton through this cycle. During the first quarter, the first field installation of Nucor's new Berkeley piling sections was successfully completed. This new product is the result of a $115 million project we started off in the fourth quarter of last year. Our customers will benefit from this new domestic piling solution as they pursue Buy American government-funded infrastructure projects. Nucor's expanded product portfolio will also create valuable synergies with the other products and services bolstered by the Skyline Steel piling distribution business we acquired in 2012. Our goal over the next several years is to grow our wider piling sections annual volume to 100,000 tons, with combined steel mill and distribution pretax profit potential of approximately $450 per ton. Momentum continues to build at Nucor's Berkeley $98 million wide-lake capital project that started in early 2004 and has shipped approximately 120,000 tons last year. We expect to ship about 200,000 tons of the new products in 2015 and eventually grow volumes to at least 300,000 annually, with the pretax profit averaging $100 per ton through this cycle. Berkeley now has the widest hot-rolled gage capability of any sheet mill in the Southern United States market and with the finished width capability of up to 72 inches. Of particular importance, the upgrade allows Nucor to produce thinner high-strength steel grades that we plan to use to develop lightweight automotive applications. As I said earlier, these are just some of the growth initiatives. I look forward to updating you again next quarter on our progress implementing our strategy for profitable growth. Here are some of the reasons why I believe Nucor will continue to deliver profitable long-term growth and industry-leading returns on capital. Our low and highly variable cost structure is Nucor's bedrock competitive advantage. We understand that to generate attractive returns in a commodity business, you have to be a low-cost producer and see continual improvement in the cost structure. Our balance sheet strength and through-the-cycle cash flow generation underpin our long-term focus and ability to take advantage of profitable growth opportunities, particularly during cyclical downturns. Our upstream vertical integration into raw materials enhances the profitability and flexibility of Nucor's core steel-making business. David J. Joseph Company's unmatched global raw material supply chain, combined with our investments in DRI and scrap dealers, is Nucor's best-in-class capability and flexibility in optimizing our largest single cost item, iron units. Our industry-leading product and market diversity continues to grow as we move up the value chain in all of our businesses. Our downstream vertical integration into value-added steel products enhances the profitability and flexibility of Nucor's core steel-making business. Our expanded channel market such as Harris Steel, Steel Technologies, and Skyline Steel increases our ability to compete with unfairly traded influences by expanding our opportunities to add value to our customers. Our commitment to achieving commercial excellence by leveraging Nucor's competitive advantages such as product diversity and operational flexibility to create more value tools and build stronger relationships with each of our customers. And most importantly, Nucor's employees are the right people. They embrace the Nucor culture's pay-for-performance philosophy and cash the continuous improvement and taking care of our customers, plus shareholders, and their fellow teammates. That is why they are the company's greatest assets and our greatest competitive advantage. As has been throughout Nucor's history, our company’s best days are head of us. Thank you for your interest in Nucor. We would now be happy to take your questions.

Good afternoon.

Good afternoon, how are you?

Good. Hey John, can you help me bridge the gap between the commentary around non-residential construction improvement and the shipment levels in the first quarter? If I look at some of the key categories and structural and even in the joist and decking and the bar businesses, there is some fairly healthy decline year-over-year. Could you just give us some color on what that is driven by? Is that mostly an import issue or is it timing?

Well, it's actually a combination of imports and timing. You're comparing it to the first quarter of 2014. At the beginning of 2014, we were looking at a situation where, as you said, imports were much lower, service center inventories were down, and we were going into a year where non-residential construction was projected to be up. Frankly, in the first quarter, we were talking about price increases that were out there. So, you know, the combination of all of those resulted in much higher order rates in the first quarter of last year compared to the first quarter of this year.

Okay. And then if you look at the full-year expectation—square footage is expected to grow about 7% to 8% this year. I mean outside of the first quarter issue as it pertains to destocking and imports, would you expect that these categories should grow about in line with that pace?

Again, taking imports out of the equation, if we see the growth that we are projecting in non-residential construction, we should see volume increases compared to the first quarter, particularly as we move out of the seasonal issues that are affecting the first quarter in a lot of our business, particularly when you look at some of the downstream businesses such as Harris, where frankly the type of new construction work in the first quarter of January and February in many of our Harris facilities are located in Canada, just to kind of amplify the situation. So we do expect it to improve as we come out of the first quarter, weather conditions improve, and we see the expected increase in non-residential construction.

Okay. And just secondly on DRI understanding that we've got high-cost inventory to work through and that impacts unit cost in the outage as well, if we imagine a scenario where we stay in the sort of 260-275 pig iron environment and iron ore at $50, can you give us some sense of how we should think about profitability of DRI at full production? Is it profitable meaningfully at that level?

It would be cash positive at those levels. When you're talking about pig iron at $250, we do transfer our DRI on a pricing mechanism that's based upon pig iron, and I would say that at the level of about $250 for pig iron, we are cash positive. I would also point out that I'd be quick to say that I personally believe $250 for pig iron is an unsustainable level. It's a result of some significant and unusual currency issues and geopolitical issues, so I personally would not expect that to stay at that low level long-term. Having said all of that, we have said from the beginning when we talk about the DRI project that over the course of the cycles, there are going to be times when we get singles, times when we get doubles, and sometimes when we get grand slams. We talked just last quarter about the very positive contribution from our Trinidad operation when pig iron was at a more normalized rate, and we expect to be back up to those levels again, and we expect to see very good returns on our DRI investment when that occurs.

Alright, thank you gentlemen.

Yeah, hey, good afternoon.

Good afternoon. Timna, how are you?

I am okay, thanks. I wanted to make sure I can understand what happened between your initial qualitative guidance to the quantitative guidance to the beat. Can you just talk us through what changed in your assumptions or what changed in the market environment to change the outcome?

Certainly, we can do that. As always in these things, there are many factors, but the key one that drove all this was, frankly, the steel performance; the performance of our steel mill improved. In forecasting, we underestimated the impact that we would have on our margins on scrap pricing going down. We got to realize the lowest scrap price quicker, and frankly in some of our products, we had higher volumes. So the combination of an improved margin relative to our forecast and some volume increases above our forecast led us to beat the forecast as you mentioned.

Okay, so two questions just to finish up then. One, why did prices fall less in sheet than they did in the plate and beams? That's a very high profile to see how much sheet prices have fallen recently, but plate and beams I thought would fall on just more recently with the $100 scrap moving just in February. So why did you see plate and beams fall more than you did in sheet in the quarter?

One element that you have to take into account when you answer that question is that some portion of our sheet businesses is on quarter-over-quarter contract pricing that is based on some mechanism. So when you—there is a lag time before you see that decrease in those contract pricing. I would also point out that although the import situation is very serious on sheet product, particularly plate has been an unbelievable tsunami of imported plate over the last two quarters. Of course, that had a dramatic impact on pricing of the plates.

Okay. That’s helpful. And then the only thing that I want to ask is just, maybe it's philosophical, but now I'm just surprised at how I know prices always overcorrect in a down market. But why would a company like—and many like yourselves, you have some flexibility to ramp down, continue to produce at these very low prices and to match imports? Isn't there a price at which you say, 'No, I don't want to make that lower margin and I'm going to hold out and if the prices are expected to recover?' Why is everybody, including yourselves, I guess, continue to produce and offer these low price tons at import levels? Is that import equivalent level, what do you think?

Well, so it's balanced. You want to look at your facility, which obviously impacts your fixed cost of that facility—that's one issue. Secondly, we need to take care of our customers. We don’t want to give up market share; sometimes when you lose a customer or lose a business opportunity, it's hard to regain it. Our customers count on us being there, even when it's a difficult pricing environment. So there are just a couple of reasons that we continue to operate. I'll also point out that Timna, and let me know if I didn't answer that question—if I did, tell me what you wanted to hear on that. But given the radical change in the scrap cost, which we frankly believe is coming because of the large gap between scrap pricing and iron units, we felt that we could work our way through those tough times, keep our customer satisfied, maintain our market share, not lose good opportunities, knowing that we would ultimately be able to, as a result of our scrap cost going down, correct our pricing and get it closer to the market to the imported price and maintain a margin.

That makes sense. Thanks for the answer.

Hey, good afternoon, guys.

Hey Evan, how are you?

Good. My first question is on trade. So it seems like you're taking kind of a two-pronged—or maybe the industry is taking a two-pronged approach to trade issues. One is just putting together a trade case and keeping at about on flat rolled. But the other is on the legislative front. Senator Brown has got these level playing field rules that is, I assume, trying to attach the TPA at this point. So it seems like maybe there is a chance you get some of these rules that would actually change the way that harm is measured in the U.S. through in the next few months here. How do those two things impact one another? So my question is, would you wait to file a trade case on flat rolled if you think it could maybe change the rules at the ITC on the harm decision or are those completely independent?

When we fight, we use both of these approaches. Those are two-pronged approaches, and we're going to use both of those prongs to achieve a level playing field, so that our teammates can be successful, which we know they will be on a level playing field. I've mentioned on the last couple of calls that we're gaining traction in Washington on both of those fronts. I do think we are getting a much better reception. People are beginning to understand, I believe, people are beginning to understand the impact of these illegally traded products on our industry and on our teammates—steel workers in general. It's about focusing and pursuing trade cases when it’s appropriate and moving forward on the legislative front at the same time. We see great opportunity, frankly, on the legislative front, particularly with the TPA discussions that are going on today, and we are pushing very, very hard to get good reception on both sides of the aisle to the concept that if TPA is going to be approved, it must be approved with strong trade language to protect our industries and give us the ability to better and more effectively and more proactively combat illegally traded products.

Great. And then just maybe on the trade case. What's kind of your outlook there on timing? It seems like it's been a pretty weak first quarter from most folks at this point, and the second quarter probably for most folks will also be fairly difficult. Do you think the case is ready to bring at this point or do you need to demonstrate more harm before the industry is comfortable filing?

Let me be clear: we will continue to assess the market, and we will implement the trade case at the appropriate time.

Okay. And then maybe just one last one quickly on scrap. What's your view for the upcoming months? It seems like flow has maybe somewhat picked up a little bit, which would be negative or maybe demand is coming back. Where do you think it all shakes out?

Well, frankly, our forecast will be pretty flat for the rest of the year. Obviously, when you talk about scrap, there are always slight variations in different regions. We expect some movements in different regions—up 5, down 10, and so forth—as we go through the year. But overall, as you look at the year as a whole, I think we're going to be pretty flat on scrap prices.

Great, thanks. With that, I'll turn it over.

Good afternoon, everyone. Thanks for taking my questions.

Good afternoon. How are you?

I'm alright, alright. Let me ask how much of your lead time is improved today say versus the bottom of this previous quarter. And how deeply are you sold into May and June, particularly as you're expecting much better results in the downstream segment looking at?

Well as we mentioned in the script, this is a quarter of transition. So we're not quite sure when we'll see that actual kick in today. I would say a very modest improvement in lead times, very modest, frankly not significantly over the first quarter. I would expand it to go across, say, I would apply it in all of our products. Now the one exception I would add to that is in the sheet side on the galvanizing and cold-rolled products, those lead times are longer and we still see pretty strong demand in that area.

Alright, and kind of following up on that and on your volume expectations, gradual construction in order to meet improvements. When you're looking into this transitional second quarter, is the improvement in earning really going to be mostly a margin expansion story on the realization of scrap cost or could you see some real volume improvement?

I would say it's a combination of the two. And again, to give me it out further than that is very difficult to do. But I would say that it was a combination of both.

Got it. Appreciate the time, gentlemen. Thank you.

Thank you.

Hi, can you hear me?

I can hear you great.

I'm good, thanks, yeah. I was just wondering what your capacity utilization is right now. If there was 65% on average for Q1, would it be lower than that now?

It's about the same. I can't speak to what it is exactly today, but so far we are about the same.

Yeah, okay. And is that—I mean, I guess I'm just wondering what the recovery profile of that is? Should we basically be watching imports coming off to drive that back up?

Well again, there will be a number of factors. Imports beginning to drop off. Although we have seen—and I want to stress that it's going to be a while before we see that drop off. Although we've seen a slight decline in licenses, it was so much out there in the pipeline that this is going to take—and so much has already reached the service centers and just filled up their inventory. It's going to be a while before we work our way through that. I can tell you that for the first time this month, in numbers that just came out on service center inventories, we see them coming down just a little bit, but imports are some—it's certainly something to watch. There are other factors too, particularly on our sheet business when you want to look at oil prices. Now I can't tell you when it's going to recover, but certainly we've seen a tremendous impact on our flat-rolled business as a result of oil pricing going from $150 to $50. Our volumes are way down—same situation there; we flooded the pipeline with material. There has been a complete stop as they work their way through this inventory. At some point, maybe in the third and fourth quarter, we'll start working our way through that inventory and we will see order rates that are consistent with new normal drilling levels that are expected with the lower prices. Another thing you can keep your eye on is currency; obviously the strong dollar has an impact on what's happening both on our raw material side and on our steel shipment side, and it relates to imports and other factors. So I tried to give you a couple of things that you can keep an eye on, but there are a multitude of things that we have to watch and see what's going to happen as we go forward.

That’s good color. I mean, I understand it's a six-month thing but I understand it's dependent on all of those factors. I guess on scrap prices, I have been a little bit surprised that no one is expecting much more weakness there given we have seen continued iron ore weakness. So I guess just on scrap, what’s the confidence of that? We've got some pricing stability for a while here?

Well, I mean all I can tell you is my confidence level. We gave you our projection; we believe in that projection, and we think that it's going to be fairly stable. Right now, iron ore pricing fluctuates a little but it's been relatively stable also. If there is a dramatic change in iron ore pricing, it might have an inflection in scrap pricing, but we don’t see that at this time.

Okay, thanks.

Yes, good afternoon.

Good afternoon, Michael. How are you?

Very good. I have a question: if you are assuming that scrap prices are going to stay relatively flat for the rest of the year and you saw a massive $100 drop a couple of months ago, when do you or are you now picking up share against the integrated mills who are basically fixed cost? And when you get a $100 drop in scrap, they saw very little of it?

Obviously, it made us much more competitive, and the reason people buy steel is based upon four things: I said this many times—service, quality, on-time delivery, and price. When we are in a situation where there is such a difference between scrap and iron ore pricing, we had a real disadvantage on pricing, and that impacted our competitive position. Frankly, when I think about how we did during that period with a gap so large, I am really proud of the job our team did on the other three elements of quality, service, and delivery that kept us in the game when we had a $100 differential on cost. Now that has been reduced with the scrap coming down; I’m very confident that we will continue to be aggressive, and now we're competitive on all four of those elements, and I feel good about the way that will go forward in terms of any market share.

Is it your sense that you are gaining market share now?

I am not going to get into specifics at any one point in time. I'll just say again, we have the pricing competitive risk not only integrated, but we reduced the gap between imported pricing and all pricing, and we deliver superior quality service and delivery. Based on all of that, I am confident that our team will gain market share as we move forward throughout the year. Now there is going to be a lot of practice that comes into that, as we've talked about in the past.

Thanks a lot, John.

Okay.

Thanks, good afternoon, John and Jim.

Brian, how are you?

Good. Just wanted to follow up on Timna's comments earlier. So I guess I'm equally surprised that spot price has been computed down—and I guess more so. I know imports continue to be a big problem, but if you just look at where import offers are today versus physical flow, do you think we pass the point where now it’s more about domestic competition for market share versus all the domestic producers trying to keep out the imports?

Let me be really clear about this: imports continue to be our number one challenge. We are focusing on pricing here, but you need to remember that there is such a tremendous overcapacity. We are looking at 300 million tons of excess capacity worldwide. That has been a continuous good pressure on our market and our profitability. Having said that, we have reduced the gap between the domestic pricing and imported pricing, but imports are going to continue to be our number one challenge for our industry and our company as a whole.

Okay. Second question is this is more with your iron ore pellets inventory. How much inventory do you typically keep on hand at Louisiana? I think you mentioned earlier that you're probably going to use through the high cost in the second quarter. So, if that occurs...

Let me, if I may, just correct that because I want to make sure we are clear on that. Today, there is a gap of about $60 between the pricing of the iron ore that we have on the ground and what market pricing would be. At the end of the second quarter, we expect that we will reduce that gap from about $60 down to about $15. We will reduce the gap by $45 at the end of the second quarter; it will take us through the third quarter sometime around the middle towards the end of the third quarter before we reduce that last $15 gap and get us down to market price for iron ore. Please continue with your question, but I wanted to correct that and be very specific on that.

That was a lot more information I had hoped for, so great. But maybe along those lines, how much inventory do you typically keep on hand?

About iron ore you are asking about…

Yes, iron ore in general.

That would be about five to six weeks at Louisiana.

Okay. And when you take these inventory adjustments, the further LIFO credit, incorporate assumptions about iron ore piling cost, and is that accurately separate?

Well, it certainly affects our LIFO calculation at the steel mills. Our LIFO but the DRI plant is not under LIFO.

Okay, got it. Thank you.

Good afternoon, guys. Thanks for the opportunity. Just had a couple of questions. The first one is about market share on the back of Mark's question earlier. Could you talk a little bit about where you might be seeing market share opportunities in the back half of the year, be it either by sort of product or end market?

Well, we've talked about the organic growth that we've had and the products that we're bringing to the market, so certainly we would expect to see market share growth in our structural business with our new piling sections. We talked about the growth in the sheet side of the business with projects and how we expect that to grow year-over-year. SBQ would be another area as we continue to bring new products onto the marketplace. We are continually moving forward with our private in SBQ, so I expect market share growth in that area also. And as I mentioned on calls in the past, one of the few bright spots in the marketplace today is automotive, and we expect to grow our participation in automotive this year also. Last year we shipped about maybe 1.1 million tons of sheet and SBQ combined products into automotive, and this year we are anticipating shipping about 1.45 million tons of combined sheet and SBQ into the automotive market. Part of that is being supported by—I’m going to put a little plug in here for our new Detroit automotive office that we've just established, and it's been well received by the automotive companies. We have metallurgical and engineering teammates and salespeople in that office to help support and push into the automotive.

That's useful, John. Are there any updates on the sort of exposed order or body and white industry since the last we spoke about this?

No, certainly, body and white—that's one of our strong points that we are moving into. When you say exposed, exposed accounts are about 15% of the weight of steel per vehicle. Certainly we want to play in that game, and we do. We have a product that we can put into that and have put into that and exposed applications. But that's clearly not a focus point for us. When we look at body and white, we see 75% of the volume going in there; that's our focus point. We look at what they're calling closures, which represent 25%, the remaining 25%, and only 15% of that is exposed. So combined you're looking at 15% out of the total weight of the cost. It's not something—it's not where our major push is going to be.

Got it, okay, that's helpful. And my final one was just one on the DRI project and raw materials. Look, I certainly understand the raw material strategy here, and we do like the fact that there is this additional flexibility built into your sort of iron units procurement here. But, I mean, can we consider a scenario where the pricing environment is just not conducive to DRI being profitable? And let's assume it has something to do with iron ore and pig iron spreads. Could you talk a little bit about what sort of flexibility you have in your raw material contracts to effectively flex those volumes down? And so you're going to reduce DRI output just because it isn't profitable, or it can't be profitable. And perhaps bring it back again later in the future when margins or spreads are a bit more conducive to that plant being profitable.

Well, we get our raw material iron ore from four different sources. And I'm not going to give you the specifics of what kind of contracts we have with each one of those particular suppliers. But in general, we have a level of about 25% to 35% flexibility in the supply of raw material iron units. So we can cut back 25% to 35%, and I'm talking now across all the contracts. I'm not going to get any more specific on that. But if I may, I want to take a moment here, because there was a question earlier about the DRI and how they should look at when the cost of iron units and going down—we would see improvements. I have to answer the question because it was tied originally back to the number of weeks on hand of iron ore supply inventory we had. I said that we keep about five to six weeks of inventory on the ground. That is an accurate statement. But if he was looking to get some sense of when pricing changes, relative to iron ore pricing on an index basis changes, we need to factor in the issue that we buy at a quarterly basis with a lagging quarter. So for whoever asked that question earlier about seeing changes in the pricing of raw material going into Louisiana, please bear in mind when we see the change occur in the index, there is a one-quarter lag in the pricing that we see at the plant itself.

Alright, thanks very much, John. I appreciate it.

That correction is credit to Joe Stratman, who held up a piece of paper and said quarterly pricing.

Hi, good afternoon.

Good afternoon.

Just had a question on the U.S. rationalization of scrap collection and processing and maybe what you've been seeing there the last couple of months and whether or not you will be participating in that trend.

Clearly as pricing has dropped and everyone that’s in the processing, it’s been very challenging. Margins have been severely compressed, and it's very challenging for processors to make a decent profit. We expect to see some people not making it through this very difficult time. Certainly, we have a strong balance sheet, which gives us the opportunity, and we have a history of taking advantage of downturns and troubled times to grow our businesses. So we'll be keeping an eye out for assets that come available when they make sense, that fit into our strategic plan for raw materials, as the locations are right, the pricing is right. I'll tell you what we won't be shy about; we'll be at the table.

John, I was just curious as to whether or not you're seeing actual rationalization particularly in the south.

We haven’t seen much of it yet. But remember that often, a lot of times, it's not during the downturn where you see the greatest pressure on these companies, but actually during the upturn. But I have to stop replacing inventory when you're completing inventory; you generate cash. When you have to replace inventory, you burn fluid cash, and sometimes that can be more challenging as it bottoms out. Maybe the upturn, when you really see companies struggle to stay in business.

Okay, and then I just appreciate that, and then I just had a question for clarification because you were generous enough to give out some of the targets here on Hertford and Berkeley. Were you saying that the Hertford normalizing line is about $200 a ton over what your normal mix is? And then the same thing with your Nu model on the 450 and then Berkeley on the 100?

That is correct.

I appreciate it. Good luck.

Thank you.

Hi, good afternoon. A couple of questions here. First, I wanted to ask about the upcoming DRI facility outage in Trinidad in the second quarter. Is that a standard maintenance project, or are you implementing process improvements that you just implemented at the Louisiana facility? And then on a related note, is the timing related to the availability of low-price pig iron from abroad and what will be anticipated operating loss associated with the outage? Thanks.

Let me work through this note. This is, in fact, a planned preventative maintenance shutdown that is scheduled in advance and must be done on a regular angle basis. Without getting into all the technical details, the shutdown is needed to clean out the piping in the furnace. It's done about once a year; it takes about a month, and it is a normal process. We are frankly adding a piece of equipment in Trinidad that has nothing to do with the Louisiana situation—it's a polisher to improve the yields as the product ships from Trinidad to the United States. But that’s a side issue; there is no failure in Trinidad. I anticipate a variance; it is strictly a planned maintenance outage. In terms of what we expected to get us with, James, do you have that number?

I'm sorry; I was thinking. I missed it.

The question I was asked, can we have the estimate on what the cost of that project is?

We don’t have the estimated loss during outage, but it’ll probably be less than what you saw from Louisiana for the quarter. It's going to be much less than that, but there would be some loss from the loss structure of one month.

Okay. Thanks, and then I change gears for a minute. Given your unique purchase capacity to observe the scrap market, to what degree have you seen scrap collection rates dry up in the slower price environment? And how low would scrap prices have to fall before you would expect availability to become a legitimate concern?

Well, although pricing is dropping, those have a negative impact on the collection and flowing to the yards. Bear in mind that it's also spring. It’s a whole lot of at the time when people are collecting materials in winter; transportation is not a factor like it is in winter. They kind of balance out, and although we have seen a small amount of increase in flowing to the yards, it's not been significant, and it's balanced by the two factors of lower pricing offset by springtime. And there was another issue just to kind of build upon that’s something that hasn’t come up in all the discussions we have had today about scrap, and I’m a little surprised by it. But bear in mind that the other thing we look at to keep the supply of scrap up in the United States is the load that we buy offshore, particularly with the way the currency is today; we are picking quite a bit of scrap up overseas.

And where is the majority of that incoming scrap coming from?

As a general statement, Europe.

Okay, great. Thanks for the color.

Thank you.

Hey, guys, how are you doing?

Good, how are you?

I'm doing well. So a quick question: you know, you talked about pig iron being sort of low and expected eventually to bring back up. How do you think the removal of the export tax in China is going to impact out there?

Well, if it's a renewal of an export tax, it should go up.

I know they'll be able to export more.

Yeah, so I mean the volume will go up; their exports will go up. I'm not sure how much of that would actually make its way to the U.S. market; I would expect that there will be other markets that will go to in Europe and in Asia and even in India—those will be more logical markets from a logistics perspective than here in the United States.

So just wondering whether that would continue to put pressure on big iron prices.

Absolutely, it's economics—one of supply and demand. Whenever you have a situation where more suppliers are coming into the marketplace, it puts pressure on pricing. I would ask you to consider one factor, and that is, I can't test to the quality of the pig iron coming out of China; that might be a question.

Okay. And you don't think lower pig iron prices potentially put more pressure on scrap as well, that people will start to take more pig iron and then scrap could go lower?

Same reason; well, supply buying units into the market and it brings pressure on all aspects of volume units—scrap, pig iron, DRI.

Okay, thank you.

Thanks.

Good afternoon, gentlemen.

Tony, how are you?

Good, John. Is there a rationale for the mills not raising prices yet? I mean, service centers indicate they would be receptive. We see the MSCI inventories are still a bit higher but moving in the right direction. Totally, we're hearing that end users are living for the most part and the mills. I'm just wondering how you feel about that.

Well, if there are service centers out there that want some from us guaranteed at higher prices in the near term, but as a general statement, I understand your point. It’s about an inflection point; whenever you hit the bottom. If you're asking me where I think we stand on that cycle, I would say a couple of times during the—call that we this is a transitional quarter. So we might see something this quarter. But I would ask you to remember that there is still a tremendous amount of imports that are in the pipeline that are on their way to the United States. That continues to put pressure on pricing. As I said, we're not opposed to selling steel at a higher price; we like to do that. But we also have to take care of our customers and maintain our market share in order to those factors that we spoke about earlier in the call.

Okay, fair enough. And my second question is: some of the industrial companies are starting to talk about some signs of softening with regard to U.S. demand. Are you guys seeing any signs of declaration anywhere in your end markets? So, outside of energy, and also if you could address…

I'd have to say no. In fact, I would say that our downstream products demand is strong. We see a significant improvement in our backlog, order entry, and backlog prices.

And would that be the same, John, from a standpoint of geography as well?

I'm not sure I understand what you mean by that.

Just in terms of different parts of the country. Obviously, you guys have pretty good exposure.

Yeah. If there is any part of the country in which we're seeing that. But right now, we're pretty well balanced. I might say in Canada, we're seeing again Harris—we're seeing much more improvement because they were down so significantly due to weather conditions in the first quarter. But other than that, we're pretty well balanced.

Okay, thanks very much. Appreciate the color.

Well, let me conclude by saying thank you, thank you to our shareholders. I appreciate your confidence and your support. Thank you to our customers. We appreciate your business, and I want to say thank you to my teammates for creating value for our customers, generating attractive returns for our shareholders, and building a sustainable future for all of us. And most importantly, thank you all for doing it safely. Thanks for your interest in Nucor. Have a great day and a great weekend.