Nucor Corp (NUE) — Q4 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. Your leadership team in Charlotte would like to thank everyone on our Nucor Harris deal, David J Joseph, Duferdofin, Nucor Steel Technologies, and skyline steel teams for your hard work every day to build a safer, stronger and more profitable Nucor. In extremely turbulent global steel industry conditions, we are taking advantage of Nucor's unrivaled competitive position and highly flexible business model to grow our company's long-term earnings power while many of our competitors are fighting to survive. More than 23,000 teammates are positioning Nucor to continue to thrive in the years ahead. Jim Frias will now review Nucor's fourth quarter performance and financial position. Following his comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?

Thanks, John. Fourth quarter of 2015 adjusted earnings of $0.46 per diluted share, excluding impairment charges of $237 million, exceeded our guidance range of $0.15 to $0.20 per diluted share. Fourth quarter results included a LIFO credit of $218 million, somewhat higher than the $181 million LIFO credit projected in our guidance. The larger than expected LIFO credit increased our earnings for the quarter by approximately $0.07 per diluted share. The biggest factor driving our fourth quarter outperformance was stronger than forecast results for the month of December at our steel mills, particularly the sheet mills and our downstream product segments. Nucor continues to benefit from effective execution of our channel to market strategy and our ongoing investments to expand our offerings of value-added products. At the same time, all of our Nucor teams continue their unrelenting focus on maintaining our position as the low-cost producer across our extremely diverse product portfolio. During the fourth quarter of 2015, we recorded two non-cash impairment charges totaling $237 million, a $153 million charge reduced the value of our equity method investment in the Duferdofin - Nucor steelmaking joint venture in Italy. In addition, an $84 million charge was taken to write off the entire amount of certain assets, primarily engineering plans and equipment related to a potential blast furnace project at our St. James Parish Louisiana site. Due to technology advances and other factors, we no longer expect to use those plans if we proceed with the blast furnace project. Including these impairment charges, Nucor's consolidated net loss for the quarter was $62 million, or $0.19 per diluted share. Our deferred Nucor impairment charge reflects the ongoing financial performance and deterioration in near-term projections for this business. The 50% ownership in Duferdofin - Nucor was acquired in July 2008 for approximately $667 million. Although market conditions in Europe remain extremely weak, we are very pleased with the dedication and hard work of our approximately 700 teammates at Duferdofin - Nucor. They have achieved very significant improvements in costs and product mix. As one example, conversion costs at our melt shop have reached world-class levels. Duferdofin - Nucor is also successfully expanding its portfolio to include value-added and more import-resistant products such as engineered varieties of blooms and billets as well as special profiles. Across the entire organization, our Duferdofin - Nucor teammates have embraced and taken ownership of a culture focused on safety, environmental stewardship and production efficiency. All of these initiatives are focused on achieving consistent profitability for the joint venture in the near future. A quick comment about our fourth quarter of 2015 tax rate, as it can be confusing due to the impact of profits from non-controlling interests and the impairment charges. Excluding profits belonging to our business partners and the two non-cash charges, the effective tax rate was approximately 31% for the fourth quarter. Nucor continues to generate very robust operating cash flow in extremely challenging steel market conditions. With our highly variable and low-cost structure, we benefit from significant reductions in working capital during downturns. 2015 cash provided by operations was approximately $2.2 billion, a dramatic increase from 2014's operating cash flow of about $1.3 billion. It also represents our strongest cash flow performance since 2008's record level of $2.5 billion. Over the prolonged steel industry downturn that began in 2009, Nucor's annual operating cash flow generation has averaged approximately $1.3 billion. That compares with average annual operating cash flow of $500 million during the previous cyclical downturn from 2001 to 2003. 2015 capital expenditures were $365 million. For 2016, we estimate capital spending of approximately $500 million. Depreciation and amortization for 2016 is expected to total about $700 million. Most of our recent larger scale organic growth projects have been completed or are nearing completion. Nucor's financial strength allows us to invest in capital projects and strategic acquisitions during severe industry downturns when the long-term returns are most attractive. Through the downturn that began in 2009 and continued with a vengeance in 2015, Nucor has invested more than $6 billion to grow our long-term earnings power, which includes capital expenditures of approximately $4.4 billion and acquisitions totaling about $1.9 billion. Rather than fighting for survival, the Nucor team is executing our strategic plan for driving profitable growth and delivering attractive returns to our shareholders. Nucor's disciplined and balanced approach to capital allocation also allows us to reward shareholders with attractive cash returns on their investment. Over the 10-year period ending in 2015, Nucor has returned a total of approximately $6.8 billion of capital to our shareholders through dividends and opportunistic share repurchases. With the dividend increase announced in December and effective with next year's quarterly payment, Nucor has increased its base dividend for 43 consecutive years, every year since it first began paying dividends in 1973. Reflecting our success in growing long-term earnings power, the base dividend has increased fivefold over the past 10 years. In December, we began repurchasing shares of our common stock under the $900 million program approved by our Board in September. Our repurchases totaled about 1.7 million shares at an average cost of just under $40 per share. Nucor's financial position remains strong. Our gross debt-to-capital ratio was 36% at the close of the fourth quarter. Cash and short-term investments totaled approximately $2 billion, which compares with total debt outstanding of $4.4 billion. 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; the facility does not mature until August of 2018. Nucor is the only North American headquartered steel producer to hold an investment-grade credit rating. Market conditions for our stainless segment remain extremely challenging as a result of global overcapacity and import levels that remain at extremely high levels; however, we anticipate some improvement in the steel mill segment in the first quarter of 2016 compared to the fourth quarter of 2015 due to a lower average cost of inventory to begin the first quarter, a small decline in imports and more balanced inventory levels at service center customers. The performance of our downstream steel product segment will be lower due to typical winter seasonality. We expect downstream products for the full year of 2016 to achieve notably improved performance compared to 2015. Performance in the raw material segment should increase slightly over the fourth quarter level as Nucor Steel Louisiana resumed production earlier this week following its extended fourth quarter maintenance outage. Margins are expected to improve modestly in our scrap recycling business. We are confident that Nucor's significant competitive advantages and highly adaptable business model will allow our team to continue to execute our proven strategies for delivering profitable long-term growth and attractive returns to Nucor shareholders. We appreciate your interest in our company. John?

Thanks, Jim. I am proud of the results achieved by our teammates in one of the toughest steel markets in decades. Because of their work, Nucor is growing stronger and actually thriving compared to our peers. First, I will comment on the overall industry issues we face today. It is not an exaggeration to say that the global steel industry is in a crisis. The crisis is the direct result of foreign governments, particularly China, blatantly subsidizing their steel industries. In further violation of international trade rules, this glut of global steel production has led to the dumping of steel products into the U.S. market. Despite the highest level of domestic steel consumption since 2006, the American steel industry capacity utilization in 2015 was around 70%, and pricing for most steel products essentially collapsed. Nucor's culture has always been defined by our willingness to tackle challenges head-on and focus our energy on what is within our control. To that end, Nucor continues to be proactive and aggressive in pursuing trade cases whenever and wherever it is appropriate. When foreign producers and governments break mutually agreed upon trade laws, there must be meaningful consequences. Nucor has joined other U.S. steel producers in filing trade cases for hot rolled, cold rolled, and corrosion-resistant flat-rolled products. We are pleased that the International Trade Commission made preliminary determinations of injury in all three cases. Regarding the preliminary duties announced by the commerce department, we are satisfied with the duties applied to products from China in the corrosion-resistant and cold-rolled cases, but we are extremely disappointed in the other determinations and believe that the facts support higher duties; however, we are confident that the government will be more aggressive in its final determinations after further analysis is done. Another important trade issue in 2016 is China's bid to gain recognition as a market economy under its protocol of ascension to the world trade organization agreed to in 2001. Over the past 15 years, China has failed to implement the reforms necessary to become a market economy. China remains a government-run non-market economy today. Therefore, the U.S. has no reason to change its treatment of China as a non-market economy. Great challenges provide great opportunities for great companies that are ready to seize them. At Nucor, we are more than just ready; we are doing it. We are on the offensive and growing stronger. Our multi-pronged growth strategy is simple and flexible. That strategy is supported by Nucor's five drivers of profitable growth, which highlight where we are focusing our energies to build long-term earnings power and provide our shareholders with attractive returns on their valuable capital. Here they are: 1. Strengthen our position as a low-cost producer; 2. Achieve market leadership positions in every product line in our portfolio; 3. Move up the value chain by expanding our capabilities to produce higher quality, more import-resistant products; 4. Expand our downstream channels to market to increase our steel mills' base load volume, especially in weak markets; and 5. Achieve commercial excellence to complement our traditional operational strength. Our performance in 2015 provides numerous examples of how we are growing stronger in this downturn and positioning Nucor to deliver higher highs in profitability during the inevitable cyclical upturn. Despite the challenges from illegally traded imports and less than robust capacity utilization rates, our bar mills delivered solid profitability in 2015. The keys to their success are powerful and sustainable: market leadership positions, strong channels to the market, and an unrelenting focus to drive costs lower. Our fabricated construction products group achieved very strong year-over-year profit growth in 2015 and actually approached the record profitability reached in 2007. That is very impressive when you consider the fact that U.S. non-residential construction activity for 2015, as measured by square footage, represents less than 60% of 2007's peak activity. In addition to their strong market leadership positions, Nucor's fabricated construction products enhance the through-the-cycle profitability and flexibility of our steelmaking businesses. Our structural steel business also delivered attractive earnings growth in 2015 while working against strong headwinds from high import levels and low mill capacity utilization. Impressive results were delivered by all of our structural steel teams. Our Nucor Yamato model mill, our Berkeley County South Carolina mill, and our piling distribution business, Skyline Steel, Nucor's ongoing success in the structural steel business continues to be powered by our market leadership position, strong channels to the market, and new product introductions that continue to move us up the value chain. Our Nucor structural mill is continuing to expand its value-added product portfolio. In 2015, Nucor Yamato began shipping its wider sheet piling sections. These new products are already enjoying strong marketplace success. We see significant opportunities for profitable growth in this market, which currently is largely supplied by imports. Further, during the second half of 2016, Nucor Yamato will begin commissioning its $75 million question and self-tempering projects. This investment will position Nucor as the sole North American producer of high strength, low alloyed beams. Our Berkeley County, South Carolina sheet mill achieved very solid fourth quarter and full year 2015 profitability in what can best be described as horrific flat-rolled market conditions. The Berkeley team continues to capitalize on their investments in vacuum degassing and the wide light capabilities provided by caster and hot mill equipment upgrades. New products from the wide light modernization are allowing us to gain new business in a wide range of end-use markets including metal buildings, railcars, auto heaters, automotive, heavy equipment, and motor lamination. Of particular note, Nucor's automotive business continues to grow with work awarded by a diversified and high-quality portfolio of automotive OEM customers. Highlighting Nucor's overall commitment to profitable growth in the automotive market and our strategic focus on commercial excellence, we opened a Detroit sales office earlier this year. Our shipment rate to the automotive market from our sheet and SBQ bar mills increased by about 20% in 2015 versus 2014 to approximately 1.4 million tons. We believe the time could not be better for a financially strong and technologically advanced steel supplier such as Nucor to make a more significant contribution to the automotive industry. In November, we acquired Dallas cold finished bar facilities located in Ohio and Georgia. The combined annual production capability of 75,000 tons strengthens Nucor's market leadership position in this very attractive value-added business and important channel to the market. I warmly welcome to the Nucor family all of our newest teammates in Orrville, Ohio, and Cartersville, Georgia. Our list of five drivers to profitable growth begins with the objective to strengthen our position as a low-cost producer. Nucor's DRI production capability, with its excellent conversion cost structure, has significantly strengthened our position as a low-cost steelmaker. It gives us the flexibility to optimize Nucor's overall iron units mix and, most importantly, cost. Consistent with our announcement earlier this month, our DRI plant in Louisiana has resumed operations and is producing high-quality DRI. Recent changes in raw material pricing led to this decision. These are challenging times in the steel business, but for a company such as Nucor, one that is in a unique position of strength, these are also times of great opportunities. Here is what I see throughout Nucor: the right people working with their typical high energy level and sense of urgency to seize these opportunities for profitable growth, ensuring that Nucor's best years are still ahead of us. Thank you for your interest in Nucor. We would now be happy to answer your questions.

John, my first question I just wanted to know on the trade side what gives you the confidence the final decision will bite harder and be more broad based first of all?

Well let me start by saying that we take a hard look at the data and as we view the data, and as we are anxious to go back and present it to the commerce department, we feel confident that we can prove a strong case and then came out in the preliminary. So we're pretty confident -- remember that during the preliminary findings they see only some of the facts presented by frankly on the countries that we are looking to gain some duties from. So they all see the whole picture. We have an opportunity during this period to present our case and we're confident that when we get to present our case, and get a more balanced view in front of them, they will come out with a stronger determination in the final determination.

In this environment provided that they do see a little bit more in the way of the industry and the final determination is little bit stronger. We still have obviously certain end markets which some call in recession and U.S. dollars still fairly strong raw materials at depressed levels. Can you envision hot rolled moving sustainably above $450 per ton?

It's very difficult to project where pricing is going to go. Let me ask by addressing your earlier point that we do recognize that Nucor, despite our best efforts and effective trade cases to effective trade action, we recognize that because of the dollar, there's always going to be some challenges on the import front. This is why when you look at our strategy and how we have developed our products to move up the value chain, we have got a strategy that we use to help insulate us as much as possible from the imports. Higher value products that are harder to import. We continue to develop a stronger channel to the market that provides a nice barrier for us, giving us some protection from the imports. So we're taking this from a two-front battle: one, we are continuing to fight the imports, the illegal unfairly traded imports—let me be very clear about that, we do not have a problem with imports. We have a problem with illegal unfairly traded imports. So we'll continue that battle and we'll continue with our strategy of moving up the value chain and gaining more market leadership position in the products in which we participate and continuing to develop our channel to the market.

And just talking a little bit further about that, I was intrigued by your comments about market opportunities you and I wonder if you could talk a bit further about the opportunities you see to further penetrate the automotive and maybe HVAC. Is it possible to quantify the opportunities in terms of volume and margin potential that you'll see?

Let me address that from the automotive front because that's probably where we feel we have the greatest opportunity. As you know, we've increased sales in automotive on a delivery basis by about 20% over last year. Today we're at about a 1.4 million ton a year market penetration. We fully expect to be able to get up to 2 million tons over the next couple of years, and that's going to be in both sheet products and our SBQ. As we continue in sheet and we move up the value chain into the advanced high strength steels, particularly when you think about what we've done on our Berkeley facility, we provide light project capabilities that are giving us the ability to continue to move even higher in strength steel products while maintaining the light gauge they need in the automotive applications. So we feel very good about our sheet penetration into the automotive and I'll also point out that on our SBQ, we continue to develop more and more products. Bear in mind, Tony, that as our team does a great job selling to the automotive market, our products present great opportunities for the automotive customers. Indeed, the automotive industry is taking a look at the entire steel industry today and they look at Nucor and our balance sheet and see a long-term sustainable supplier. When you think about how they order steel, it takes a long time to get qualified and years to go through that entire process. Then the steel they're ordering today could show up on a platform that's not going to roll out for two to three years from today, so they want to make absolutely certain that after they've gone through the entire qualification period, when they roll that product out, that new platform in two to three years, they want to make sure that their steel supplier is going to be there and able to supply the steel they need to keep their factories running.

I wonder if you could comment. I've been hearing about a competitor perhaps losing some people on the R&D side, you know the heavy auto area in Michigan since you opened up that office out there. I'm wondering if you might have been able to attract a few of those folks over to your shop?

Let me just answer the question this way. The most qualified people out there are looking to work for companies that they know are going to be around for the long term. When you look at our balance sheet and when these potential candidates take a look at our company, one of the things they bring up all the time is that they want to work for a company they know is going to be there for the long term and where they can finish their career. Not only are they impressed with our balance sheet, but once they come down and spend some time with us, they like our culture and like working for the concept of being part of the Nucor family. So yes, we have great potential to attract the best people out there, and having opened this office in Detroit was a great move. I will tell you that, two months ago, we had a grand opening, and I can confidently say that over 200 customers came by to talk to us. One thing that we heard consistently through that two or three hour period was a major concern about the suitability of some of our competitors in this industry, and they are anxious to do more business with Nucor as a result of that. We'll move on and give someone else a chance to ask questions. Thank you, Tony.

Maybe just picking up from there in terms of R&D and auto, can you summarize what some of the main steps, the mini mill industry need to make to make more in-roads on auto? What are some of the key quality steps that you have to make and how quickly can you address those to make more meaningful in-roads?

Well probably I'm going to speak just to Nucor because I can't speak for other competitors. The biggest issue is getting through the qualification period. It's an issue of timing. When you talk about what products we need to develop to be able to get penetration into automotive, I would tell you that today we're producing just about all of the products we need to get our full penetration into automotive. We have great quality steel going to the automotive industry, so where we need to be in terms of products today. Now having said that, what's good today is not good enough tomorrow, so we need to continue to work on developing even more sophisticated grades that have higher strength while still maintaining flexibility or improved flexibility for the designs that are coming out in the future. So there's always more to do, but I want to be clear about this point. Today at least, we can produce virtually every type of steel needed in automotive. One of the questions I'm always asked is about exposed automotive quality, and I've answered this question several times, but I'll say it one more time. Today we have the ability to produce exposed automotive that is actually out there on cars and has gone through a qualification period. So we're very comfortable with the products that we can supply and the quality that we can provide. There is a long qualification period, and after that, you have to wait for it to be introduced and your steel is being specified on. There's a period of time it will take to grow to this 2 million or better tons a year level with automotive, but it's strictly a question of working our way through that time period now.

Just wanted to talk a little bit about the rebar market and I know you mentioned December shipments were running better than you guys expected. I was just curious if you saw any order strength from the implementation of the new highway bill. Are you seeing public spending dollars starting to flow into your business?

It's really too early to see much of an impact from the Highway Bill. Although we are really pleased the government, after what's been more than a decade of having short periods of time, it's great to see them come out with a five-year plan. Frankly, we believe they need to go even further and have a longer-term plan, as the infrastructure of our country is desperately needed. To answer your question directly, we haven't seen much of an impact right now. We expect that probably in 2016 we will begin to see some effect and we believe that we'll see a more significant impact starting in 2017.

Just as a quick follow-up, have you ever tried to calculate the potential market impact from the spending dollars? Any thoughts on how much volume could be generated for the industry just from roads and bridge projects coming up?

I don't know that we've ever tried to figure out an exact number, but I'll tell you, when you look at the product prep we have to offer, the type of products we have to offer, not only you mentioned rebar, but think about the plate applications that go into infrastructure. We have bar products that go in there, we have plate products that go in there, and by the way, don't forget a lot of this work is going into bridges and we've got great piling that we can offer. Nucor produces piling products that only we produce domestically. When you're going to build a bridge, we can supply every type of steel you need in that bridge, and when all is said and done, we'll sell you the nuts and bolts to put it together from our fastener division. I believe Nucor is positioned better than most to take advantage and gain the most from this Highway Bill as it comes into fruition and the dollars begin to flow.

Just after a little bit more detail in the CapEx outlook for 2016, I see you mentioned a budget of $500 million and talked about $75 million for Yamato. Just wondering how else or if you can give a breakdown of how the CapEx layout looks for the year?

I'm sorry I missed the second half of the question.

The question is we mentioned the $75 million in QST and we talked about a total budget of about $500 million. He's looking for a little bit more color on how the rest will be distributed. A couple of things we always have are maintenance CapEx, which accounts for somewhere around $300 million to $350 million typically, is that a good number?

That's right and there aren't as many large organic projects right now in the pipeline outside of the project at Nucor Yamato.

But I'd mention one other, and that's the heat treating project. We're adding heat treating capability at our Memphis facility, and an earlier question was about automotive that will also help us move further into the automotive as we can heat treat our own product coming out of Memphis. Although we've already spent most of that money because it was more installing than spending fresh capital.

But that's another project that we're doing. So those are the two that we can mention. As John said, most of the large ones— and we're kind of happy about it—most of our large ones were past the phase where we're spending the money; we're well into the startup, and frankly past the startup and we’re beginning to see some of the returns from these projects that we've invested in heavily. We mentioned several types: the wide light project, we mentioned the piling project. I'll mention the DRI project, so it's not to be past the point where we will have spent on the existing projects. Now having said that, I want to be very clear that I can't give you any specifics as to what we're doing, but we believe that there are many opportunities both organically and through M&A activity to continue to grow our business and we're anxious to do that. Just because we're planning on a $500 million budget does not mean that’s what it will be at the end of 2016.

Is there anything else you wanted to say on the acquisition side or the competitive advantage? You've obviously talked quite a bit about the order space but specifically what sort of industries you're looking at there or what opportunities you actually see?

Well I'll tell you what, I'd love to talk about that but I don't want to go to prison, but there's really nothing I can say about it other than I'll make this general comment and it's going to go back to our five points of profitable growth. So if you look at those areas we talked about, there are things in which we can continue to improve our market leadership position in the markets in which we compete, things that will strengthen our channel for the market, that will continue to move us up the value chain, our products up the value chain, making them more import-resistant. I don't want to leave out one of the most important ones, which is to continue to invest in our operations in ways that lower our cost of operation because at the end of the day, we operate in a commodity business, in a global marketplace. The way to succeed in a commodity business in a global marketplace is to be the low-cost producer. Thus, we will continue to invest below our cost of production, which obviously was one of the big reasons we invested our $750 to $780 million in our DRI facility. So that's more of a general answer to your question, but really all I can give you.

I wanted to ask about your costs and about uses of cash. So just for starters, can you provide a little bit more clarity on your SG&A run rate since it dropped off sharply in the fourth quarter versus your run rate for the first three quarters of the year with about $125 million in the first three quarters and then it went to $84 million? Similarly, getting a lot of concerns over the LIFO swing potential into the first quarter. Can you provide more context for how to think about that?

First on the SG&A, we are a pay-for-performance company. We have a significant amount of our compensation across the company, including profit-sharing for all employees, that's affected by our profitability. The impairment charges did result in a reduction of our obligations to incentive compensation. So that's the first point; and that's why the second half run rate is different than the first half. The second point you asked about was remind me, Timna.

Yes, concerns over the LIFO swing.

So on LIFO, it's based on where we have a view about where the long-term raw material prices are going, so it's hard for us to predict what scrap is going to do over 2016. We begin every year with kind of a conservative view that scrap is going to go up some and we book some expense in the first quarter. That's what we're being more transparent about in our guidance regarding the first quarter. Clearly, without knowing what the final outcome is going to be, we will have some LIFO expense, which is non-cash, but we will have the expense in the first quarter to position ourselves to move either way based on what really happens to scrap prices as the year unfolds.

Okay, and then my other question was regarding uses of cash, and I know you've already highlighted your five areas of focus and talked about what M&A might look like. But if you could comment specifically on the buyback—it seems like we couldn't find evidence of much buyback since 2008. Does this mean this is a new focus for the company, that it means you're not finding better M&A alternatives and therefore finding your shares as a better use of cash? Or can you talk to us a little bit about your thinking there?

I’ll be happy to address that. We always have three approaches to our capital allocation and let me make sure I highlight the first one. The first one is to invest in the profitable growth of our company; that is always our first focus. I want to be clear, Timna. We strongly believe that there are many opportunities to continue to invest in the profitable, sustainable growth of our company, both internally and organically and externally through M&A activity. The second objective in capital allocation is to return our shareholders valuable capital to them in an appropriate way. We look at dividends as a very appropriate way to do that. We think it's a good dividend, a well-balanced dividend; we look to maintain a prudent payout ratio between supplemental and our base, and we look forward to the days—like we had in 2005 and 2006—where we have such good cash flow coming in that we can increase the supplemental dividend and return more of the capital to our shareholders. That's our second objective. And the third objective, as you mentioned, when we can't beat either of the two first ones is to look at stock as a potential buyback. Those are the three areas we look at, and I'll point out that there's a lot of questions about cash and our cash position today. When you look at 2015, we generated a lot of cash; it's actually the second highest we have had since about 2005 and the highest since 2008. We have a lot of cash on hand, but let me be clear again, we feel we have a lot of opportunities to spend it wisely in a disciplined manner, on a flexible, disciplined manner to grow our company. If we don't see opportunities that return the kind of capital and return on invested capital that we're looking for, we will do the prudent thing and return it to our shareholders or buy back stock. Right now, when we look at all three of those, we saw that during the past month, stock was a good opportunity and we bought some stock. It is definitely not a major change in our position or direction; I want to be very clear about that.

I had a question on your sheet mix and how much shaft shipments last year went to the hot roll market versus downstream market. Any way you could help us think about that?

When you look at our mix about 55%-60% goes to hot and the rest is pretty well split evenly between cold rolled and galvanized, but basically I would say an easy way to remember the numbers, which is what I need, I'd use 60% hot band, 20% cold rolled and 20% galvanized, and that's pretty close.

And I was interested in the comments on a notable 2016 improvement in the fabrication piece of the business, and given the fact that at least we were thinking there were some pricing resets occurring on maybe some rebar fabrication and potentially cold-finished bar products. How are you thinking about the meaningful improvement? Is it volume-related, pricing-related? How do we get there?

Well, our improved profitability in '15 and expected in '16 is a result of a couple of things. Strong operational performance by our teams lead the way in my view with lower costs, and we expect those to continue in 2016. We also continue to see improving demand for our products and services in our downstream businesses, and we continue to lead the market in technology such as 3D modeling, and we continue to add value to our products.

I hope everyone understood the comment about the bin and what it allows us to do and the sophisticated computer system we use that helps us design our buildings allows us to tackle and build more complex structures, which are higher-margin structures and also impacts our costs, so it has two very positive effects for us. I want to just make a shout-out to my team and say great job, guys. I'm really proud of the fact that if you look at all three of our downstream businesses, we had a very good year, and we expect another one in 2016. Maybe a comment about our shipments in 2015 and how they compare to the previous year, given the fact that when you look at McGraw Hill, the demand for non-residential construction was down 5-6%.

The non-residential market was down in '15 about 5%-6% in new construction starts and backlogs, yet all of our key downstream segments are up, and our shipments in 2015 were basically the same.

Up a little bit more than 2014.

So the team did a great job even though demand was dropping. We were able to maintain our shipments, and we were able to improve our profitability. That's a formula for long-term success right there. So great job, team, thank you.

And then just the last one I had. You said the recent changes in raw material prices led to getting the DRI back on track. Just clarifying what you meant on that, given that iron ore prices and pig iron prices have been relatively stable over the time frame. So I'm looking for more color.

Well, the keyword you used is relatively stable, and when we look at it, we see an increase of $20 to $30 a ton on scrap and a $10 increase in pig iron. While that might be relatively stable, when you buy 15 million tons of scrap and 1.5 million tons of pig iron, that's a big change. We felt as we talked with our DJ Joseph team, whose out there all the time working in the marketplace, we could attribute at least half of that to the fact that we were taking a DRI plant offline. Since we finished the maintenance outage at the end of last month, we were at a point where we had to make a decision on when to come back online. We were basically breakeven on a marginal contribution basis, and so we were kind of up in the air as to what to do. We thought it was a good opportunity to leave it offline, and we believed that bringing it online had a significant impact for us on our costs of scrap and pig iron, so we decided to go ahead and bring it back online. We saw a bump go up, and it's about $25 to $30 a ton across the spectrum on scrap and $10 on pig iron, so again that's a huge impact for us. We bought it back online because of that, and I came away from the whole thing and the team came away from it more convinced than ever that although you might not see immediate profitability in the DRI plant itself, when you look at the overall impact on our company, on iron units which represent 60% of our costs, the overall impact is significantly better when we have that DRI plant operational compared to not having it, even if it is not profitable in its own right.

First, just from a housekeeping perspective, my apologies if I missed it. I heard the comment about $300 to $350 million of maintenance CapEx but what's your full year CapEx guidance figure and then also for D&A?

The depreciation and amortization is about $700 million, and the CapEx is about $500 million based on the things we have planned today.

And wanted to ask about scrap flows. How are you seeing scrap flows currently in the recycling market? What do we need to see a significant improvement in scrap flows for your recycling operations to restore positive margins?

Scrap flows over the last 60-90 days have been basically flat, but on a year-over-year basis, they are still down by probably 25-30%. The second part of your question, I think let me take a shot at looking at it this way. Our DJJ business model is a very diverse business model and sometimes we get caught up in thinking that it's only a recycling business with scrap yards, but we have five or six different business elements in our DJJ business, and the recycling group alone represents about 15% of DJJ's revenue flow. So the DJJ business model performance does not rely on the recycling group. For the recycling group to see improvements, really all you need is not as much flow based as it is you need stability in pricing. In other words, for most of 2015 we saw significant drops in the market price for scrap and that’s kind of like catching a falling knife. You can never really catch up with it. Once prices stabilize or show any signs of increase, then that is what drives margins and profitability at the recycling group more than just volumes.

First question is this touches on your auto comments a little bit earlier, but a bit broader. With the various blast furnace operators out there, the contract prices reset lower but they aren't giving any indications of whether or not they've lost business in that process. I know you've mentioned your auto shipments are going to improve. If we just look at the broader contract picture and the billions you have done business within the past, the new ones you've got, were you able to win any new customers going into 2016? Is it possible to give us an order of magnitude like how much more does that base load your order book for this year?

Well, I can only talk in terms of what I've already said in terms of the amount of tons we are selling into. Our order entry rate will result in about 1.4 million tons we sold in 2015, and we think it will be up a little bit in 2016 in the order of about 1.5 or 1.6 million tons, but we do think over the next two to three years based on the interest we have—and there are people that are working with us on qualifying our products—we feel very comfortable in saying that we will be up in the 1.9 to 2 million-ton a year range within the next couple of years.

I was thinking more broadly than just auto and appliance producers and machinery companies. I think, John, in that case the 2 million-ton number is right for next year versus in two or three years the broader market.

If you take the entire market, I'd say we're looking at about 2 million tons of contract business next year.

And then what is that versus what you did in 2015?

It was a little bit less—not significantly less, maybe an improvement of about 10%.

And the second question I've got is this goes back to the fabrication business, and you guys have noted profitability is up, shipments were sideways, and pricing is down a little bit. Was it possible that the drop in steel prices did improve margin?

We were remiss in not mentioning that, and you're absolutely correct, and frankly I apologize because one of the notes I have is the steel pricing, and we forgot to mention it, but I have to tell you that we looked at this carefully, and taking that into account; we are confident saying that still our team did a great job on lowering costs exclusive of our steel costs and we are confident that the other things we mentioned played a large role in the profitability picture.

John, if I may add, adding value to the construction projects we work on, through our channel to market and with our customers, our team has done well in that area; but certainly, to reinforce, reduced steel prices certainly helped in 2015.

Okay, the other part of my question was just that you are guiding for increased profitability in '16. It sounds like you're getting better prices above your input costs in '16 versus '15. Then, on the volume side, are you looking for a pickup in volumes out of the downstream business in '16?

Well, the only thing I can tell you on that is we look at our order entry rate and we look at our backlogs, okay? We feel the backlogs are very strong; order entry rate is strong. Our best estimate today is we will see an improvement of 5-6% in our businesses in 2016 versus 2015. And if you'll look at the pundits, McGraw Hill and so forth, they are saying 6-7% improvement. We think across the industry that might be a little bit aggressive, but we think in our business, we will see 5-6%.

There's been some data suggesting there's been a bounce in domestic steel capacity utilization rates over the past month or so. Is that consistent with what you're seeing across the industry, and should we expect to see a rebound in Nucor's volumes with utilization appearing to be moving up and with imports and inventories having come down a bit?

You kind of answered the question for me. Imports are coming down a little bit, in addition to imports coming down, the service center inventories are down a little bit. So bottom line is yes, we do see our utilization rates increasing as we go into the first quarter. Remember that we are moving into a period where we come out of the fourth quarter, which is usually the weakest quarter in terms of the steel business. So we're kind of coming out of that quarter, and for the first quarter, second quarter, we typically see utilization rates improving. We think we'll continue to see that. You mentioned the slowdown in imports. You mentioned the reduction of the inventory in our service centers; but also, there have been quite a few shutdowns from some of our competitors that we believe will see some improved utilization as a result of that. Additionally, we're seeing a small bounce in pricing, and when you see a bounce in pricing, typically that gets things going again. Customers, when pricing is going down, tend to wait until they hit the bottom. We have increased pricing on several products, and those price increases have been holding, so we feel pretty confident we have stopped the slide and are moving back up. Customers see that also and order entry rates go up.

In the past, you've said Nucor's goal is to control 6-7 million tons in scrap substitutes. Is that still your goal or has your thinking changed at all in light of the drop in scrap prices we've seen over the last several quarters?

Frankly, our thinking has not changed at all. We still see that as a key long-term strategic goal. I've said this several times: at Nucor, all of our strategies are directed towards long-term sustainable profitable growth. At the end of the day, we still believe very strongly, that I’m not sure whether it’s going to be five years, seven years, or ten years, but we believe that as a result of manufacturing decreasing in the United States and several other factors, we will be glad we have that DRI plant. Just remember one other thing: We're very heavy into pig iron, and that's very important to us. Right now we get about 80% of our pig iron out of Russia; the rest of it is coming out of Brazil. Those are not the most stable places in the world geopolitically. HBI, which is another potential product we could use as a scrap substitute, comes out of Venezuela, and that's also not a very stable geopolitical area. So when you look at all of these facts and you look at our goal of being flexible and having balance across our portfolio in a cyclical business, whether scrap pricing is cyclical, iron ore is cyclical, or pig iron is cyclical, steel pricing is cyclical. When you look at that, I believe the key to long-term stable returns to our investors, the best way to accomplish that is to have a nice, balanced portfolio and a flexible portfolio that allows us to move things around as we need to optimize the lowest cost product inputs and optimize our margins coming out of our mills. So, long-winded answer to your question, but no, our strategy hasn't changed. We believe it's the right strategy and we'll continue with it.

I noticed how sharply your scrap costs fell in the Fourth quarter, and I note also though that it's been lagging the index in the industry if you take some of the published numbers, and I'm wondering your comment on the first-quarter low scrap. Would it help you in the first quarter, do you think there's a chance you'll see even if the index is flat to slightly up in the first quarter versus the fourth, the actual cost of your scrap that you consume probably goes down a little bit?

Let me start that. You're right; there is a lag between the index and our performance because we always have some scrap inventory we own at our steel mills. The indexes don't reflect what we're consuming; they reflect what we're buying. So you're right that the bottoming of the scrap prices that happen during the fourth quarter are going to benefit us from some of that to start the first quarter.

Jim, one other follow-up: the large LIFO that you took in the fourth quarter, does that help, or would that lower the average cost of scrap in the first, or would that actually keep it higher?

It does not go through the scrap line, so it doesn't affect the scrap costs we published at all. It's in the corporate line we show the segments, in fact.

There might be one thing I'd want to add to your comments, and that is you have to look at that by segment. Because when you look at our bar mills, we have a lot less scrap on the ground. In fact, some of our bar mills, just because they are geographically challenged, we don't have a lot of room, so some of them happen to have as little as two to three weeks of scrap on the ground. Then you take a look at our sheet mills, and they may not necessarily have to have more on the ground, but it's a different mix, and the mix they use will depend upon the mix of products they are producing. So it's a very complicated process that you go through, but the impact that you mentioned, Jim, will occur more on a larger plate and sheet mills, just to give you a little more color.

One more question. Separately, is there any way you could comment on your lead time in the sheet products and the long products?

We can do that. I know hot band is the shortest lead time; we're probably only out a couple weeks, three or four weeks in hot band. But when you look at cold rolled and galvanized, we are probably held to March towards the end of March for our cold rolled and galvanized.

So you might have answered this a couple of questions ago, but a couple of your competitors have taken impairment charges on their facilities. I was wondering where do you guys stand with DJ Joseph?

Well, we aren't going to answer that question directly. What we will say is that we do our impairment testing every year and we always look at all of our operations, and we're comfortable with where we are with that. I'm going to refer back to what Joe said earlier about the business model at DJ Joseph being different. We aren't going to comment on what our competitors have done in terms of breakdowns, but when we look at our business model, as Joe mentioned, it's much more than recycling, and in fact the vast majority is out of recycling. When we look at our brokerage, we look at how they are performing, we're very comfortable that we are well within the range of having a level of impairment.

And, Dave, if I can add, John's absolutely correct. When you look at that mix within what we call the DJJ business, the recycling components can be a little bit cyclical, but the non-recycling components provide a very, very stable and very, very healthy earnings and cash flow stream, so that diversity adds a lot of strength to the value of the DJJ model.

Let me conclude by saying thank you to all of our customers. We really appreciate the opportunity to earn your business every day, and if we are blessed with your business, we won't let you down. Thank you to our shareholders. We appreciate your ongoing confidence and support. It means a lot to us. And to my teammates, I want to say thank you for creating customer value, generating attractive returns for our shareholders, and building a sustainable future for all of us. Most importantly, thank you for doing it safely. Thanks for your interest in Nucor. Have a great day.