Nucor Corp (NUE) — Q3 2017 Earnings Call Transcript

Good afternoon. Thank you for joining us for our conference call. 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; Chief Digital Officer, Joe Stratman; and our other Executive Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Leon Topalian, Dave Sumoski, and Chad Utermark. The leadership team in Charlotte would like to thank all of our teammates throughout Nucor for their excellent work in the first nine months of 2017 to build a safer, stronger, and more profitable Nucor. You are the reason our company's best years are still ahead of us. Thank you. We also want to extend a very warm welcome to the newest members of the Nucor family, the approximately 125 teammates who joined us in September with our acquisition of cold finished bar facilities in St. Louis, Missouri, and Monterrey, Mexico. Nucor is proud and excited to have you on board. Our Chief Financial Officer, Jim Frias, will now review Nucor's third quarter performance and financial position. Following those comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?

Thanks, John. Nucor reported third quarter of 2017 earnings of $0.83 per diluted share. Nucor's third quarter performance represents a decrease compared to second quarter of 2017 earnings of $1 per diluted share and year-ago third quarter earnings of $0.95 per diluted share. Our earnings for the first nine months of 2017 of $2.94 per diluted share compared to $1.99 per share for the first nine months of 2016. The first nine months of 2017 earnings actually exceed annual earnings achieved every year since 2008, a cyclical peak year. Nucor's disciplined strategy for profitable growth is working. During the steel industry's protracted downturn, we have invested aggressively to increase our capabilities for delivering value to our customers and profitable growth for our shareholders. We're achieving these improved results when large parts of our business, including rebar, merchant bar, special bar quality steel, plate steel, structural steel, and DRI, are operating well below peak performance. Our team is encouraged but not satisfied by the initial returns we have realized this year. Compared to the second quarter of 2017, our third quarter earnings decline were largely reflected lower capacity utilization rates and metal margins at our steel mills segment, as well as the impact of an unplanned outage at our Louisiana direct reduced iron ore DRI plant. The facility stopped production in late July and resumed operations in early October. Third quarter earnings before income taxes and noncontrolling interests in the raw material segment declined approximately $56 million compared to the second quarter. The vast majority of this decline was driven by the unplanned outage at Nucor Steel Louisiana, the last of the majority of the third quarter. The profitability of our steel products segment improved in the third quarter from the second quarter. Our comment about our tax rate as it can be confusing due to the impact of profits from noncontrolling interests. Excluding profits belonging to our business partners, the effective tax rate was 29.3% for the third quarter and 32.1% for year-to-date 2017. Third quarter of 2017 results included a benefit totaling $0.04 per diluted share related to tax return true-ups and state tax credits. This benefit was incorporated in our guidance issued in mid-September. Nucor's financial position remains strong. With total debt outstanding of $4.4 billion, our gross debt to capital ratio was 33% at the end of the third quarter. Cash and short-term investments totaled over $1.6 billion. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility which remains undrawn. The facility does not mature until April 2021. For 2017, we estimate capital spending of approximately $500 million and depreciation and amortization of about $730 million. During the third quarter of 2017, Nucor repurchased 1,591,000 shares of its common stock at a cost of about $90 million or just under $57 per share. Nucor's capital allocation priorities are clear and they have been consistently practiced over many years. Our first priority is to invest for profitable long-term growth. Nucor's growth investment strategy is simple and flexible. We are leveraging our five drivers to profitable growth. Our second priority is to pay cash dividends consistent with our success in delivering long-term earnings growth. Nucor has increased its cash dividend for 44 consecutive years. We believe that record is strong evidence of both the sustainability of our business and our disciplined approach to capital allocation. Our third priority is to opportunistically repurchase our stock when our cash position is strong and our shares are attractively priced. From 2004 to the just completed quarter, Nucor has cumulatively returned $8.3 billion to our shareholders via regular dividends, supplemental dividends, and share repurchases. These returns to shareholders represent approximately 39% of Nucor's cash from operations generated over that period. We are confident that Nucor's significant competitive advantages, highly adaptable business model, and proven strategies will allow our team to continue to deliver profitable long-term growth and attractive returns to Nucor's shareholders. Approaching the end of 2017, we are encouraged by a number of positive factors impacting our markets going into 2018. We see generally stable or improving conditions for our most important end markets including nonresidential construction, automotive, energy, heavy equipment, and agriculture. Although illegally traded imports remain at unacceptable levels, we are encouraged by the cumulative benefits of the U.S. steel industry's successful trade cases. We expect fourth quarter earnings to be similar to slightly decrease from the third quarter exclusive of the previously mentioned tax benefit recognized in the third quarter. The raw materials segment's performance should improve significantly driven by more consistent DRI production. The steel products segment is likely to benefit from margin improvement. The steel mills segment will see some decline largely due to weakness in plate and typical seasonality.

Thanks, Jim. Nucor's disciplined strategy for profitable growth is working. Jim noted that our first nine months of 2017 earnings represent Nucor's best performance for this period since the cyclical peak year of 2008. In fact, our year-to-date earnings of $948 million are more than double Nucor's average comparable period earnings of $411 million reported during the 2010 to 2016 time period. More than 25,000 men and women of the Nucor team are delivering this profitable growth despite several ongoing headwinds. 2017 has seen a renewed surge of illegally traded imports into the U.S. Through the first nine months of 2017, finished steel imports have increased an estimated 15% compared to the same period last year. The year-to-date market share for finished steel imports stands at approximately 27%. Nucor continues to believe significant work remains to be done to achieve free and fair trade for U.S. manufacturers. More specifically it is time for comprehensive and broad-based remedies that address illegal foreign trade practices that have materially weakened our nation's economic volatility. We applaud the U.S. international trade commission's unanimous and affirmative vote earlier this month on Whirlpool's Section 201 petition regarding serious injury from imported washing machines. Nucor and our customers embrace and thrive in a marketplace where winners are determined by real economic advantages earned by efficiency and innovation. Additionally, growth remains modest in our key end-use market nonresidential construction. Estimated 2017 nonresidential construction activity measured by square footage represents only 67% of the most recent cyclical peak level reached in 2007. Rebuilding America's infrastructure is an absolute prerequisite to the U.S. economy returning to a vibrant growth path that delivers rising standards of living for everyone. Nucor continues to urge bipartisan action on this critical issue. Action is years overdue on a meaningful infrastructure investment plan for our country. Economic and industry conditions remain challenging but the men and women of the Nucor team are doers. Our focus remains on what is under our control, execution of our disciplined strategy for long-term profitable growth. The strategy is simple and flexible. We are leveraging Nucor's five drivers to profitable growth. The five drivers are strengthening our position as a low-cost producer, achieving market leadership positions in every product line in our portfolio, moving up the value chain by expanding our capabilities to produce higher quality, higher margin products, expanding and leveraging our downstream channels to market to increase our steel mill's base load volume for sustained results, and achieving commercial excellence to complement our traditional operational strength. I will now update you on highlights of our team's recent progress implementing our strategy for profitable growth. During the third quarter, we announced two growth investments for our bar mill group. A micro mill project is being considered for five states in the Midwest and Southeast: Nebraska, Kansas, Missouri, South Carolina, and Florida. We will also be expanding our existing merchant bar operations in either Illinois or Ohio. Nucor's bar mills are a cornerstone of our company. Capitalizing on our position as a market leader and a low-cost producer of merchant and rebar, they consistently generate attractive returns on capital and free cash flow. Both the micro mill project and the expansion of our merchant bar operations leverage our existing infrastructure and allow us to better serve our customers. These investments will combine the firepower of multiple drivers to profitable growth enhancing our position as a market leader and low-cost producer, expanding our capabilities to serve our downstream channels to market, and pursuing across-the-board commercial excellence. In September we completed our acquisition of two cold finished bar products facilities, one in Missouri and one in Mexico for a purchase price of approximately $60 million. The combined capacity of the plants is 200,000 tons which increases Nucor's total cold finished bar and wire facilities to more than 1.1 million tons annually. This acquisition advances our profitable growth strategy on a number of fronts. It expands Nucor's market leadership position in cold finished products. It grows our portfolio of value-added products. It creates synergies with our bar mills by providing an additional channel to market for Nucor's special bar quality or SBQ products. From a geographical perspective, we are increasing our footprint in the U.S. and gaining entry into the Mexican market. This positions Nucor cold finish to better serve North American automotive and industrial customers. In his remarks, Jim discussed the Louisiana's DRI plant's negative impact on third quarter earnings. When in operation, our Louisiana DRI facility has met and in many cases exceeded our expectations for quality and conversion costs. The challenge has been Louisiana's inability to achieve consistent uptime. Various equipment failures and other issues have resulted in a number of unplanned outages. In light of this unacceptable performance pattern, we are currently focused on developing a more holistic approach to achieving system-wide reliability at the plant. As we study potential design and engineering modifications at Louisiana, we will be drawing upon lessons learned from our Trinidad DRI plant. Trinidad is currently approaching world-class productivity levels to complement its long-standing world-class quality achievements. Nucor's DRI production capacity is a critical foundation supporting our strategy to move up the value chain, and that strategy is working. I am pleased to report that our Decatur, Alabama sheet mill was notified this month that Nucor will be one of three recipients of the Honda Environmental Recognition Award at Honda's Sustainability Symposium on October 24. Nucor is receiving this recognition for supplying galvanneal, cold-rolled, high-strength steel as a replacement for this grade produced by integrated steel mills. Nucor's EAF production process emits roughly 70% less carbon dioxide and equivalent greenhouse gases to manufacture the equivalent amount of steel produced by integrated steel mills, yet has shown improved performance ability. Congratulations and thank you to our Decatur sheet mill teammates for your excellent work. Please keep it going. For a company such as Nucor with its unique position of strength and proven ability to execute its strategy for profitable growth, this is a time of great opportunity. That is why the Nucor team is both ready and eager to continue unleashing the pent-up earnings power that we have built into our company during the industry downturn. I am absolutely confident that Nucor's best years are still ahead of us. We appreciate your interest in Nucor, and would now be happy to answer your questions.

I just wanted to do a check on your situation with electrodes in the face of the recent spike. How much inventory do you have and when do you see the price effect kind of kicking in 2018?

Let me start by saying that we do not buy our electrodes on spot markets. We have long established contractual relations with our suppliers, and as a result, we feel pretty good about our position. First, the most important thing we think to look at is our availability; we make sure that we do have electrodes and we think our inventory will get us through the first quarter of next year, so we're feeling very confident about that. We have letters of intent from our suppliers to be able to supply us with electrodes for the rest of 2018. So for us, supply is really not an issue, and because of the contractual arrangements, all the hype that you’re reading about the spot price increases really doesn’t pertain to us and we have pricing through the first half of next year. We expect to see increases in the second half of next year in pricing, but again, availability is really not an issue for us. We buy almost all of our electrodes domestically; rather, let me rephrase that, we buy none of them from China. And so we don’t see any issue with the Chinese supply. The other thing that I would point out that gives me quite a little bit of an advantage on this is our DRI usage. Through our DRI, we’re able to accomplish what we call single charging, and that reduces our power on times in our EAF and reduces the energy consumption that we have as well as electrode consumption by about 10%, which is pretty significant. And as a result of us not requiring to swing the roof off as a result of using the DRI and the feeding of the DRI through the roof of a furnace. So all those reasons, we feel pretty good about where we are both on availability and in terms of pricing, and frankly our position in terms of consumption of electrodes as a result of our DRI usage.

If I could squeak in a second question, can you just comment? There have been some competitors recently announcing price hikes; do you believe the market is right for a hike right now in HRC?

We announced one last night, and as I have said many times on this call, we don't make price announcements unless we believe that they’re appropriate and that the market is ready to accept them. So that's my answer to that question. We think it is appropriate, and we think that it will stick.

I have a couple of questions on the plate market outlook, please. In fact, earlier on the call, I think in the release as well, that plate was a meaningful drag on Q3 to begin in Q4 earnings, but looking at the shipment and pricing data, it looks like your shipment perhaps grew over 20% year-over-year in Q3. I realize price is roughly stable quarter-over-quarter. So can you just help us understand a bit better what's driving the current margin drag and then with that in mind perhaps what we should expect into Q4? Obviously, the spot market has indeed weakened, so are you basically expecting a bit of catch up on margins in the fourth quarter? Thank you.

I’m going to let Leon, who is responsible for our plate operations, begin and then I’ll add anything maybe towards the end. Leon?

We have seen some metrics that are better than a year ago certainly, shipments are up year-over-year as you indicated. Our backlogs are a little stronger and we do see some segments and reaches, such as mining and military applications, that are improving and continue to have strong demand. As we look to the fourth quarter, we would anticipate probably the market to be stable going through the fourth quarter. However, as we saw in the first half of 2017, service centers really began to restock inventory levels. In the last quarter and moving forward, we see that pretty stable and then putting a lot of pressure on pricing, so that’s some—obviously, the demand is at its best and so that it will put some contraction in pricing moving forward.

I might add just two quick points to that, Leon. When I look at Q&T products, our Q&T lines are now full; that’s an improvement of what we’ve seen in the past, but that’s good news. The trade cases are doubling, but the amount of dumped Q&T imports and, frankly, the return of the mining and energy business has contributed to demand side. My final comment would be on infrastructure, and we feel very strongly that this country is in dire need of a very intensive infrastructure program. We have confidence that at some point in the near future, we will see some action, and we’re encouraging bipartisan action on this issue. I think there is one thing the hurricane and the damage caused by hurricanes have taught us is that we need to really upgrade our infrastructure throughout the United States. When that happens, we expect to see an improvement in the plate demand as a result of that infrastructure we built. So heading into 2018, we see some positive factors on the horizon.

Just one follow-up question, and I guess a lot of what you walked through outside of the move on inventory, the service centers actually paint a more positive picture for plate on the demand side in particular. Can you give a sense of what’s happening in terms of your margins? Whether or not will be a bit more dramatic, like expecting a bit of a pullback into the fourth quarter? And then, a separate question as well, if I may, on the Louisiana DRI facility. Can you please walk us through a bit more detail what has been the cause you believe of the recent maintenance issues? What other components do you have for a more stable Q4? And as you mentioned earlier, you’re just in the process of taking a more holistic approach towards the facility; when should we expect more complete updates on what's happening looking forward?

Well, I’ll ask Jim to address the first issue on margins.

I think when Leon was talking about service and restocking he was talking about the beginning part of the year, not what we’re seeing currently. And so now that time has passed, and so we're getting a bit of a boost in the first part of the year in the plate market because of that. Then, as the year progresses, scrap prices have moved up and we were unable to move plate prices up with scrap prices. So we started to see margin compression, and that’s where we live now. We’re living in a margin-compressed world today, and we think that will continue into the fourth quarter. However, when we look at end market demand, it hasn't changed for the better; it's probably improved, just that the restocking that benefited us at the beginning of the year is over.

Since we pack on plate, I might just make an additional comment that when I look at the work we’re doing on grades at our Tuscaloosa facility, as well as our Hertford facility, we are now qualified and in some cases in the process of being qualified to supply most of the plates that go into the large pipe and transmission lines and that's very exciting. One more point on this because I hear this all the time about the U.S. industry as a whole, and that is that we’re not able to produce all of the products necessary to appease the tight market in the United States. While Nucor cannot supply all the grades, they’re all available within the U.S. market and there is no reason therefore to have any exceptions on the trade cases relative to pipe.

So now while we move on to your final question about Louisiana. Okay, and I’ll make some comments on that and Jim you can jump in if there is anything you’d like to add to it. One of the things, as we said in the script, while we’re looking to accomplish with the modifications that we have to our long-term process that we have been using what we call HYL the new process is looking to improve our quality and at the same time decrease the amount of issues of emissions and therefore improve the environmental friendliness of the process. And in those two metrics, we’ve been very successful. We’ve been very pleased with the quality of the product that's come out of Louisiana, and we’ve been very pleased with the reduction in emissions by using this technology. The challenge of course has been mainly reliability, and we recognize that, and we are now in the process of taking the time to look at the entire engineering of the entire process, making the necessary adjustments as we referred to, and taking a holistic approach to the entire process from beginning to end and making the changes that we believe are necessary to improve reliability. As we go forward in that study, of course, we will be tapping in for the talent and the lessons that we learnt in our Trinidad facility which is frankly world-known for its reliability as well as quality but particularly its reliability. So that process we expect to take the next couple of months; at the end of that period, we’ll be able to give you a better explanation of the time that would be involved to make any repairs that we feel are required.

Yes, Jim, let me add one other thing, and that is that the plant did start its operations up early October. It’s running near full capacity again. We’re doing these things proactively not because we have a problem today; it’s running well, and we don't see any reason why it shouldn’t continue to run well. However, given the track record we've had, you’d be forced to put your head in the sand and not be aware of other problems. We’re trying to be proactive and looking at every possible issue and the other things we could do to make the plant even more reliable.

That’s a good point, Jim, because I should have pointed out we might go through this process in segue and reengineering it, taking a hard look at the overall process, making the necessary adjustments, and coming to the conclusion that the improvements that we have made to the process to date, both in the process gas heater and in the furnace itself, have rectified the issues. I mentioned several times on this call, and I’ll repeat it: the technology itself doesn’t seem to be the issue; it's the equipment that has enabled the technology to result in less emissions in particular that’s been a major change that has given us the most heartburn with the facilities. So we’ve taken a hard look at that; we want to find a solution that allows us to continue the improved environmental aspects of producing DRI while still having the improved reliability.

I want to ask you a question I asked earlier, but I’m just asking with how much the U.S. market is kind of lagging the global market. And I know the recent price hike maybe addresses that. Is there any structural reason you can think of why the U.S. market will respond to higher global prices, or do you think that this has just been something that may be related to this time of the year or any other explanation you have would be great?

Yes, I definitely do not feel that there is any structural change that is resulting in this. I think it’s more or less a question of lagging and leading cycles. We go through this from time to time where one or the other makes a major move. In this case, we see global pricing move up and at the same time - frankly, because of the import surge that has occurred in the United States that has had a very negative impact on the demand here in the United States and our ability to meet that demand. Although demand has improved, the improvement in demand is being held back by illegally traded products. So when we see that again actually coming to an end, we see pricing, frankly, we think it has bottomed out. We made our price announcements and, as you pointed out, $40 move off bar; we believe the market will support that, which will reduce the gap. So really, Timna, I think it’s more of just a case of the lead, lag in what is normally a cyclical pricing environment, compounded a little bit by the impact of illegally traded imports on us shifting the demand and the supply in the United States, which has had a negative impact on pricing, and now, as I said, we believe that has bottomed. There is a little bit of seasonality to it. It also, I think, Timna, if you look back over the past several years, you’ll see the same kind of thing happening at the end of September or early October; things are going to slow down a little but you’ll see an impact on pricing, and that occurs more here in the states than on the global marketplace. So that also might have played a role there.

And then kind of a big question just in this whole topic of capital allocation, how you think about using cash? Clearly, you need to buy back; you've done that for a while, so I was just hoping you could comment a little bit more about how you think about buybacks in your toolkit and then talking about a new micro mill. Do we really need more rebar, if you could explain that a little bit more? And then how you’re looking at other M&A options in a little more detail would be great.

Let’s start with the first question. I’ll ask Jim to address the buyback issue.

We have done a lot of returning of cash to shareholders over the years, and we've used base dividends, supplemental dividends, and share repurchases. We also look at what we have in our pipeline in terms of free cash flows as we forecast the future and imminent M&A transactions. We always have things in the pipeline we look at what's imminent and about to happen. And so we were encouraged by both the fact that we felt like the stock price was a little undervalued. We had a lot of liquidity and so we will always be opportunistic to look at that, and we know that our dividends this year, as we’ve gone deeper into the year, our payout ratio is going to be above 40%. As we talked in the past, that’s something that we think about in terms of what we make sure we’re paying at least that much in dividends. And so that was kind of the way we looked at it; it was a good opportunity to use some of our extra cash with the stock price where it was.

And now we have a second question that had to do with rebar in our investment in new rebar mills relative to the marketplace, and I’m going to ask Dave to tackle that one.

Timna, Nucor is committed to the rebar business and maintaining our low-cost position in the market. We believe that micro mill is a viable technology and it will allow us to better utilize our regional approach in growth markets where we have scrap available. We’re confident that we will see some increased investment in infrastructure as well.

Dave, maybe just trying to add two points to that. One is, and you kind of touched upon it, we’re looking to place these markets, so we’re turning to micro mills looking to place them in markets where Nucor has a large scrap supply as well as we know that there is good demand that’s being underserved in that particular region. So we will look at this as being able to give us a good return based on the largest and the impact that will have by a low logistics cost and getting scrap to the mill and then from the mill to our customers. And the other point that we mentioned in the script that I want to emphasize again is that when you look at rebar and merchant bar in general, long products in general, they’re not a real cornerstone for our company. In fact, I would like to say that it built our company and when I look at the rebar strategy and the expansion of it, one of the five drivers of profitable growth is to improve and increase our downstream channel to the market, and we’ve got a great channel to the market through Harris. So we feel that although you might feel that there is excess or perhaps not a need for additional rebar in the United States, we’re confident that based on the geographical locations that we're choosing, along with our channel to the market through Harris, these are going to be very good investments with good returns to Nucor.

There is a big logistics play, and we always approach these markets regionally, and we feel that this technology that's proven will allow us to expand on that regional approach and focus on where we have scrap available to us and where there are existing markets.

And can I ask you to repeat the third part of the question? I know it has something to do with mergers and acquisitions.

Yes, there is one question. So I was just asking about capital allocation broadly and then if you had any more comments about how you're thinking about M&A options or priorities?

I can answer that one without even getting help from Jim. How are we looking at growth opportunities and our capital investments going forward? I will tell you what, we have a full pipeline of opportunities, there’s a lot of things that are taking place in the world today. I will show you, and most of them, there are a lot of things happening both in the global marketplace and in the United States, a lot of changes, some companies are more challenged than others and that provides opportunities. We want to continue to invest in our downstream businesses to improve our channel; we are looking at additional upstream opportunities to invest in. So I mean we are in a great cash position; this is again one of those cases, having a strong balance sheet gives us opportunities to continue to build upon five drivers of profitable growth and we’ve got a lot of opportunities out there. Now, one thing that I would tell you that we will look at every area that we invest is value-added investments, investments that are going to improve the value added. We think that the higher we move up the value chain, the higher the margin and the more sustainable the business, so the investments that you see from us going forward will all be in the area of improving our value proposition by providing higher value products to value-appreciative customers willing to pay for that higher value, and that’s what we will be focusing on.

So I’m going to drill down into the rebar market as well; it has been somewhat perplexing from my perspective this year, and that metal spreads seem to continue to trend lower, and you have the Turkish terrors. It seems like all the excess inventory in the calls has been absorbed, and that is pretty close; I think Turkey is selling at 525, 530 metrics, which, as I think about, what the price is on a landed basis, is around like 555, 560. Can you comment on how you see this market sort of evolving into next year? And then I know you've been in Washington. It seems like from sitting down with respect to 232, do you think that from your discussions recently you said this is asset 232 is still going to happen, and do you see rebar playing into that? Thank you.

Let me start, and you can add on. Basically, your question is if I’m hearing it correctly: look, there are a lot of things that are changing in the marketplace, but still the margins on rebar and pricing continue to drip down. But I think you have to consider what happened at the beginning part of the year: a surge of inflows that came into this market, still a month where we saw a 30% market share slightly higher, and 30% of market share going to inflows on rebar. So there is a little bit of a lag in the effects, so we are still seeing some of the negative consequences or the negative impacts—the adverse impact of that surge of imports that was totally out of control at the beginning of the year. Yes, with one trade case, I find that we didn’t get the kind of remedies we felt were justifying given the surge, and we’re going back in Washington as you noted. We’re going to continue to fight, and we’re going to continue to win cases and continue to appeal that. We don't get the right outcomes. I mean, the story of rebar in the United States this year is all about two words: illegally traded imports and the need to stop them and get the situation under control, and I’m confident again that given the actions we’re taking in Washington, we will see those positive results. Dave, do you want to add anything to this?

Just demand is decent. I mean, you really hit it. Those illegally traded imports are the thing that really hit us in the beginning of the year; those record levels of imports. We’re working our way through that; the import level is down about 21% now since we have got the—now we’re starting to see rebar coming from other areas besides Turkey. But it’s down, and we feel the demand is decent, and we look forward.

I guess on the brighter side, we look forward going into the end of the fourth quarter, end of the year, and into next year because of the decrease in imports. Now it’s going to take a while for that surge to work its way through the system; no doubt about that, but we will continue to see—and we believe we will continue to see imports will lower—and that excess demand has been holding steady and possibly maybe improving a little bit again if we see that infrastructure build and other things that are happening. Some of the results frankly, said it was the devastation from the hurricanes that might though result in a little bit more demand on rebars like we build parts of areas devastated. So all said, we think it will pick up a little bit, and we love to continue to keep the imports down. You asked a question about 232, so I think so I can take just a minute of your time to share with you my thought. You summed it up well. I said this many times; I’m getting a little concerned about the length of time it’s taking for this to be implemented, and I’m concerned about the surge of illegally traded imports that are coming in as a result of the delays. With that said, I’m still confident that President Trump will fulfill his commitments to our industry and that we will see 232 hopefully early part of next year—absolutely that may be there will be a nice Christmas gift for the industry, and we will see at the end of this year. But it is certainly needed, and it has been—we have a commitment to get it, and I think as you look at some of the things that are happening even outside of our industry, for example, with the Whirlpool 201, which is a different action of course but still points to the severity of the imports and the type of holistic remedies that can be offered by Washington, and we’re counting on getting one from the steel industry.

Just to stay on imports for another minute. So are you guys surprised to see imports, I guess, as high they are given that the import arm is pretty much non-existent now, and when do you expect imports to return back to a more normalized level as a percentage of the U.S. market?

We're not surprised at all at this surge; not at all. The reason is that we see all of the countries and companies that are looking to beat because they know they’ll be some form of trade relief. They’re looking to get every product, every time in that they get in before we either go to the 232 or we continue to win these trade cases that we’re winning. Whether we get 232 or not, we're going to continue to prosecute trade cases with the same vigor that we have over the last 12 to 18 months. I’m confident we’re going to continue to see the types of wins that we’re seeing. Apparently, we saw these countries that are breaking our laws because they are doing everything they can to get their product in here before something goes into effect. So I’m not surprised to see this surge; I think it’s a direct result of the commitment that was made by President early in the year, and a belief that he was going to go into effect sometime in the June time period as was indicated. And with every month that passes that doesn’t go into effect, I always say they continue to get their product in here before something goes into effect. Now the one thing that we’ve been talking about lately in Washington, and certainly I have been sharing with the administration, is our belief that this should be vocal about the fact that these—any results of 232 should be applied retroactively to the time period when the President made his first commitment back in the early part of this year. We think that frankly is the right thing to do, but also we believe that if he were—or the administration were to make that kind of commitment, it would put an immediate end to the surge, and therefore we would not see the damage occurring to the industry who love the administration and took the time it needed to complete the study of the 232. So that’s something I wanted to mention because we’re pushing very hard in Washington; I don't know if we’ll get it, but we’re pushing it very hard with the administration.

And John, that will be some essentially like critical circumstance on the AD/CVD duty side; I think those are the rules for critical circumstance?

It would be exactly the rules for critical.

I probably should have said it easier; about just saying we want the same rules applied to 232 that do exist for critical circumstances. And I got to tell you, this is critical circumstances. I mean, even the G-20 has come out and called the crisis in steel today a crisis, okay? That needs immediate action. That’s the G-20. And the OECD has made a very similar comment, and I’ll just point out this is that the United States is suffering through this surge and results follow the capacity in China. It’s Europe, and Europe is quietly quickly taking action than we are then moving much quicker to get relief for their steel industry, as well as other regions. India just recently, a few months ago, put tariffs on all of the Chinese products that come into the country. So it’s a global problem; other regions are reacting much quicker than the United States, sadly, which means that we remain the market that they can get into while our government is dealing more slowly with the issues that other governments have dealt with more quickly.

If you don’t mind one quick follow-up, so switching to pricing, we've been seeing HRC prices weakening recently. I would assume that you said you’re primarily due to this high-level imports. Can you just walk us through kind of fundamental drivers and what you're seeing from your seat as to why maybe why the market will accept and enable the recent price hikes to stick? Thanks, John.

I’m assuming you’re talking about price hikes on sheet products and… We watch the demand curve very carefully here, and we believe that we’ve seen it bottom out. A couple of things that are coming into effect here: we see the imports on HRC been drifting down while demand remains constant, even drifting up a little bit. At the end of the day, it's always about supply and demand, and then we see the market picking up or entering over the last two weeks; we’ve seen it increase significantly. We feel good about the demand level going into the fourth quarter and particularly into 2018. One area that I would mention in particular is in the oil and gas market; that whole market, as the energy market has improved much more quickly than we expected to, and that’s a particularly strong dynamic for Nucor as to our acquisition of Gallatin; we serve that market very heavily. So with oil and gas picking up a little bit, imports are down a little bit, although automotive has kind of slowed down a little bit, we expect that to slightly pickup again as a result of some of the sadness associated with the hurricanes coming both in Florida and in Texas. We do estimates of anywhere from 700,000 to 1 million vehicles that are going to need to be replaced. The one last point that I would make is we didn’t touch upon it too much, but in relation to the automotive market picking up, Nucor’s participation in that market and the grades that we continue to develop and offer to that market; I feel confident it’s going to help our sheet business. And the final point would be that when you look at the MSCDI inventories to sheet products, they have been drifting down to a fairly low level now, which we again believe bodes well for the fourth quarter and firsthand next year.

I just have a clarification on the micro mill investments; you mentioned Illinois and Ohio as targeted regions for expansion. Are we talking about both…?

We talked about those two states as areas where we look to invest to expand our merchant products. We talked about five or six other states that we're looking at for the rebar, though Ohio and Illinois we’re looking at as potential areas to invest, to expand on merchant product offerings.

So we would be looking at new capacity then in both merchants and rebar if I’m hearing you correctly.

You're definitely correct.

And would you expect us to replace other capacity within your system, or is this a thought whereby you want to grow production?

We want to grow production now having said that, we have a complete plan in place that takes into account all of our facilities. There will be some rearranging of markets; there’ll be some plants where we shipped product as a result of this new capacity and rebar. We’ve taken a holistic view of this. We've done a study of all of our merchant and our rebar decisions and how we led our markets, and I don’t want to get too many details out here, but yes, this is really a function of more fully utilizing our melt in each of our areas and better matching the product offerings in each region to the markets in that region. And as we shift things around, we’ll be taking—we mentioned the word logistics several times here today because we’ve done a study and taken a hard look at how we match our product offerings to the market from a geographical perspective in which they are located and how can we rearrange that offering to optimize on this or minimize on logistical costs. At the end of the day, we said this how many times, Nucor continues to be the low-cost producer in merchant and rebar, and frankly in all of products, and we continue to drive that cost lower and lower. At the end of the day, especially in the world with excess capacity, the low-cost producer is going to be the winner, and here at Nucor, we believe and continue to improve our processes while continuously looking for ways to drive that cost even lower; this is an example of it. The team has a great data. The long product group has done a great job at making a detailed market study, and now we’re going to be implementing the changes that result from that study.

And most of the micro mill investments we've seen have been around, I want to say, between 300,000 and 400,000 tons; should that be what we’re thinking about right…?

Yes, in that neighborhood; we’re not going to give out any specifics at this point, but yes, in that neighborhood would be fair to make that comment.

And if I could ask a second here just maybe it’s a good segue in both merchant bar and beam, but a few weeks ago Nucor had severely cut list prices into the fourth quarter. I was just thinking about what the rationale was behind that from a timing standpoint. And should we think there’s going to be a little bit of pressure on pricing in fourth quarter? Thanks.

I can answer it very simply. The rationale behind it was the fact that our book prices have been targeted by our competitors who offer discounts off of our book price, and our book price was becoming irrelevant to the market. And so we got to make it more relevant to the market, and as a result of it becoming a little bit less relevant to the market, we lost market share in the third quarter. And that’s greatly upset me, and I could tell you the instructions to the team going forward: that we were going to launch discounts off our market price—our full price, excuse me. But I watch discounting offer our book price much more closely, and I’ll react to any discounting off our book price much more quickly as we move forward so that we always have a relevant book price that pertains to beams, merchant, and rebar. Did that answer your question?

Yes, you confirmed my suspicion; I thought you were unhappy with something, and I was right. Okay.

Okay, while your suspicion was correct.

Thank you. Let me close as I usually do by saying thank you to our shareholders. We appreciate your confidence and your support. Thank you to our customers. We appreciate the opportunity to earn your business every day, and we will continue to work hard to earn this business every day. I also want to say thanks to my Nucor teammates for creating value for our customers, generating attractive returns for our shareholders, and building a stronger future for all of us and our families. And most importantly, thank you all for doing it safely. Thank you for your interest in our company. Have a great day.