Nucor Corp (NUE) — Q1 2019 Earnings Call Transcript

Good afternoon. Thank you for joining us for our first quarter earnings call and thank you for your interest in Nucor. Other members of Nucor's executive team are also on the call today including Jim Frias, our Chief Financial Officer; Joe Stratman, our Chief Digital Officer; Craig Feldman, responsible for Raw Materials; Ladd Hall, responsible for Sheet and Tubular Products; Ray Napolitan, responsible for Engineered Bar Products; Dave Sumoski, responsible for Merchant Bar and Rebar Products; Leon Topalian, responsible for Beam and Plate Products; and Chad Utermark, responsible for Fabricated Construction Products. Lastly, Joe Stratman announced his plan to retire from Nucor on June 8th after more than 29 years of dedicated service to Nucor. Joe has been an exceptional and resourceful leader who has made outstanding contributions throughout his career with Nucor, which has included key roles in our steel, raw materials, and steel products businesses. Joe also served as our Executive Vice President of Business Development and most recently, as our Chief Digital Officer. Joe, thank you for your leadership; you have played a key role in positioning Nucor for continued success in the years to come. Speaking personally and on behalf of our 26,000 teammates, we want you to know that you will be missed and that we wish you and Jill the very best as you begin this new chapter in your life. Effective May 19th, Mary Emily Slate will be promoted to Executive Vice President and will assume responsibilities for the tubular products group, logistics and joint ventures. Mary Emily is a dynamic leader with 19 years of experience at Nucor in senior sales and operational management roles. We look forward to her building on the success that Ladd Hall and his team have achieved in tubular products. Ladd Hall will continue to serve as Executive Vice President of Sheet products. Ray Napolitan will assume responsibility for Nucor's digital initiatives while also continuing in his role as EVP of Engineered Bar Products. Before we discuss our strong first quarter results, I want to emphasize that safety is the number one priority for everyone on the Nucor team. While we consistently lead the industry in safety outcomes, our goal remains zero incidents at every Nucor facility. We will keep working to achieve this goal by continuously identifying and mitigating safety risks. That is the mindset that will drive our success. By working together, the Nucor way, I have no doubt that we can achieve our goal of zero incidents. And while I'm on the subject of safety, I would also like to congratulate and thank our teammates at Nucor Gallatin for being recognized as a VPP Star Site by Kentucky's Division of Education and Training. Nucor Gallatin is only the 13th site to be awarded this designation by the Commonwealth of Kentucky. For those of you who are not familiar, Kentucky's VPP or Voluntary Protection Partnership program is similar to the federal government's OSHA VPP program. These programs are the gold standard for implementing and maintaining safety and health management systems. To achieve VPP status, companies must meet rigorous qualifying criteria and undergo an extensive onsite evaluation. After a two-year process, Gallatin is the 24th Nucor division to achieve this impressive recognition. Each of our VPP starred divisions must demonstrate continuous improvement and safety and health in order to maintain the designation going forward. Congratulations again to my teammates at Gallatin on this outstanding achievement and my continued thanks to all Nucor teammates who put safety first every day. Let's continue to set the bar higher for all manufacturers and lead the way towards better safety outcomes for all. Moving on to our first quarter result, Nucor achieved significant year-over-year improvements in our first quarter earnings, again demonstrating the value of our position as North America's most diversified producer of steel and steel products. The steel-making operations that contributed most significantly to the improvement over the prior year include our plate, rebar, merchant bar, engineered bar, and beam mills. Several of our downstream businesses also achieved earnings gains compared to the first quarter of 2018 including our metal buildings, joists and deck products, and piling products. Jim Frias will discuss these results and outlook in more detail shortly. There's been a lot of commentary about capacity expansion plans announced by the U.S. steel industry. While we will not speak to the plans of other participants in our industry, Nucor's long-term strategy for profitable growth is both disciplined and sustainable. Sustainability is achieved by making strategic investments that position Nucor to deliver a superior value proposition in cost, quality, and service to our customers. Discipline is driven by Nucor's laser focus on being effective stewards of the capital that our shareholders entrust to us. We only deploy capital on growth projects when we identify high-return opportunities that will create value for our shareholders. Importantly, our senior management incentive compensation plans are directly tied to Nucor's return on equity and return on capital performance, aligning pay with performance and value creation. We have announced 10 significant growth projects. We anticipate that six of these projects will begin operating this year including the new specialty cold-rolling mill at Nucor Steel Arkansas, which came online during the first quarter. We expect all 10 of these projects to be in operation by 2022. These projects will create approximately 1,500 direct jobs and we believe at least 7,500 indirect jobs. With respect to the six projects set to begin operations this year, three projects expand the value-added capabilities of our flat-rolled steel operations and the other three projects improve the competitive position of our rebar and merchant bar long products businesses. Let me provide more detail about the new specialty cold-rolling mill at Nucor Steel Arkansas and two others that will start up this summer. First, our new specialty cold-rolling mill at Nucor Steel Arkansas had a successful startup in March. We have already delivered to customers prime products both pickled and oiled as well as fully processed cold-rolled product, and production continues to ramp up. This flexible cold reduction mill expands our capability to produce motor lamination, high strength low alloy, and advanced high-strength steel products. Congratulations to the entire Nucor Steel Arkansas team on a very successful startup. The second project, Nucor Steel Marion's new in-line rolling mill is scheduled to start up in the third quarter. The newly installed reheat furnace is running well and delivering the anticipated reductions in energy use. These upgrades will significantly improve Marion's cost structure and position the mill as a leader in the regional rebar market that it serves. And third, we expect our sheet mill in Kentucky, Nucor Steel Gallatin to begin producing pickled and oiled coils in July and galvanized coils in August for the mill's new 72-inch galvanizing line that will be the widest hot-rolled galvanizing facility in North America. It expands our capability to serve the automotive and other value-added markets. Three other projects, our joint venture galvanizing line with JFE Steel in Mexico, the merchant bar mill expansion in Illinois, and the new rebar micro mill in Missouri are all on track to start up later in 2019. I also should mention that we have recently received our permits and commenced construction on our Frostproof Florida rebar micro mill. We are targeting startup there in mid-2020. In March, we announced a plan to build a new state-of-the-art plate mill in Brandenburg, Kentucky. This is a strategic move to solidify Nucor's position as a leader in the U.S. plate market, not just in terms of volume, but also quality, reliability, and cost. The new mill will give us the ability to produce 97% of the plate products consumed in the United States including specialty high-margin grades. Our site on the Ohio River is located in the center of the country's largest plate consuming market, strengthening our ability to serve our customers with lower freight costs and superior on-time delivery. Further, we will be in a region with an abundance of low-cost graphite that is well covered by our David J. Joseph scrap business. We are excited about this investment in our entire pipeline of value-enhancing growth projects. Nucor has achieved success over the past five decades by building market leadership positions, and we have done this by providing our customers with unmatched performance in quality, cost, product range, and on-time delivery. At Nucor, we build powerful partnerships that deliver powerful results. The more successful we can make our customers, the greater success we will have as Nucor shareholders and teammates. Jim Frias will now provide more specific detail about our first quarter performance as well as our outlook for the remainder of this year. Jim?

Thanks, John. Nucor reported first quarter of 2019 earnings of $1.63 per diluted share. Included in these results was a benefit of $0.08 per diluted share related to the gain on the sale of an investment in our raw material segment. Excluding this non-recurring gain, first quarter performance exceeded our guidance range of $1.45 to $1.50 per diluted share. As John discussed, Nucor continues to benefit from our diversified business model. Another key strength of Nucor's business model is strong through-the-cycle cash flow generation. First quarter 2019 cash provided from operations was $651 million, even after funding just over $300 million in profit sharing earned by Nucor's teammates in 2018. Inventory was a source of about $108 million in the quarter, even as net sales were approximately 10% higher year-on-year. Consistent with Nucor's disciplined approach to capital allocation, other major uses of cash during the quarter were capital expenditures of $289 million, dividends of $123 million, and stock repurchases of $73 million. We returned almost 40% of net income for the quarter to our shareholders while also investing for long-term profitable growth. We ended the quarter with $1.6 billion in cash on hand. Nucor teammates are executing the current stages of our long-term growth strategy and we therefore expect to accelerate our capital spending as the year progresses. For the full year of 2019, we continue to estimate that our capital expenditures will total approximately $1.8 billion. Nucor's financial condition remained strong with total debt outstanding of $4.3 billion. Our gross debt to capital ratio was 29% at the end of the first quarter. Our $1.5 billion unsecured revolving credit facility remains undrawn and does not mature until April 2023. It is worth noting that our first quarter results included $19.6 million of pre-operating start-up costs related to strategic investment projects. That is an increase from $17.4 million in the fourth quarter 2018 and $2.3 million in the year-ago first quarter. Now turning to the outlook, we expect 2019 to be another robust earnings year for Nucor. We continue to be encouraged by the overall strength of our domestic end-use markets. In fact, we see stable or improving demand in 21 of the 24 end-use markets we monitor. One market, power transmission, is seeing a meaningful decline due to the completion of major grid extension projects in 2018. Automotive OEMs and automotive suppliers comprise the other two markets that we expect to decline for the year. However, we anticipate that the decline in automotive unit volumes will be moderate and Nucor will actually grow its shipments to these customers in 2019. Of course, the largest source of demand for our products are applications in non-residential construction, which appears set for another solid year in 2019. Earnings in the second quarter of 2019 are expected to be similar to the first quarter excluding the gain on the sale of the investment. We expect similar linked quarter performance in the steel mill segment as improving margins for structural environmental products offset weakening margins in our sheet and plate mills. The steel products segment is expected to achieve significant improvement in the second quarter over the first quarter as typical seasonal patterns and improved weather conditions benefit construction activity. The performance of the raw material segment is expected to decline in the second quarter compared to the first quarter due to further margin pressure at our direct reduced iron or DRI plant. Thank you for your interest in our company. I will now turn the call back over to John.

Thanks, Jim. Before we take questions, I want to make a few remarks about trade. Nucor has long maintained and more importantly consistently demonstrated that when operating on a level playing field, we can successfully compete with any steel producer in the world. Free and fair trade is a critical underpinning to the continued success of both Nucor and our customers. While much of the focus has been on Section 232 steel tariffs, prosecuting trade cases remains vital to ensuring a level playing field. For that reason, Nucor applauds the recent determination by the U.S. International Trade Commission that there is reasonable indication of material injury from imports of fabricated structural steel from China, Canada, and Mexico that are subsidized and sold into the United States at less than fair value. More effective enforcement of rules-based trade has made a significant contribution to improving the performance of the U.S. economy in recent years, benefiting the steel industry and the entire domestic manufacturing sector. 2019 is going to be another exciting year for our company, as we continue to bring new projects online. We will continue to pursue profitable growth opportunities and we remain confident that Nucor's diversified business model will enable us to continue to outperform the industry over the course of the economic cycle. Thank you to our more than 26,000 teammates for the way you execute our strategy and thank you for the work that you do every day to build a safe and more profitable Nucor. I would also like to say thank you to our customers. We appreciate the trust you place in Nucor and we will continue to do our very best to earn it with every order. And finally, thank you to our investors for entrusting us with your valuable capital. We would now be happy to answer questions.

I've got two for you, one near-term and one a little bit longer term. First is on expectations next quarter, you mentioned thinning margins for sheet and plate and offset by better profitability in structural and rail, excuse me structural and bar. How should volumes across your platform look relative to last year across these different segments particularly as Mary is ramping up? And is there any potential patch-up of the weather delays seen against the first quarter? And then my second question is on what you just mentioned, John, that fabricated structural steel trade case. How do you think about the opportunity that that could bring to Nucor, how much do you sell right now in terms of tonnage and revenue today what that represents, and is that a market where you had been seeing increasing pressure from imports? Thanks a lot.

I’ll address the first question regarding volumes heading into the second quarter. We have noted that demand is fairly steady, and it may actually be growing slightly on the sheet side and hot band side. Our order entry in the past couple of weeks shows marginal growth, which is a positive indicator. As we enter the second quarter, we anticipate that volumes will remain consistent, especially for the products you mentioned. Our downstream businesses might experience slightly better volume due to improving weather conditions after a long winter and a very wet spring. Overall, I expect our volumes to be steady moving into the second quarter. Regarding the second question, please keep in mind that this is still a preliminary situation, and we have not received a final ruling yet. However, we are optimistic about a favorable outcome in the final determination. This could potentially be great news for us, as we sell roughly 50% of our beam structural products to our fabrication businesses, amounting to about 1 million tons annually for fabricated steel construction. Demand and pricing have been adversely affected, which we believe is due to the influx of dumped and unfairly traded products, particularly from Canada, Mexico, and China, which are the largest violators of our trade laws in this sector. A positive outcome would be a significant advantage for us, and we are confident about it; we just need to wait and see how it unfolds.

Can you provide a little bit of commentary given the recent flooding on the river system, maybe discuss how this has impacted your material sourcing and if it has had any temporary implications for the input costs for the Company?

Overall, we've done quite well through the flooding. I'd say our most seriously impacted plant was on Nebraska facility where we had significant flooding in the division. We have lost a bridge that we use for rail transportation in and out of the town of Norfolk, but I got to tell you the team there did a great job responding to the crisis. We had minimal impact if anything over the course of a month. And in general, when we talk about the river, in terms of raw materials coming in and out, there really hasn't been much of an impact at all. The river has been pretty good in terms of the flooding, we haven't had too much of an issue, a little bit on the Mississippi, but nothing that's impacted our plants, either with shipments going out or raw materials coming in.

Okay, thanks for the detail there. And if I could one other, within the release, you did highlight the internal growth initiative, but also called out other growth opportunities. Any more detail you could provide around this? And would it be something focused on the core steel segment domestically based or something else?

Anything that was outside of what we mentioned specifically in the opening comments, we will not be able to comment on.

Hi, John and team. Just a follow-up to that last one maybe more conceptually, the comments on the front around the other potential growth opportunities, these are independent of the ten projects that you've spoken about; I just wanted if you could comment on that, and secondly just on the guidance for next quarter, I know you touched on the volumes, you expect to be flat to potentially a touch up. I would have thought that the spreads would still be widening, so that appears conservative on the guidance. Just wondered if you could comment on that as well?

First of all, on the comment about our potential growth opportunities outside of what we mentioned, it's a general statement. We are constantly looking for good opportunities to grow our Company profitably. You've heard me mention many times our five drivers of profitable growth as we are constantly on the lookout for opportunities that fit those five drivers of profitable growth and continue to grow the diversity of our Company. We take great pride in the fact that we're the most diversified steel and steel products Company in North America for sure, and we think that brings great value to our customers and to our shareholders. So we will continue to look for opportunities that are expanded there, and that met with the criteria we've established in our five drivers of profitable growth, but beyond that, I really can't say anything more specific. In terms of the earnings going into the second quarter, what we said was they will be similar, and I think that's really all we can say at this time. We are in a very cyclical business, things change rapidly. As we see the second quarter right now, we see the earnings, the volumes to be about the same; we see the earnings to be similar and that's how we view it right now.

So, first question is just on working capital management. If I look at the last two years between accounts receivable and inventory, it's been about a $2.8 billion cash outflow, which I understand you're going to trend up just given what the pricing did and what's going on in the market, but it would seem that there is a significant opportunity to get working capital back out of the Company. I just wondered if you could address that given sheet pricing is back down basically to where it was a year ago.

This is Jim. I'll respond to that question. Our inventory and receivables haven't increased in terms of days on hand; they've increased in line with the volume of business we're doing. So, while receivables may have risen, average prices have increased as well. We're currently collecting our receivables in just over 30 days. There's no possibility to shorten the collection period, but it's true that if prices were to decrease further, we would benefit from that. Looking back to 2015, we had a weaker earnings year due to a dramatic decline in prices, yet we still generated strong cash from operations by liquidating working capital. When steel prices decrease, scrap prices also drop, which reduces the overall cost of our inventories. Additionally, we do reduce our inventory volumes somewhat when business activity is lower. Therefore, in the event of a significant downturn, there is potential for some reduction in working capital. However, in the first quarter, our working capital was relatively neutral, unlike last year when it negatively impacted earnings by several hundred million dollars, around $600 million. Currently, we're experiencing a more stable working capital environment, in contrast to last year when it was increasing along with expanding margins.

Right. But if I look at inventory days, you finished last year at 82, a year before that, you're at 73, 66, 57....

Yes. We discussed that this year and quarter experienced some shipment delays with a few customers at the end of the year, along with supply chain issues related to raw materials. We found ourselves with more pig iron than expected, and we're gradually reducing that, although the opportunity isn't significant. I expect working capital to remain relatively flat as we move through the middle of the year.

Okay. And then just one follow-up on automotive. John, with some of the investments you're making on the galvanizing side, I know the Company has already had pretty good success on gaining auto share. Can you just talk to your expectations for auto share growth with these new investments? I think you were targeting about 1 million tons of auto sheets either this year or last year and if you could just update us on sort of the amount of OEMs you're engaged with now versus a year or two ago that would be helpful. Thank you.

We noted earlier that one of the markets facing a decline this year is automotive. We anticipate a decrease of approximately 16.8% to 16.9% compared to 17.2% last year. However, the positive aspect is that we are continuing to expand our market share in these shrinking markets, meaning we are securing a larger portion of a smaller market. The investments we're making will enable us to strengthen our market share in these areas, particularly with projects like the cold mill at Hickman and the expansion at Gallatin, which will help us enter automotive products. Moving forward, we expect our market share in automotive to keep growing. In terms of our current status, we plan to produce around 1.6 million tons this year and by the end of the year, we should be operating at an annual rate of about 2 million tons. We are very enthusiastic about our progress in automotive. In response to your query about which companies we work with, I won't provide specific names, but I can say that we are engaged with nearly all of the 14 OEMs we do business with today, and we are very excited about that.

So, I'm hoping you can help me connect the dots on the volume discussion we've been having. If I look at your Q1 volumes, just looking at the category, as you gave us, you got 5 million tons, and if I look at the first half of last year, it was 10.7, let's call it, but you're flat into the second quarter, then you are declining substantially year-over-year, but you told us that most of your end markets are going up nicely and auto will be flat. So, I'm just struggling with how to understand that. Is it something we're missing on the weather side, are customers not buying according to their demand? Can you help me understand that?

I have a few comments to make. First, your last point is absolutely correct; there are numerous dynamics in the market today, demand remains robust, but we are observing various developments. One example is that the inventories at service centers are decreasing quickly and reaching quite low levels, while there is still a significant amount of sales between these centers as they manage their numbers from the end of last year. We're witnessing this activity unfold, and as I mentioned, the weather affected the first half of the year, but we see improvement as we move forward. Additionally, with scrap prices declining, our customers often hold back, waiting to see how the scrap market will evolve. Personally, I believe there is considerable pent-up demand, as many people are waiting to see what happens with scrap and other factors. Nevertheless, it's important to remember that demand remains strong, imports are lower than last year, and they continue to decline year-over-year. We anticipate that volumes will begin to rise in the second half of the year, consistent with the overall yearly performance. We expect an uptick in demand during this period. Ultimately, as stated at the beginning, we track 24 end markets and regularly communicate with our customers, who are optimistic about the current market conditions. Lastly, some customers last year increased their inventories due to hedge buying, anticipating action around tariffs, which has led to some excess inventory still being managed. There are many factors at play, but I pay close attention to market trends and customer feedback, and I believe that we are well-positioned in a variety of downstream markets, including rebar fabrication, metal buildings, and tubular sectors. Our involvement in these markets provides us with valuable insights, and we continue to feel positive about the demand we see in these areas, as well as in our steel markets.

Okay, helpful, but maybe that...

I don't know if that helped you connect the dots.

Yes, I mean, they helped, but I'm still of a confusion, I'm confused about the next area or maybe the same answer, but on price, so we've talked about volume, but on price, I'm not going to hopefully put you on the spot, but prices have been going down despite demand going up and more in the flat-rolled side, I recognize in some of the scrap, but why are domestic mills, I know, I have to repeat myself here, but why are the domestic mills charging at or below landed import prices if demand is so good and imports are down?

One reason I can share is that there are some new players entering the market, and they need to establish themselves, which sometimes means they have to lower prices to gain a foothold. This dynamic contributes to price pressure as these newcomers may face challenges with quality and delivery when starting up or restarting operations. When quality issues arise, it can lead to lower prices in the market where they are trying to compete. Additionally, with scrap prices declining, buyers often hold off on purchases, anticipating even better prices in the future. This situation compels us to be cautious in our pricing strategies. While pricing doesn't always align perfectly with volumes and demand, we remain optimistic about the market. Demand is still robust, and although scrap and steel prices are decreasing, we believe that metal margins will remain strong and may even improve slightly moving forward. When comparing this year to last year, I confidently state that we expect it to be a solid year, even if it might not be quite as strong as the previous one. However, it will certainly outperform most years over the last decade.

Okay, helpful. If I could just ask one last one, can you talk a little bit more about the raw materials segment, because I know in the last call, you had said that in the second half there are going to be some outages, so I had already adjusted for that, but now you're talking about a margin squeeze in DRI, and I'm just wondering if you could elaborate a little bit more on what's going on there and what the bigger picture is; I think if iron ore prices are going up, is it just a question of not being able to pass that through, or can you detail that a little more? Thanks.

When discussing our raw material segment, particularly DRI, I want to reassure everyone that our DRI plant in Louisiana has been operating very well and has not caused any issues in our operations. The challenge comes from selling DRI to our home mills, which is correlated to pig iron pricing. As pig iron prices have decreased, our selling price for DRI, adjusted for its value and use, has also dropped. This has been the primary impact in the first half of the year. We did experience a brief outage of about 12 days due to a valve failure, but it was not significant enough to take the operation offline for an extended period. Although pig iron pricing decline affects DRI pricing negatively, we produce around 3.5 million tons of DRI while purchasing about 3.5 to 4 million tons of pig iron, so we offset some of the losses on DRI with better pricing on pig iron. Regarding the second half and the anticipated 60-day outage for major repairs to our furnace vessel and associated systems, this will occur towards the end of August. We will address long-standing reliability issues with these repairs. Additionally, we will be improving the material handling processes early next year, but the immediate focus during the outage will be on enhancing the process gas heater and addressing past problems with the refractory. While this outage will not significantly disrupt operations, it is part of our efforts to improve efficiencies in the long run.

So to follow up on what Timna asked, am I right in interpreting the profitability for the raw materials division as being $53 million, which includes a $34 million gain? The core figure was around $20 million, but you mentioned that the results for the DRI business are expected to be even weaker in the second quarter. This likely implies that DRI will be in a significantly negative position or facing losses. Over the past few years, there have been periods of positive and negative results, and I understand you are working to address this. Should we consider that throughout the cycle, especially during times when iron ore is costly and pig iron is not, this asset will largely function as a cost center for you?

I'm not certain it will be a cost center; you mentioned it more accurately at the start when discussing how pig iron pricing fluctuates, which in turn affects the profitability of the DRI facility. One of the reasons we pursued this was its ability to provide us with balance and a hedge against rising pig iron prices. There will indeed be periods when DRI pricing is pressured due to low pig iron prices, but there will also be instances when that trend reverses. So, DRI pricing will vary as pig iron prices fluctuate.

And John, it also keeps pressure on prime scrap prices, allowing us to benefit from having the pig iron and the DRI. However, DRI did not perform as well in the first quarter as it did for most of last year; it will likely perform slightly worse in the second quarter, but that is not primarily due to operations, as John mentioned earlier. It's really about the pricing of pig iron and iron ore, which are becoming tighter. The margin for profit is not as significant as it once was.

Is there availability issues in terms of the pellet supply stream, because I would assume you likely get some from Brazil and some from Europe, because that's where the main pellet suppliers are at. I mean, are you seeing any tightness in supply right now or has that been something okay?

It's definitely becoming more challenging. There's no denying that. You've heard about the issues Vale has faced, but remember, we are one of their largest customers and have maintained a strong, reliable relationship with Vale and several other suppliers. Despite the tight conditions, we have not experienced any difficulties in securing the materials needed to sustain our operations.

So, let me close by saying, again, I want to express our appreciation to our shareholders, and say thank you to our customers. We firmly believe that together we can build powerful partnerships and get powerful results. And finally to my Nucor teammates as always, thank you for what you do for Nucor every day, and most importantly, thank you for doing it safely. Thank you all for your interest in Nucor. Have a great day.