Nucor Corporation Q1 2009 Earnings Call Transcript

Apr.23.09 | About: Nucor Corporation (NUE)

Nucor Corporation (NYSE:NUE)

Q1 2009 Earnings Call Transcript

April 23, 2009; 2:00 p.m. ET

Executives

Daniel DiMicco - Chairman, President and Chief Executive Officer

Terry Lisenby - Chief Financial Officer

John Ferriola - Chief Operating Officer of Steelmaking Operations

Hamilton Lott, Jr - Executive Vice President

Keith Grass - Executive Vice President

Ladd Hall - Executive Vice President

Mike Parrish - Executive Vice President

Joe Rutkowski - Executive Vice President

Joe Stratman. - Executive Vice President

Analysts

Kuni Chen - Bank of America

Luke Folta - Longbow Research

Applebaum - Michelle Applebaum Research

Timna Tanners - UBS

Wayne Cooperman - Cobalt Capital

Mark Parr - Keybanc Capital Markets

Michael Willemse - CIBC World Markets

Sal Tharani - Goldman Sachs

Mark Linima - Morgan Stanley

Operator

Good day everyone and welcome to the Nucor Corporation first quarter earnings release conference call. As a reminder, today’s call is being recorded. Later, we will conduct a question-and-answer session and instructions will come at that time.

Certain statements made in this conference call are forward-looking statements that involve risks and uncertainties. Although Nucor believe they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy.

Some of the important factors that may cause actual results to differ from our predictions are listed in Nucor’s SEC filings. The forward-looking statements made in this conference call speak only as of this date and Nucor does not assume any obligation to update them.

For opening remarks and introductions, I would like to turn the call over to Mr. Dan DiMicco, Chairman, President and Chief Executive Officer of Nucor Corporation. Please go ahead, sir.

Daniel DiMicco

Good afternoon and thank you for joining us for Nucor’s first quarter conference call. We appreciate your interest in our company. Joining me for today’s call are the other members of Nucor’s senior management team; Chief Financial Officer, Terry Lisenby; Chief Operating Officer of our Steelmaking Operations, John Ferriola; and Executive Vice Presidents, Keith Grass, Ladd Hall, Ham Lott, Mike Parrish, Joe Rutkowski and Joe Stratman.

After reviewing Nucor’s first quarter results and our work to grow our long term profitability, we will take your questions. First and most importantly, I would like to say thank you for all members of the Nucor team for your focus on safety, continuing improvement and taking care of our customers.

These are the most challenging steel market conditions we have ever seen. It is very unfortunate and extremely frustrating that our country’s misguided economic and political policies over the past two decades have created the current financial crisis.

When times get tough the 21,000 plus men and women of Nucor and our David J. Joseph and Harris Steel subsidiaries see opportunities to make our company even better and stronger. As always Nucor’s most significant competitive advantage remains our people. The right people working together as team, the team that takes ownership of driving Nucor’s long term success.

This facts experience not only a record of strong profitable growth of more than four decades, but also why we know our best years are still ahead of us. I want to again express my gratitude for the dedication of every member of the Nucor team there at this time of global economic crisis.

We realized that this is a time of hardship and difficulty for all of our team mates as older time, the significant loss value for our share holders, but I want to assure you that our work during these adverse economic times will pay big dividends and the inevitable economic recovery arrives.

We only have to look back as recently as 2001 to 2003, to see what we achieved during the last economic downturn. Quit simply, we positioned Nucor for the greatest period of book in our history. As always, we are doing it together. Thank you and keep up the good work.

Severity of this down turn is unprecedented. Steel production, capacity utilization numbers and the American Iron and Steel Institute tell a story. For this quarter 2009, steel production in the United States declined 53% from the year ago quarter.

Industry capacity utilization for the just completed quarter was less than 43%, down from the first quarter of 2008 rate of more than 90%. Nucor is not immune for these conditions and economic crisis unlike anything seen in their life time. Today, we reported the first losing quarter in our history that breaks a record of continues quarterly and annual profitable going back to Nucor’s start in 1966.

Warren Buffet said that best last month in his observation that the economy has fallen off a cliff. Now, we have yet to see any evidence that’s abrupt in severe decline in economic activity has reached the bottom. In fact, conditions are continuing to worsen with each successive month so far in 2009. There are few signs of improvement at this time.

I whish I was able to write a more encouraging report on current and future second quarter conditions, but as always our team will tell exactly like it is and it is extremely ugly out there. I’ve noted one simple, yet extremely important fact many times over the years in my conversations with investors. Nucor has a business model that even in the good times is based on how the company might have to run things in the bad times.

If you wait for an economic crisis to hit to get prepared for it you probably want survive. There never been truer that in today’s economic crisis. A sustained recovery in the economy all depends on while government gets serious and realistic about fixing the deep structure and balances in our huge foreign trade and budget deficits that brought the U.S. economy under world’s economy to this tragic condition.

Quite simply, we need significantly more job creation, significantly less debt, significantly lower cost of doing business, not significantly higher cost and a much stronger focused on the top five most important issues facing our country and the world’s future. The economy, the economy, the economy, the economy and the economy extremely certainly presence and our economy suggests that may come down to survival of the fittest in the months and years ahead.

We need less uncertainty going forward not more, but always seen to be getting is more, not less. While we are very concerned and clearly see that these are very grim times for the U.S. in global economy, we are at same time optimistic about the prospects for Nucor to do what Nucor has always done during tough times. That is to get even stronger and grow our long term earnings power.

Why is Nucor team able to view times of economic distress as opportunities? Here are five decreases. First Nucor’s balance sheet is strongest in North American steel industry. In fact we along with [Basco] and Nippon Steel have the highest credit ratings amongst global steel producers.

Second, Nucor’s long term cost structure is highly variable and Nucor is one of the lowest cost producers in the global steel industry. There is absolutely no question that a cost structure in 2009 is caring and extremely heavy burden from the over hang of high cost pig iron inventories, but that reflects the unprecedented abruptness of this downturn, a downturn driven by almost unimaginable crisis in the worlds financial markets.

From raw materials to energy to labor, our long term cost structure remains both highly variable and significant in the range of variability. Here are some numbers that make our point. Over the last five years among North American steel producers, Nucor achieved the highest average annual return equity by using the least amount of debt leverage. Our achievement speaks volumes about the competitiveness of our cost structure.

Item three; Nucor is North America’s most diversified producer of steel and steel products. In addition to reducing the volatility of earnings, we are seeing both more and more one-stop shopping. Growth opportunities develop as we work to build strong mutually beneficial partnerships with that customers.

Four: Nucor’s highly flexible production process utilize electric arc furnaces and highly productive labor. We’re able to almost instantaneously adjust our outlook to match market demand

Fifth: and most important of all, our people have an unrivaled can do attitude and passion for continued improvement in every aspect of our business. These long-term competitive advantages have been and will continue to be critical to Nucor’s success and rewarding our shareholders with attractive returns under valuable capital. So, let me repeat them once more.

Our financial strength, highly variable and low cost structure, applied diversification and highly flexible production capabilities and our culture. No one welcomes economic conditions as challenging as those of today’s environments, but this crisis in United States and world economies provides strong validation of Nucor’s long standing conservative financial practices and extremely strong business model and we believe the current downturn will represent unusually attractive growth opportunities for Nucor.

I can assure you that our team is focused on doing what Nucor does best, operating safely and efficiently, reducing costs, continually improving, growing stronger and expanding our long-term earning dollar.

My last comments are with respect to steel imports into our U.S. markets. During the first quarter of 2009, steel imports continue to enter the market and capture the increasing share of the dramatically declining U.S. market. Virtually, all of these important products could have been produced in the United States.

Nucor believes in trade that is legal and rules based. Nucor and our industry will continue to review the imports with the U.S. government policy makers and do whatever is necessary to hold our trading partners fully accountable for abiding by rules they agree to in order to enjoy access to our markets.

Where illegal and exploit of trade practices exist, we will address those activities to ensure the jobs of our workers and the interest of our shareholders. At this time, I would like to ask Terry Lisenby our Chief Financial Officer to provide you some details on Nucor’s first quarter results and financial position. Terry.

Terry Lisenby

Thanks, Dan and good afternoon to everyone. Nucor reported a first quarter 2009 net loss of $190 million dollars or $0.60 pre diluted share. These results are consistent with the guidance we gave last month for the first quarter loss in range of $0.55 to $0.65 per diluted share. First quarter 2009 net sales of $2,654 million decreased 47% from the year ago quarter. Compared to last year’s first quarter total sales tons of steel and steel products to outside customers declined 43% to 3.7 million tons.

Our result also carried at significant burden from consuming higher cost pig iron and scrap inventories purchased prior to the collapse in iron units pricing in last year’s fourth quarter. We have decided to consume these high cost raw materials as rapidly as our production rates will allow. Other will penalize our income statement results in the short run, it immediately benefits our cash flow and it will provide greater operating flexibility as we move further into 2009.

The current production rates the overhang of higher cost scrap should be consumed by the end of the current quarter and the overhang of pig iron should continue to impact our results through the third quarter. Nucor’s first quarter earnings included an expense of about $60 million for writing down inventory as it lowered cost to market.

We also had a credit of $105 million to value inventories using the last and first of method of accounting. We know some of you when comparing steel companies financial performance made adjustments for lower cost to market charges and LIFO credits. It is our view that you should adjust for lower cost to market charges, but should not adjust to remove the LIFO credits when we are in lower cost to market environment. Inventories value using the LIFO method represented approximately 65% of Nucor’s total inventories at December 31, 2008.

As a result of significantly higher scrap and other raw materials cost in recent years, our LIFO reserve increased from $387 million at the close of 2006 to peak of slightly more than $1 billion at the close of 2008 third quarter. Without this significant LIFO reserve we would have recorded a lower cost for market expense of approximately $360 million at December 31, 2008.

On adjusting Nucor’s earnings to performance comparisons to peers, we suggest adding back our lower cost for market charges for the period, but not adjusting for LIFO credits. This is a correct approach because as we work through extensive inventory, the excess cost are being reduced by the LIFO credit since effectively these inflated inventory cost would charge to prior periods of the LIFO charges.

Nucor’s liquidity position remains extremely strong. The close of the first quarter cash and cash equivalents totaled $1.9 billion. The decline from the year-end 2008 level reflects the first quarter 2009 funding and long-term debt retirement totaling $175 million, 2008 profit sharing and incentive compensation payments of nearly $400 million and the $200 million payment for 2008 federal income taxes.

With these one-time outlays related to 2008 behind us our cash balances will continue to benefit from reductions in inventories and receivables. That trend was strongly evident in the just completed quarter and should continue well into 2009.

Our liquidity position is also enhanced by the fact that we have no borrowings on our $1.300 billion unsecured revolving credit facility. That credit facility does not mature until November 2012 and we have no outstanding commercial paper.

At the close of the first quarter, debt totaled $3.98 billion dollars and our debt-to-capital ratio was 28%. Our weighted average coupon rate on our fixed rate debt is 5.7%. We estimate gross interest expense of approximately $154 million for full year 2009. After retiring a $5.4 million industrial revenue bond later this year, our next debt maturity is not until 2012. $2.167 billion of our debt or 70% of the total matures in 2017 and beyond.

Nucor has earned the highest credit ratings of any North American metals and mining company awarded by Moody’s and Standard and Poor’s and our credit default spread is lowest among North American steel producers and one of the very lowest among global steel producers.

Nucor’s balance sheet strength and industry leading credit ratings gives us tremendous flexibility in managing and growing our business. For example, our debt-to-capital ratio of 28% provides us a significant cushion relative to the 60% debt-to-capital covenant limit in our credit facility.

Capital expenditures for the first quarter were $120 million. For full year 2009 we continue to project capital expenditures of approximately $400 million that represents a substantial decline from 2008 capital spending that exceeded $1 billion with the completion of a number of major projects.

The first quarter depreciation and amortization totaled $138 million and we expect about $590 million for full year 2009. As Dan discussed the unprecedented turmoil in the global economy and financial markets has highlighted the value of Nucor’s conservative financial policies. Our extremely strong balance sheet positions Nucor not only to weather today’s economic storm, but also to capitalize on attractive investment opportunities that will develop.

Consistent with our records established over many years, Nucor will continue to be most disciplined and opportunistic in pursing profitable growth that rewards our share holders with attractive long-terms returns.

Thank you for your interest in Nucor. Dan.

Daniel DiMicco

Thank you, Terry. We’ll now ask John Ferriola to report on our steel making operations. John.

John Ferriola

Thanks, Dan. Good afternoon. Let me begin by thanking all members of our Nucor steel mills and David J. Joseph raw material teams for your incredible commitment to working safely and taking care of our customers in this challenging environment. I cannot emphasis enough the importance of everyone’s staying focused on safety.

Nucor’s best years are still ahead of us and we want all of our teammates to be around to enjoy them. Here are some quick statistics that highlight the severity of the current steel market conditions. Nucor’s first quarter steel shipments of 2.8 million tons declined 53% from the year-ago quarter.

Our steel mill utilization rate for this first quarter was 45%, less than half of last year’s utilization rate of 92%. First quarter of 2009 capacity utilization by product range from 53% for plate and 51% for bars on the high-end, the 42% for sheet and 36% for beams on the low-end.,

As tough as today’s market is, I think about a saying we have at that describes Nucor’s mind set and actions in distressed steel industry conditions like these. We say simply “Nucor does bad, really good” it is the point that Dan made in his remarks. Our company is in a unique position of strength in today’s steel industry to build our competitive advantages and our long term earnings power and even better our team is already moving ahead on a number of exciting growth projects.

I will quickly review some of them for you. A particularly promising opportunity is the leverage effect that no competitor can match the broad product range offered by Nucor. How our one Nucor initiative is bringing together sales teams from across all product lines to better serve and encourage Nucor’s participation in key end use markets.

For example we have an automotive team providing value to our customers in this sector in the form of one stop shopping for their SBQ sheet investment needs. Our heat team works with heavy equipment, agriculture and transportation customers to serve their plate, beam, fastener and SBQ needs and we recently formed a bridge an infrastructure team to serve growing infrastructure markets at the Nucor’s package of rebar fabrication, beam, plate, mesh, decking and sheet products.

The early returns from our one Nucor work tell us that we have only begun to capitalize on Nucor’s position as North America’s most diversified steel and steel products supply. Importantly the one new core opportunities extend beyond the steel side of our business our teammates David J Joseph are proving to be an extremely valuable part above one Nucor value package.

In the automotive market, we are now able to offer our customer’s one stop shopping for both buying steel and trading scrap. It seems that our steel mills are also taking advantage of reduced operating rates to work on developing new products. This work is difficult to do in stronger market conditions where we need every ton of available capacity to satisfy our customers’ needs. As an example in the first quarter of 2009, our Decatur, Alabama sheet mill successfully entered the Armor plate market.

Decatur shipped over 5000 tons of their Armor plate products in the first quarter for the use in the protective structure with the Hungary military vehicle. In addition to military applications our Decatur team sees additional armor plate opportunities in transportation and energy markets. Nucor Steel, Berkeley continues to innovate and introduce new flat roll products for automotive applications.

As the first electric arc furnace, thin-slab sheet mill with the gassing capability, our Berkeley team is developing steels with unique properties that are not offered by other mills. Product advancements have been achieved in the areas of formability advanced high strength steels that result in stronger yet lighter vehicles.

Berkeley’s product development successes of both expanding our relationships with existing customers and attracting new customers that include European auto makers. Nucor’s plate mills are also using current market conditions as an opportunity to do extensive product development work involves new range and new sizes of plate to further enhance our product mix capabilities. Particular emphasis has been placed on products which will expand our opportunities in consuming sectors such as energy, bridge, warship building and heat treated plates.

These product development initiatives position Nucor and our customers to take advantage of any infrastructure stimulus spending. As a result of these advancements we have been enable to secure our business that was previously beyond our scope of production.

I continue to be amazed by the work our plate mill teams has done, since Nucor first began making plates in late 2000 and as outstanding as their result have been to this form and best years still to come. Our new state of the art special bar quality mill in Memphis is moving ahead with successful starter. Complementing our SBQ mills in South Carolina and Nebraska, we believe Memphis will position Nucor with most of highest quality and lowest cost SBQ product offerings in North America.

In the first quarter Memphis got its rolling mill fully operational and started shipping prime rolled bars to customers. Nucor steel Memphis team is raising to the challenge of starting up tough economic conditions. It is worth nothing that Nucor has a proven in work when it comes to beginning production at steel mills in recessions. These mills include our Utah bar mill, our Nucor Yamato beam mill and our North Carolina plate mill.

They have all gone on to become stellar performance for Nucor. These results of testimony with the power of the Nucor culture and its can do attitude. As you can see our focus remains on the future and Nucor’s very attractive prospects for building interactive long term value for our shareholders. We greatly appreciate your interest in our company. Dan

Daniel DiMicco

Thanks, John. I’d like to ask Ham Lott to update this Nucor’s fabricated construction product businesses. Ham

Hamilton Lott

Thanks, Dan and good afternoon. Demand was extremely weak for our fabricated parts and products in the first quarter of 2009. Compared with last year’s first quarter steel production decreased 55%. Steel deck sales turns declined 35% and metal building volume fell 50% year-over-year. Our fabricated rebar tons did increase compared to the prior year period.

However, the increase resulted from the volume contributed by the ambassador steel fabrication plants acquired by Harris in August 2008. Nucor’s growth in fabricated construction products began more than four decades ago. We are well experienced in managing through economic construction market down cycles. In fact, our company has a long history of taking advantage of the down turns to grow stronger.

We grow stronger while many of our competitors cut their capabilities for serving customers and that is exactly where our energy is focused in the current market turmoil. These efforts are ongoing at all of our fabricated construction product divisions. Here are two excellent examples of our work.

Our Verco and Vulcraft teams have introduced to the joist and deck market of the Ecospan combined forces. Ecospand reduces the cost of validated floor construction and it offers the advantages of green building materials that help projects qualify for lead certification. With the [Manutrench] acquisition in 2007, Nucor gained a much larger presence in pre-engineered metal building business.

Currently our building group team is enjoying strong success in expanding our distribution network in growing our market share. Our market place gains are being driven by Nucor’s unmatched commitment of resources to providing our builders with cost effective solutions that made their specific metal building project requirements.

Nucor’s growth opportunities in fabricated construction products have never been brighter than they are today. Most importantly I want to say thank you to our team members at Harris steel, Nucor steel, Nucor buildings group, Verco and Vulcraftyou’re your excellent work managing through these unprecedented market conditions. You are positioning Nucor for continued attractive growth in our long term profitability. Dan.

Daniel DiMicco

Thank you, Ham. Earlier this decade we laid the foundation for five excellent and four record years over the five year period ending in 2008. What we are doing during this down turn will lay the foundation for future record years to come. Indeed Nucor’s best year is still ahead of us. We appreciate your interest in Nucor and we’d now be happy to take your questions. Paul.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kuni Chen - Bank of America.

Kuni Chen – Bank of America

I guess just to start off on the pig iron issue. Can you just talk about your mix of pig iron consumption going forward, does that change or are you increasing the mix as you sort of try to burn through that at a faster phase?

Daniel DiMicco

Yes. During the first quarter, we made a decision after we continue to see deterioration in the markets to increase the pig iron consumption dramatically. Up to that time in the quarter, we are probably only using between 5% and 7% and we decided to up that to about 35%. That continued throughout the later half of the first quarter and we’ll continue at that phase through the second quarter.

Kuni Chen – Bank of America

Okay. So even at that accelerated phase it still takes you into the third quarter?

Daniel DiMicco

Yes. Unfortunately Kuni, when things fell off as dramatically they did in second half of September, first part of October and you see your order eventually drop by 50 plus percent, and you are forecasting in a modest seasonal downturn, but not as to follow up the end of the world.

You have to order pig iron out six to eight months in order to ensure supply, in this case to the fourth quarter, but into the first quarter. When you cut that you can have in terms of your operating rates that normal pig iron inventory that would have been depleted by the middle of the first quarter and that goes at least twice as longest now longer. That’s a situation that we’re in right now.

Kuni Chen – Bank of America

Right, understood and then just one quick follow up if I may. Can you perhaps give us some sensitivities on what the potential inventory breakdowns could look like going forward? Let say if we assume hot rolled prices go to let’s say 350 or 400 a tone and the scrap goes to a range of maybe 1 to 150?

Daniel DiMicco

No, at the top of my head, I can’t and maybe I will make some comparison of what we wrote down in the first quarter, but remember if that happens with respect to our five fold operations, sum of both. So at this time, I really can’t give you a good forecast on that.

As we mentioned earlier midway between the two earnings releases will come out with an updated guidance, but if you take a look at the impacts that pig iron situation had on the first quarter, which was only for the half of first quarter, it was somewhere around $85 million and a six, seven week period and we did report back in the earnings release. I mean that will give you some idea that impact will high up in the second quarter as a result of the pig iron.

Operator

Your next question comes from Luke Folta - Longbow Research.

Luke Folta - Longbow Research

My first question is you guidance for the second quarter was bit more pessimistic than what we referred from some other companies reporting this week. Would you quite characterize that as you are being more conservative, more realistic or do you think is it just this pig iron issue that’s kind of dragging results.

Daniel DiMicco

No, the pig iron issue is what it is. What we’re talking about with respect to second quarter has to do with a very realistic view of the world ahead of us. I mean we’re already in to the second quarter, I mean here we are and near the end of April and if you go back and look at our forecast in the first quarter conference call or the fourth quarter conference call and year end conference call, you’ll see we were probably only one I gave the realistic view of what was in front of us.

So my comments to you would be our booking forward forecast is based upon realism not just based upon wishes or pipe dreams.

Luke Folta - Longbow Research

Okay, just a follow up by math, you think the bigger risk is on the pricing side or do you think weakest utilizations kind of come in further.

Daniel DiMicco

Certainty we’re seeing continued deterioration and pricing through the first quarter and into the second quarter, how that goes forward depends upon what happens in the competitive market place. Also there is still the issue of whether or not volumes will pick up or continue to be negatively impacted in the market place. We still have to go through the whole or mobile industry issue and the supplier issue and it’s going to be some time before we see any impact of any stimulus packages on that particular situation and so it’s a big unknown out there with respect to that so I’ll tell you what GM said, they were going to shut down their operations for nine weeks this summer.

So there is so much uncertainty out there in the overall economy, both here and globally and there is so much lack of confidence in part of consumers and business leadership and what’s going on in Washington and elsewhere that our view going forward is that all issues have to be taken into account weather it would be volumes or pricing and in terms of deciding exactly how things we’re going to look going forward. Right now it’s not a pretty picture.

Operator

Your next question comes from Michelle Applebaum - Michelle Applebaum Research.

Michelle Applebaum – Michelle Applebaum Research

Hi. I wanted to ask you about, two weeks ago and I know this isn’t your product sold maybe on catching you unprepared. Two weeks ago, there were seven companies on our joint filing for OCTG to a case against China and I just wanted to get through thoughts on the case?

Daniel DiMicco

I think it’s long over due. It doesn’t impact us, because we do supply materials to the folks to make those tubular products both from our Memphis facility and others and it’s very long over due and I commend those companies to going forward to have our full support and it’s time for our government to get realistic about the mercantilist trading practices that go way beyond just steel or tubular products as practiced by our Chinese trading partners.

Michelle Applebaum – Michelle Applebaum Research

Can you tell me, what I found curious about it and I really wasn’t aware of this completely was that the Canadians have had duties on the same exact products for well over a year and the Europeans actually announced duties on this product the day before the U.S. companies filed the trade case and in fact they said in the document that that was one of the reasons that European put duties on, so the steel would come here.

I’m just wondering because we all have similar trade rules and we’re all WTL compliance. Why are we so late to the party that the other people, because I know the OCTG guys have been taking about this for a couple years?

Daniel DiMicco

Well, while we all have similar laws on the books that are WTL comparable, each region of the world goes about being proactive with different rates and the prices by which you have to go forward can be different in Canada versus the United States. So I think part of has to do with the level of proof that needs to be put together and the circumstances that have to be incurred to deal with this type of issue, but I’m sure that the companies involved did their home work and will be successful in their filing.

Michelle Applebaum – Michelle Applebaum Research

Can I ask another trade related? Right after that happened and I didn’t see this pick up in the press any where so I’m kind of surprised by that. There was an eight-way group thing that our trade association, Canadian, Latin American, European, eight different global trade associations got together sent a letter to China about their steel industry and I was just curious if you knew the back stories of that and has that ever been done before. We got all these western trade associations get together and sort of address other regions issues.

Daniel DiMicco

No, as we’ve always said Michele, extremes become extremes and the extremes in China’s is mercantilist trading practices I think have put in place a very strong reaction like by global trading partners and in fact Japan was conspicuous by it’s absence in that filing because literally every other region of the world has joined in on that, whether it be South America or Mexico or Canada, the United States to EU you name it.

I think it’s indicative of the illegal trading activities that have been conducted by the Chinese, particularly as it relates to manufacture products and further particularly as it relates to steel and people have just had enough and it’s about time our own government got with it and calls an apple-an-apple and said that, what we all know was a Chinese currency is very disappointing to see the Obama administration continue down the same stale path, the Bush administration than the Putin administration product to that.

Operator

Your next question comes from Timna Tanners - UBS.

Timna Tanners – UBS

Good afternoon guys. Just to follow-though quick first on Luke’s question, when you hear all comments of the loss in the guidance was from pig iron. Was your response to say that most of it is the pig iron issue continued in the second quarter?

Daniel DiMicco

I wouldn’t say that most of it is, but a good portion of it is and probably most of that what we’ll experience sort of sheet metals.

Timna Tanners – UBS

Okay. So then I guess to clarify on guidance. Because in your course always been a compare has been profitable even at low levels of utilization. Can you help us understand what else might be going into the forecast for a loss and what to expect in terms like maybe your scrap out look that might be incorporated there?

Daniel DiMicco

First off we have never seen this low utilization in the history of our company, I don’t think the steel industry in this since many the great depression or maybe the next time that would may have been involved with this kind of low operating rates it might been around World War II, but this is unprecedented and we are certainly been impacted by the unprecedented nature of the lack of business and the complete disappearance of business with respect to steel orders.

So it is unprecedented, mean if you go back 2001 to 2003 are lowest operating rates were in the 70% to 75% to 85% and again that was worst we have seen prior to this. Our situation is definitely impacted by the low operating rates, compounded by drops off in significantly you well know drop off in selling prices across all products and then add to that issue with respect to lack of orders and significant drop off in orders and impact of inventories last thing is significantly longer than and otherwise would impact of the pig iron and sheet mills and somewhat on our plate.

That is what is where we are today and I’d say the inventory issue is probably the single biggest component. In the first quarter and going certainly in second quarter, but there is still issues of continuing deterioration of possibilities in pricing and we don’t forecast pricing, but there are certainly is enough business fall off continuing that lower prices and money product is still possibility.

You still have way too many imports coming in with mark-to-market shares imports in this country while the execution leverage going down, the market share is gone up compare to what’s being produced and domestically and sulked by domestic producers into the market. So there is always the issues that across the Board and across all steel companies and which give us a reason to be very cautious with our guidance going forward in second quarter and very realistic. So will get back to that.

Timna Tanners – UBS

Do you have anything on scrap?

Daniel DiMicco

As far as scrap as scrap at self goes not talking about iron units like pig iron that they arrive with scrap. Scrap is going to go do as market demand indicates as right now there is very little demand in the domestic steel industries. While there is some exports going on to this Asia and Turkey in particular some of that maybe delegated to a seasonal impact like we saw last year and a year before.

Right now, bottom line is that the global steel industry is still seeing a downward trend and not an upward trend. So, scrap prices will be determined by what happens here if things don’t get any better than they are to date, throughout the entire year, you won’t see scrap prices change a whole like a lot.

Operator

Your next question comes from Wayne Cooperman - Cobalt Capital.

Wayne Cooperman - Cobalt Capital

Hi, guys. I guess giving your advantage cost structure, what’s your thought about increasing volumes and taking business from guys who don’t have the cost structure or you’re kind of content to run your plans for the low utilization level and try to keep price on pricing integrity?

Daniel DiMicco

The way we’re content with this level of operating rates. This is historically low, it’s very uncomfortable. Our employees are making half of what they’re making a year ago. There is nothing good about this. We are competitive in the marketplace. We’ll continue to be competitive in the marketplace for pricing. We know that we’re going to be here for many, many years to come, but you’re only going to get so much business in an environment like this and we’ll continue to be competitive to get as much of that as we can.

I think you’ll see that in some cases the comparison to some of our competitors are rates well down significantly maybe slightly better than what you see come out form other folks, but at the end of the day, this crisis show you into economically around the world and then the industry that everybody is being impacted and to where pricing goes will depend upon, when that things turnaround or not, but we will be competitive and we’ll get every time that we possibly can.

Wayne Cooperman - Cobalt Capital

I guess, just it seems to me that it’s going to be getting more returns now if you wanted to or not this is not early returns out there for you to get?

Daniel DiMicco

There is the demand online that our customers and our customer’s customers, is virtually non-existents. When the entire industry is running at 40% there is no demand and so everybody is out there fighting for whatever they can get. All I can tell you is we’ll definitely be around.

Operator

Your next question comes from Mark Parr - Keybanc Capital Markets

Mark Parr - Keybanc Capital Markets

I had a couple of questions, one it’s pretty specific and other one that’s little more global in nature. I’d like to get your comments on first in your played operations; can you tell us the approximate mix of plate that was moving into the pipeline business over the last couple of quarters?

Daniel DiMicco

Looking around table, we got an answer to that, I’m not sure we can jump.

Terry Lisenby

Yes, we obviously most of our plate product goes through distribution and service centers and much of that at that point Mark, we don’t have visibility as to what end markets it goes to, so it’d be very difficult for us to speculate on a percentage there.

Mark Parr - Keybanc Capital Markets

Is it fair to say that’s an important market for you than and if you can’t give us a number?

Daniel DiMicco

Certainly in today’s environment all markets are important right, but it is traditionally a very smaller percentage of our business. The larger percentages of our business would go into shipbuilding, construction, bridges. In today’s environment wind towers are obviously a good market for us, but historically and traditionally in a pipeline business per plate is not a large percentage of our business.

Terry Lisenby

Mark, you have to be careful because there is a lot of crossover sheet product that we produced in Tuscaloosa mills and our sheet mills that goes into pipe products and so depending upon the diameter you’re talking about and the application, I mean we’re putting probably well over a million tons in to that business out of our sheet mills and our Tuscaloosa subject two inch plus wide plate mill.

Mark Parr - Keybanc Capital Markets

I missed the first few minutes of the call and I don’t know if you address given an update on the iron ore project or either the pig iron projects that you’re working on, but we would like to get your thoughts on that and then I’ve got one other global question.

Daniel DiMicco

We did not give any update on that. I’d be happy to at this time. We’re currently still waiting for the permit to be finally approved, that’s going through some legal challenges as we state as we speak. The last I heard it would not be cleaned up and finalized until near the end of this year or beginning of next year.

Certainly in this environment, there’s a heavy unknowns with respect to cap and trade issues and carbon tax issues, I should say cap and taxes, it’s not cap and trade issues and the eventual cost that could have on the project like that per ton in the economic climate that we’re in, we are obviously not in any immediate hurry to move through with this project, but as we’ve talked with the governor and his people, there is nothing that we can do until we actually get the permanent hand.

We are in a process of buying the land. So that’s one positive I can offer going forward, but right everything is on hold for the permit.

Mark Parr - Keybanc Capital Markets

Just wondering about your view of the global market, we’ve seeing so much supply cutbacks around the world, not just in the U.S., but to a varying degree on other parts of the world as well and historically, there’s always been a concern because steel is somewhat more fragmented as each individual mill accounts for a relatively smaller part of the global total.

There is a sense that maybe there is a potential for the upside in steel to be less than other commodities that maybe more highly centralized. I’m just curious as to your take on that and how you feel steel’s ability to participate in a global upside over the next several years and assuming that we will come out of this in a reasonable timeframe?

Daniel DiMicco

First half, the forces for our work prior to this surprise financial collapse. Surprised from a stand point that, I’ve heard a few people anticipated or somewhat because of it so well covered up by the unethical behavior that was taking place in a number of areas, but long term we will come out of this downturn, I don’t know exactly when it’s going to be, but certainly not going to be any time soon.

We will again benefit by the global infrastructure bill that is on hold, but will be taking place. My biggest concern is that, I have not seen a willingness in part of our government to invest in America to the tune of $2 trillion necessary just to get our own infrastructure back into shape again.

So, that we can be globally competitive and have a dynamic economy going forward. So, there wasn’t really no infrastructure stimulus in that big stimulus bill on Washington and far less than what was necessary, but at some point in time, those things will come back into play globally and yes, the steel industry will certain participate and participates strongly.

However, in this country here right now, we’ve got our self a major price respect has impacted the entire world. This is not something entirely the U.S. doing, the global trading partners have had a role and watch develop there, particularly the interest rate deficits buildup for China, but we will have an opportunity to participate in that growth line of course.

The issue is one is it really going to occur. You said there have been tremendous cutbacks worldwide. Now, you hear things in the press about well, things are starting, you see a little bit of strengthening here, a little bit more activity there, but by and large the news that says we’re shutting capacity down far outweighs the positive.

Its capacity still coming out everywhere in the world and starting to catch up here and places where it should be coming out, it’s not or at least we’re not reporting it. One suspects, there may be some inventory bills going on in places like China in anticipation of their infrastructure stimulus packages and expansions of them, but the reality is, we have a major global oversupply situation today because of the economic crisis and the lack of demand.

I fully anticipate that we’ll see capacity in this country disappear and not come back, because going forward, there is going to be, we believe, less fuel consumed in the United States, unless we get serious about a major infrastructure build in this country because there will be less cars made.

Consumers going forward will be more savings driven on their consumption and less debt driven, a lot of the consumers over the past five years will be non-existent because credit requirements will change and have changed dramatically. So, even when we come out of this thing, the steel industry in this country between now and then is going to see capacity disappear permanently.

Operator

Your next question comes from Michael Willemse - CIBC World Markets.

Michael Willemse - CIBC World Markets

This might be a tough question, just given out how bad the demand is out there, but do you have any sense on when your customers might be finished with inventory destocking, are we talking months or are we talking not until next year?

Daniel DiMicco

For the last several months, it’s been like catching a falling knife, okay, because inventories get worked down with shipments and demand drop. So, apparent demand and real demand both keeps going down and so people thought would be an okay, inventory level in December today is too high inventory level.

I think we took a look at Reliance’s earnings release and their comments on the next quarter. The Reliance is one of those companies that excels and has excelled historically and they know what’s going on out there and they are very straight talkers and they see the same thing we do.

We see the second quarter that’s not going to be stronger than the first quarter and they are one of the largest service center customers out there and certainly our largest service center customer and so that gives you an indication of where the customer base is, when the inventory destocking stops because demand starts to pickup and we haven't seen that yet.

Michael Willemse - CIBC World Markets

Second question on Nucor’s inventory, you have $1.9 billion at the end of the first quarter. I know you want to work through some pig iron inventory. I guess what kind of level of inventory would you be happy or say a few hundred million lower or I guess how much more reductions could we look for there?

Daniel DiMicco

We are talking in terms of dollars, not tons.

Michael Willemse - CIBC World Markets

Dollars, yes.

Daniel DiMicco

Typically from our operations, we need to have certain level, what we focused on tons in inventory and certainly from a pig iron standpoint, most of that value and most of the tonnage is in the pig iron, which we will be working through, if order entry does pickup going forward, we would get through it faster, but the biggest component for that is the pig.

So, depending on where the value scrap is and significantly lower than just a couple of hundred million dollars below that number and I really have deferred number to put in front of you in terms of the amount of inventory that we have on hand or want to have on hand in the value that would be, obviously depends upon pricing of the raw materials. John, do you have anything you want to add to that?

John Ferriola

I think it depends entirely on the pricing of the product.

Michael Willemse - CIBC World Markets

I guess, what is the ton basis? Do you want to be a lot lower than where you are now?

John Ferriola

With respect to pig iron yes. With respect to scrap, we’re pretty much more we need to be on scrap inventories until we worked on the pig iron inventory and replace it with a scrap or DRI from our own plant in Trinidad. Again that all depends on where we operate rates are which depend on what is the demand in the marketplace and the order entry rates are. So, that is a moving target.

Daniel DiMicco

We probably could go 500 to 700,000 tons lower combined?

Michael Willemse - CIBC World Markets

500 to 700,000 tons lower?

Daniel DiMicco

500 to 700,000 tons lower than we are today and scrap and scrap substitutes combined with majority of that being in pig iron, vast majority of that.

Michael Willemse - CIBC World Markets

How many tons of inventory would you say you have now?

Daniel DiMicco

We get in scrap and scrap substitutes about 2.6 million tons.

Operator

Your next question comes from Sal Tharani - Goldman Sachs.

Sal Tharani - Goldman Sachs

Continuing on this pig iron issue, what are you doing with your DRI out of Trinidad, have you slow that down or are you still taking at the same amount?

Daniel DiMicco

We’ve slow that operation down, John or Ladd do you want to comment on that.

John Ferriola

We’re actually using a little higher percentage of DRI at our plants than we normally would, simply because our utilization rate has cut that actual tonnage down significantly. Therefore we’ve had to slow our DRI plants in Trinidad down proportionally.

Sal Tharani - Goldman Sachs

There were some comments in other conference calls between sort of long products and flat products in terms of pricing and demand. General view was that flat product pricing appear to be bottom long products, plate, beam, maps still room to go any comment Dan on that?

Daniel DiMicco

My comment on that is that, all products are still susceptible to lower prices depending upon what happened in the marketplace with demand and competitive activity and obviously the closer you get to a lower number, the pace slows down, but there is no pick up in demand in any product that would say, give anybody the ability to say that there is no further possibility for lower prices.

What happens in the marketplace with pricing, will depend upon, how each individual company goes forward with their pricing strategies and whether or not we’re seeing any demand pick up, but there is no demand pick up and so to say that there is no chance pricing will go down or that long products are more susceptible than sheet that’s poor conjunction.

Sal Tharani - Goldman Sachs

Also on your guidance just wanted to get a little more color on, first of all on your LIFO as I understand you take a yearly view and you sort of divided by four and you flow it through your P&L and then you’d make adjustments as you go forward, so apparently you have the same view of $106 million LIFO credit for the second quarter in your guidance, but are you planning more write-downs, because if you don’t have any write-down then it means the conditions in the second quarter are worse than the first quarter?

Daniel DiMicco

Well, as we said in our earnings release and during the script. Every month, since the collapse occurred in September, October has showed worsening conditions, not improving conditions, which include the month of April, which is the first month of a second quarter.

So, yes it implies that we haven’t hit the bottom yet, because we haven’t hit a bottom yet because we haven't and as far as the LIFO issued those, yes we do take a look of what pricing is today, where inventories are today, the valuation of inventory, but we project out consumption rates, we project out what we think, the inventory is going to be at year end and then we make some assumption on whether there will be a LIFO charge of credit based upon that divide equally and it is updated, we divided equally among all four quarters and then it gets updated every quarter.

So, number to go up or down depended upon how we see the picture going forward to be at the end of the year and obviously the closure at the end of the year to get better picture you have or where things you going to hand up. I will tell you this that based upon where things are today we are still very conservative in our application of LIFO credit, and but that’s the way you should be in the first quarter. You should be conservative.

If we see things moving at the end of the second quarter into the third quarter differently, we would change the amount of the credit based upon that and so all I can tell you is that, right now $105 million credit that we’ve applied at the first quarter is on the conservative side in the standpoint of where we see things for the year right now. It’s just too much uncertainty to be anything, but conservative on the application of any credit.

Operator

Your next question comes from Mark Linima - Morgan Stanley.

Mark Linima - Morgan Stanley

A little more information on the imports, I’m curious is this business that you’re getting an opportunity to bid on and loosing because it’s below your price threshold and also presumably it’s not just China, that’s a problem. Can you comment on where else things might be coming from and what sort of products? Thanks.

Daniel DiMicco

Well, the import data is very well published and you can take a look at it, it’s pretty much across the board. The latest data showed that rebar imports of Turkey, in particular jumped up significantly, which is interesting because they buy the scrap out of the United States, ship it to Turkey, turning into rebar ship it back over here in south and complete with this. I think there were like 60,000 tons that came in the last reporting period of rebar and an increase from where it was at previous month.

So, you are right it’s not just in China, but the problem with China as it stayed on and it’s heavily subsidized or virtually any tons sold over here is breaking international trading loss and it sold legally. As far as where other items are with respective cost, those things are developing, we’ve already seen several trade cases and where its property, where we believe that people are selling below the whole market price of lower cost production allocation will filed across the product mix.

Mark Linima - Morgan Stanley

But using opportunities to bid on some of those business or is a just reminisce of maybe legacy long term contracts that are still working through the system?

Daniel DiMicco

No, itself is going on currently.

Mark Linima - Morgan Stanley

Thank you.

Operator

We have no further questions at this time. I’d like to turn back over to today’s speaker for any closing comments.

Daniel DiMicco

Thank you. And again I’d like to thank everybody on this call, both here and those with the questions that were asked. Thank you all for participating and in your interest of Nucor and to our team mates around the country and outside the country. Thank you again. Stay safe and keep up the good work. We appreciate your support, and going forward we know that you will keep operating safely and work to keep our cost improving and our operations continue improving. Thank you all very much. Stay safe.

Operator

That does conclude today’s conference. We thank you for your participation.

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