Nucor's (NUE) CEO John Ferriola on Q4 2015 Results - Earnings Call Transcript

| About: Nucor Corporation (NUE)

Nucor Corp (NYSE:NUE)

Q4 2015 Earnings Conference Call

January 28, 2016, 14:00 ET

Executives

John Ferriola - Chairman, CEO & President

Jim Frias - CFO

Ray Napolitan - VP

Joe Stratman - VP

Analysts

Tony Rizzuto - Cowen & Co

Matt Murphy - UBS

Chris Olin - Rosenblatt Securities

Chris Terry - Deutsche Bank

Timna Tanners - Bank of America Merrill Lynch

Phil Gibbs - KeyBanc Capital Markets

Andrew Lane - Morningstar

Brian Yu - Citigroup

Garrett Nelson - BB&T Capital Markets

Aldo Mazzaferro - Macquarie

David Lipschitz - CLSA

Operator

Welcome to the Nucor Corporation Fourth quarter and Year-End 2015 Earnings Call. [Operator Instructions]. Certain statements made during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate, and variations of such words and similar expressions are intended to identify those forward-looking statements which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance future events will not affect their accuracy.

More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest 10K and subsequently filed 10-Qs which are available on the SEC's and Nucor's website.

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 as a result of new information, future events or otherwise. For opening remarks and introductions I would like to turn the call over to Mr. John Ferriola, Chairman, Chief Executive Officer and President of Nucor Corporation. Please go ahead, sir.

John Ferriola

Good afternoon. Thank you for joining us for our Conference Call. As always, we appreciate your interest in Nucor. With me for today's call are the other members of Nucor's Senior Management Team. Chief Financial Officer, Jim Frias and our other Executive Vice Presidents Jim Darsey, Ladd Hall, Ray Napolitan, Joe Stratman, Dave Sumoski, and Chad Utermark.

Your leadership team in Charlotte would like to thank everyone on our Nucor Harris deal, David J Joseph, Duferdofin, Nucor Steel Technologies and skyline steel teams for your hard work every day to build a safer, stronger and more profitable Nucor and extremely turbulent global steel industry conditions we are taking advantage of Nucor's unrivalled competitive position and highly flexible business model to grow our companies long term earnings power while many of our competitors are fighting to survive, this protracted downturn more than 23,000 teammates are positioning Nucor to continue to thrive in the years ahead.

Jim Frias, will now renew Nucor's fourth quarter performance and financial position. Following his comments, I will update you on the execution of our strategy for long term profitable growth. Jim?

Jim Frias

Thanks, John. Fourth quarter of 2015 adjusted earnings of $0.46 per diluted share excluding impairment charges of $237 million exceeded our guidance range of $0.15 to $0.20 per diluted share. Fourth quarter results included a LIFO credit of $218 million, somewhat higher than the $181 million LIFO credit projected in our guidance. The larger than expected LIFO credit increased our earnings for the quarter by approximately $0.07 per diluted share.

The biggest factor driving our fourth quarter outperformance was stronger than forecast results for the month of December at our steel mills particularly the sheet mills and our downstream product segments. Nucor continues to benefit from effective execution of our channel to market strategy and our ongoing investments to expand our offerings of value-added products.

At the same time, all of our Nucor teams continue their unrelenting focus on maintaining our position as the low cost producer across our extremely diverse product portfolio.

During the fourth quarter of 2015, we recorded two non-cash impairment charges totaling $237 million, a $153 million charge reduced the value of our equity method investment in the Duferdofin - Nucor steel making joint venture in Italy. In addition an $84 million charge was taken to write-off the entire amount of certain assets primarily engineering planes and equipment related to a potential blast furnace project at our St. James Parrish Louisiana site. Due to technology advances and other factors we no longer expect to use those plans if we proceed with the blast furnace project.

Including these impairment charges, Nucor's consolidated net loss for the quarter was $62 million or $0.19 per diluted share. Our deferred at the Nucor impairment charge reflects the ongoing financial performance and deterioration in near term projections for this business. The 50% ownership in Duferdofin - Nucor was acquired in July 2008 for approximately $667 million.

Although market conditions in Europe remain extremely weak, we are very pleased with the dedication and hard work of our approximately 700 teammates at Duferdofin - Nucor. They have achieved very significant improvements in costs and product mix. As one example, conversion costs at our [indiscernible] melt shop have reached world class levels.

Duferdofin - Nucor is also successfully expanding its portfolio to include value-added and more import resistant products such as engineered varieties [ph] blooms and billets as well as special profiles.

Across the entire organization, our Duferdofin - Nucor teammates have embraced and taken ownership of a culture focused on safety, environmental stewardship and production efficiency. All of these initiatives are focused on achieving consistent profitability for the joint venture in the near future. A quick comment about our fourth quarter of 2015 tax rate as it can be confusing due to the impact of profits from non-controlling interests and the impairment charges. Excluding profits belonging to our business partners and the two non-cash charges, the effective tax rate was approximately 31% for the fourth quarter.

Nucor continues to generate very robust operating cash flow in extremely challenging steel market conditions. With our highly variable and low cost structure, we benefit from significant reductions in working capital during downturns. 2015 cash provided by operations was approximately $2.2 billion, a dramatic increase from 2014s operating cash flow of about $1.3 billion. It also represents our strongest cash flow performance since 2008's record level of $2.5 billion.

Over this prolonged steel industry downturn that began in 2009, Nucor's annual operating cash flow generation has averaged approximately $1.3 billion. That compares with average annual operating cash flow of $500 million to the previous cyclical downturn from 2001 to 2003. 2015 capital expenditures were $365 million. For 2016, we estimate capital spending of approximately $500 million.

Depreciation and amortization for 2016 is expected to total about $700 million. Most of our recent larger scale organic growth projects have been completed or are nearing completion. Nucor's financial strength allows us to invest in capital projects and strategic acquisitions during severe industry downturns when the long term returns are most attractive. Through the downturn that began in 2009 and continued with a vengeance in 2015, Nucor has invested more than $6 billion to grow our long term earnings power that includes capital expenditures of approximately $4.4 billion and acquisitions totaling about $1.9 billion. Rather than fighting for survival, the Nucor team is executing our strategic plan for driving profitable growth and delivering attractive returns to our shareholders.

Nucor's disciplined and balanced approach to capital allocation also allows us to reward shareholders with attractive cash returns on their investment. Over the 10 year period ending in 2015, Nucor has returned a total of approximately $6.8 billion of their capital to our shareholders through dividends and opportunistic share repurchases.

With the dividend increase announced in December and effective with next year's quarterly payment, Nucor has increased its base dividend for 43 consecutive years, every year, since it first began paying dividends in 1973. Reflecting our success in growing long term earnings power, the base dividend has increased fivefold over the past 10 years. In December, we began repurchasing shares of our common stock under the $900 million program approved our Board in September.

Our repurchases totaled about 1.7 million shares at an average cost of just under $40 per share. Nucor's financial position remains strong. Our gross debt-to-capital ratio was 36% at the close of the fourth quarter. Cash and short-term investments totaled approximately $2 billion which compares with total debt outstanding of $4.4 billion. Our next significant debt maturity is not until December 2017.

Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility which remains undrawn, the facility does not mature until August of 2018. Nucor is the only North American headquartered steel producer to hold an investment grade credit rating.

Market conditions for our stainless segment remain extremely challenging as a result of global overcapacity and import levels that remain at extremely high levels; however, we anticipate some improvement in the steel mill segment in the first quarter of 2016 compared to the fourth quarter 2015 due to a lower average cost of inventory to begin the first quarter, a small decline in imports and more balanced inventor levels at service center customers. The performance of our downstream steel product segment will be lower due to typical winter seasonality.

We expect downstream products for the full year of 2016 to achieve notably improved performance compared to 2015. Performance in the raw material segment should increase slightly over the fourth quart level as Nucor Steel Louisiana resumed production earlier this week following its extended fourth quarter maintenance outage.

Margins are expected to improve modestly in our scrap recycling business. We are confident that Nucor's significant competitive advantages and highly adaptable business model will allow our team to continue to execute our proven strategies for delivering profitable long term growth and attractive returns to Nucor shareholders. We appreciate your interest in our company. John?

John Ferriola

Thanks, Jim. I am proud of the results achieved by our teammates and one of the toughest steel markets in decades. Because of their work, Nucor is growing stronger and actually thriving compared to our peers. First, I will comment on the overall industry issues we face today. It is not an exaggeration to say that the global steel industry is in a crisis. The crisis is the direct result of foreign governments particularly China blatantly subsidizing their steel industries. In further violation of international trade rules, this glut of global steel production has led to the dumping of steel products into the U.S. market. Despite the highest level of domestic steel consumption since 2006, the American steel industry capacity utilization in 2015 was around 70% and pricing for most steel products essentially collapsed.

Nucor's culture has always been defined by our willingness to tackle challenges head on and focus our energy on what is within our control. To that end, Nucor continues to be proactive and aggressive in pursuing trade cases whenever and wherever it is appropriate. When foreign producers and governments break mutually agreed upon trade laws, there must be meaningful consequences. Nucor has joined other U.S. steel producers in filing trade cases for hot rolled, coal roll and corrosion resistant flat-rolled products. We are pleased that the International Trade Commission made preliminary determinations of injury in all three cases.

Regarding the preliminary duties announced by the commerce department, we are satisfied with the duties applied to products from China in the corrosion resistant and coal rolled cases but we are extremely disappointed in the other determinations and believe that the facts to support higher duties; however we are confident that the government will be more aggressive in its final determinations after further analysis is done.

Another important trade issue in 2016 is China's bid to gain recognition as a market economy under its protocol of ascension to the world trade organization agreed to in 2001. Over the past 15 years, China has failed to implement the reforms necessary to become a market economy. China remains a government run non-market economy today. There for, the U.S. has no reason to change its treatment of China as a non-market economy.

Great challenges provide great opportunities for great companies that are ready size them. At Nucor, we are more than just ready, we are doing it. We are on the offensive and growing stronger. Our multi-pronged growth strategy is simple and flexible. That strategy is supported by Nucor's five drivers to profitable growth which highlight where we are focusing our energies to build long term earnings power and provide our shareholders with attractive returns on their valuable capital.

Here they are, 1, strengthen our position as a low cost producer; 2, achieve market leadership positions in every product line in our portfolio; 3, move up the value chain by expanding our capabilities to produce higher quality, more import resistant products; 4, expand our downstream channels to market to increase our steel mills base load volume, especially in weak markets and 5, achieve commercial excellence to complement our traditional operational strength.

Our performance in 2015 provides numerous examples of how we are growing stronger in this downturn and positioning Nucor to deliver higher highs in profitability during the inevitable cyclical upturn. Despite the challenges, illegally traded imports and less than robust capacity utilization rates, our bar mills delivered solid profitability in 2015. The keys to their success are powerful and sustainable. Market leadership positions, strong channels to the market, and an unrelenting focus to drive costs lower.

Our fabricated construction products group achieved very strong year-over-year profit growth in 2015 and actually approached the record profitability reached in 2007. That is very impressive when you consider the fact that U.S. non-residential construction activity for 2015 as measured by square footage represents less than 60% of 2007's peak activity. In addition to their strong market leadership positions, Nucor's fabricated construction products enhance the through the cycle profitability and flexibility of our steel making businesses.

Our structural steel business also delivered attractive earnings growth in 2015 while working against strong headwinds from high import levels and low mill capacity utilization. Impressive results were delivered by all of our structural steel teams. Our Nucor Yamato model mill, our Berkeley County South Carolina mill and our piling distribution business, skyline steel, Nucor's ongoing success in the structure all steel business continues to be powered by our market leadership position, strong channels to the market and new product introductions that continue to move us up the value chain.

Our Nucor structural mill is continuing to expand it value-added product portfolio. In 2015, Nucor Yamato began shipping its wider sheet piling sections. These new products are already enjoying strong marketplace success. We see significant opportunities for profitable growth in this market which currently is largely supplied by imports. Further, during the second half of 2016, Nucor Yamato will begin commissioning its $75 million question and self-tempering projects. This investment will position Nucor as the sole North American producer of high strength, low alloyed beams.

Our Berkeley County, South Carolina sheet mill achieved very solid fourth quarter and full year 2015 profitability in what can best be described as horrific flat-rolled market conditions. The Berkeley team continues to capitalize on their investments in vacuum degassing and the wide light capabilities provided by caster and hot mill equipment upgrades. New products from the wide light modernization are allowing us to gain new business in a wide range of end use markets including metal buildings, railcars, auto heaters, automotive, heavy equipment and motor lamination nation.

Of particular note, Nucor's automotive business continues to grow with work awarded by a diversified and high quality portfolio of automotive OEM customers. Highlighting Nucor's overall commitment to profitable growth in the automotive market and our strategic focus on commercial excellence, we opened a Detroit sales office earlier this year. Our shipment rate to the automotive market from our sheet and SBQ bar Mills increased by about 20% in 2015 versus 2014 to approximately 1.4 million tons. We believe the time could not be better for a financially strong and technologically advanced steel supplier such as Nucor to make a more significant contribution to the automotive industry.

In November we acquired Dallas [ph] cold finished bar facilities located in Ohio and Georgia. And the combined annual production capability of 75,000 tons, this acquisition strengthens Nucor's market leadership position in this very attractive value-added business and important channel to the market. I warmly welcome to the Nucor family all of our newest teammates in Orrville, Ohio and Cartersville, Georgia. Our list of five drivers to profitable growth begins with the objective to strengthen our position as a low cost producer. Nucor's DRI production capability with its excellent conversion cost structure has significantly strengthened our position as a low cost steel maker. It gives us the flexibility to optimize Nucor's overall iron units mix and most importantly, cost.

Consistent with our announcement earlier this month, our DRI plant in Louisiana has resumed operations and is producing high quality DRI. Recent changes in raw material pricing led to this decision.

These are challenging times in the steel business, but for a company such as Nucor, one that is in a unique position of strength, these are also times of great opportunities. Here is what I see throughout Nucor. The right people working with their typical high energy level and sense of urgency to seize these opportunities for profitable growth, ensuring that Nucor's best years are still ahead of us. Thank you for your interest in Nucor.

We would now be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We'll take our first question from Tony Rizzuto with Cowen & Co.

Tony Rizzuto

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

John Ferriola

Well let me start by saying that we take a hard look at the data and as we view the data, and as we have anxious to go back and present it to the commerce department we feel confident that we can prove a strong case and then came out in the preliminary. So we're pretty confident -- remember that during the preliminary findings they see only some of the facts presented by frankly on the countries that we are looking to gain some duties from. So they all see the whole picture.

We have an opportunity during this period to present our case and we're confident that when we get to present our case, and get a more balanced view in front of them they will come out with a stronger determination in the final determination.

Tony Rizzuto

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

John Ferriola

It's very difficult to project where pricing is known to go and let me ask maybe by addressing your earlier point that we do recognize that Nucor that despite our best efforts and effective trade cases to effective trade action, we recognize that because of the dollar there's always going to be some challenges on the import front which is why when you look at our strategy and how we have developed our products to move up the value chain, we have got a strategy that we use to help insulate us and much as possible from the imports. Higher value products that are harder to import.

We continue to develop a stronger channel to the market that provides a nice barrier for us gives us some protection from the imports. So we're taking this from a two front battle, one we are continuing to fight the imports, the illegal unfairly traded imports let me be real clear about that we do not have a problem with imports. We have a problem with illegal unfairly traded imports. So we'll continue that battle and we'll continue with our strategy of moving up the value chain, gaining more market leadership position in the products in which we participate and to continue to develop our channel to the market.

Tony Rizzuto

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

John Ferriola

Let me address that from the automotive front because that's probably where we feel we have the greatest opportunity. As you know, that we've increased sales in automotive on a delivery bases by about 20% over last year. Today we're at about a 1.4 million ton a year market penetration. We fully expect to be able to get up to 2 million tons over the next couple of years and that's going to be in both sheet products and our SBQ.

As we continue in sheet and we move up the value chance into the advanced high strength steals, particularly when you think about what we've done on our Berkeley facility we provide light project that's given us the ability to continue to move even higher and the strength sheet steel products while maintaining the light gauge they need in the automotive applications. So we feel very good about our sheet penetration into automotive and I'll also point out that on our SBQ, we continue to develop more and more products and bear in mind Tony that as our team does a great job selling today automotive market and our products present great opportunities for the automotive customers, and let's be honest the automotive industry is taking a look at the entire steel industry today and they look at Nucor and our balance sheet and they see a long term sustainable supplier.

When you think about how they order steel, they order steel today, it takes a long time to get qualified and years to go through that entire process and then the steel they're ordering today could show up on a platform that's not even going to roll-out for two to three years from today so they want to make absolutely certain that after they've gone through the entire qualification period that when they roll that product out that new platform out in two to three years they want to make certain that their steel supplier is going to be there and able to supply the steel that they need to keep their factories running.

Tony Rizzuto

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

John Ferriola

Let me just answer the question this way. The most qualified people out there are looking for companies that work for companies that they know are going to be around for the long term and all I'll say is when you look at the balance sheet and when these potential candidates take a look at our company one of the things they bring up towards all the time is that look we want to get with a company we know is going to be there for the long term and I want to finish my career with a company. Not only do they are impressed with our balance sheet but once they come down and spend some time with us they like our culture, like working for the concept of working for the Nucor family, so yes, we had great potential to attract the best people out there and having opened this office in Detroit.

I'm telling you what, that was a great move and I guess it was two months ago we have a grand opening I'll tell you Tony we had over 200 customers come by and talk to us and the one thing that we heard consistently through that two or three hour period was a major concern about the suitability of some of our competitors in this industry and they are anxious to do more business with Nucor as a result of that. We'll move on and give someone else a chance to ask questions, thank you Tony.

Operator

We'll take our next question from Matt Murphy with UBS.

Matt Murphy

Maybe just picking up from there in terms of R&D and auto, can you summarize what some of the main steps, the mini mill industry have to do to make more in-roads on auto? What is sort of the key quality steps you've got to make and how quickly can you make them to make more meaningful in-roads.

John Ferriola

Well probably I'm going to speak just to Nucor because I can't speak for other competitors, probably biggest issue is getting through the qualification period. It's an issue of timing. When you talk about what products do we need to develop to be able to get penetration into it I would tell you that today we're producing just about all of the products we need to get our full penetration into automotive. On making advanced high strength steals, we have great quality steel going to the automotive industry, so where we need to be in terms of products today.

Now having said that what's good today is not good enough tomorrow so we need to continue to work on developing even more sophisticated grades that have higher strength while still maintaining flexibility or improved flexibility for the designs that are coming out in the future so there's always more to do but I want to be clear about this point. Today at least new cars [ph] in mini mill we can produce virtually every type of steel that's needed in automotive.

One of the questions I'm always asked is about exposed automotive quality and I answered this question several times but I'll say it one more time. Today we have the ability to produce exposed automotive that is actually out there on cars and went through a qualification period. So we're very comfortable with the products that we can supply and the quality that we can supply.

Now as I mentioned earlier, there's a very long qualification period and after the qualification period you have to wait for it to be introduced and your steel is being specified on so there's a period of time it's going to take to grow to this 2 million or better tons a year level with automotive but it's strictly a question of working our way through that time period now.

Operator

We'll take our next question from Chris Olin with Rosenblatt Securities.

Chris Olin

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

John Ferriola

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

Chris Olin

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

John Ferriola

I don't know that we've ever tried to figure out an exact number but I'll tell you when you look at the product prep we have to offer, the type of products we have to offer not only you mentioned rebar but think about the plate applications that go into infrastructure. So we've got bar products that go in there, we’ve got plate products that go in there and by the way don't forget a lot of this work is going into bridges and we've got great piling that we can offer to and we offer piling products that only we produce domestically and as I always like to say, when you're going to build a bridge we can supply every type of steel you need in that bridge and when all said and done we'll sell you the nuts and bolts to put it together from our fastener [ph] division.

So when I look across the spectrum of companies in our industry, Nucor, I believe is positioned better than most to take advantage and gain the most out of this Highway Bill as it comes into fruition and the dollars begin to flow.

Operator

We'll take our next question from Chris Terry from Deutsche Bank.

Chris Terry

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

Jim Frias

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

John Ferriola

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

Jim Frias

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

John Ferriola

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

Jim Albrecht

But that's another project that we're doing. So those are the two that we can mention as John said, most of the large ones and we're kind of happy about it, most of our large ones were past the phase where we're spending the money, we're well into the startup and frankly past the startup and we’re beginning to see some of the returns from these projects that we've invested in heavily and we mentioned several types the wide light project, we mentioned piling project. I'll mention the DRI project, so it's not to be past point where we will have spent on the existing projects.

Now having said that I want to be very clear that I can't give you any specifics as to what we're doing but there will be we believe that there's many opportunities both organically and through M&A activity to continue to grow our business and we're anxious to do that. Just because we're planning on a $500 million budget that doesn't mean that that's what it will be at the end of 2016.

Chris Terry

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

John Ferriola

Well I'll tell you what I'd love to talk about that but I don't want to go to prison but there's really nothing I can say about it other than I'll make this a general comment and it's going to go back to our five points of profitable growth, so if you look at those areas we talked about there are things in which we can continue to improve our market leadership position in the markets in which we compete so there will be things that strengthen our channel for the market that will be things that continue to move us up the value chain, our products up the value chain making them more import resistant and I don't want to leave out one of the most important ones.

That is we will continue to invest in our operations in ways that will continue to lower our cost of operation because at the end of the day, we're at a commodity business and we're in a global commodity business and the way to succeed in a commodity business in a Global Market place is to be the low cost producer so we will continue to invest below our cost of production which obviously was one of the big reasons we invested our $750 $780 million in our DRI facility so that's more of a general answer to your question but really all I can give you.

Operator

We'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners

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

Jim Frias

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

Timna Tanners

Yes concerns over the LIFO swing.

Jim Frias

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

Timna Tanners

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

John Ferriola

I'll be happy to address that. We always have three approaches to our capital allocation and let me make sure that I highlight the first one and the first one is to invest in profitable growth of our company. That is always our first focus and I want to be clear, Timna. We believe strongly that there are many opportunities to continue to invest in the profitable sustainable growth of our company both internally, organic and externally through M&A activity. So that's the first objective that will always be the objective.

Second objective in capital allocation is to make sure we return our shareholders valuable capital to them at an appropriate way. We look at dividend as being a very appropriate way to do that. We think it's a good dividend, well balanced dividend, look to maintain a prudent payout ratio between supplemental and our base and we look forward to the days like we had in 2005 and 2006 when we have such good cash flow coming in that we can increase the supplemental dividend and return more of the capital to our shareholders, so that's our second objective.

And our third objective as you mentioned when we can't beat either of the two first ones is to look at stock as a potential buyback and so those are the three areas we look at and I'll point out that there's a lot of questions about the cash and our cash position today and when you look at 2015, we generated a lot of cash in 2015 but I think it's the second highest that we've had since what about 2005? Highest since 2008 and we have a lot of cash on hand but let me be clear again we feel we have a lot of opportunities to spend it wisely in a disciplined manner, on a flexible disciplined manner to grow our company.

If we don't see opportunities out there that return the kind of capital, return on invested capital that we're looking for, then we'll do the prudent thing and return it to our shareholders or buy stock. Right now when we look the all three of those we saw it during the past month stock was a good opportunity and we bought some stock. It is definitely not a major change in our position or direction or anything like that. I want to be really clear about that.

Operator

We'll take our next question from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs

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

John Ferriola

When you look at our mix about 55%-60% goes T hot and the rest is pretty well split evenly between cold rolled and galvanized but basically I would say an easy way to remember the numbers which is what I need I'd use 60% hot band, 20% cold rolled and 20% galvanized and that's pretty close.

Phil Gibbs

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

Ray Napolitan

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

John Ferriola

I hope everyone understood the comment about the bin and that allows us to do and a sophisticated computer system we use that helps us design our building and what it allows us to do is to tackle and Bill more complex structures which are higher margin structures and also impacts our cost, so it has two very positive effects for us. So ready to hit them all on the head.

I think that I want to just make a shout out to my team and say great job guys, I'm really proud of the fact that if you look at all three of our downstream businesses, and we had a very good year we expect another one in 2016 and maybe a comment about our shipments in 2015 how they compare to the previous year given the fact that when you look at McGraw Hill the demand for non-residential construction was down 5-6%.

Jim Frias

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

John Ferriola

Up a little bit than 2014.

Jim Frias

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

Phil Gibbs

And then just the last one I had. You said the recent changes in raw material price lead to getting the DRI back on track. Just clarifying what you meant on that given that iron ore prices and pig iron prices have been relatively stable over the time frame so looking for more color and it's a again I've been getting a lot from investors. Thank you.

John Ferriola

Well the keyword you use is relatively stable and when we look at it and we see an increase of 20-$30 a ton on scrap and a $10 increase in pig iron that might be relatively stable but when you buy 15 million tons of scrap, and million 5 tons of pig iron that's a big change and we felt as we talked with our DJ Joseph team whose out there all the time working in the marketplace we felt we could attribute at least half of that to the fact we were taking a DRI plan off line and since we when we finished the maintenance outage at the end of last month, we were at a point where we had to make a decision as to when you're back on or not and we were basically breakeven on a marginal contribution basis and so we were kind of up in the air as to what to do.

We thought it was a good opportunity to leave it all and we've always believed that bringing it online had a significant impact for us on our cost of scrap and pig iron so we said here is an opportunity to take a look and see in fact what happens so we left it all, we saw a bump go up and it's about 25-$30 a ton across the spectrum on scrap and $10 on pig iron so again that's a huge impact for us, so we bought it back online because of that and I came away from the whole thing and the team came away from the whole thing more convinced than ever that although you might not see immediate profitability in the DRI plant itself when you look at the overall impact to our company, on iron units which represents 60% of our costs the overall impact to our company is significantly better wanting that DRI plant than not wanting the DRI plant even if it is not profitable in its own right.

Operator

We'll take our next question from Andrew Lane with Morningstar.

Andrew Lane

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

Jim Frias

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

Andrew Lane

And wanted to ask about scrap flows, how are you seeing scrap flows currently in the recycling market and what do we immediate to see a significant improvement in scrap flows for your recycling operations to restore positive margins?

Joe Stratman

Scrap flows over the last 60-90 days have been basically flat but on a year-over-year basis, they are still down running down probably 25-30%. The second part of your question, I think let me take a shot at looking at it this way. Our DJJ business model is a very diverse business model and we some types get caught up in thinking that it's only a recycling business with scrap yards but we have five or six different business elements in our DJJ business and the recycling group alone as a part of that only represents about 15% of the DJJ revenue flow so the DJJ business model performance financial performance does not rely on the recycling group.

For the recycling group to see improvements, really all you need, it's not as much flow based as much as you need stability the pricing. In other words for most of 2015 we are seeing significant drops in the market price for scrap and that's kind of like catching a falling knife. You can never really catch up with it. Once price is stabilized or shows any sign of increase then that is what drives margins and profitability at the recycling group more than just volumes.

Operator

We'll take our next question from Brian Yu with Citigroup.

Brian Yu

First question is this touches on your auto comments a little bit earlier a bit broader but with the various blast furnace Operators out there that the contract prices reset lower but they aren't giving any indications of whether or not they've lost business in that process and I know you've mentioned your auto shipments are going to improve.

If we just look at the broader contract picture and the billions you have done business within the pastor new ones you've got were you able to win in new customers going into 2016 and is it possible to give us an order of magnitude like how much more does that base load your order book for this year?

John Ferriola

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

Brian Yu

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

John Ferriola

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

Brian Yu

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

John Ferriola

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

Brian Yu

And second question I've got is this goes back to the fabrication business and you guys have noted profitability is up, shipments were sideways and pricing is down a little bit. One thing and not taking anything away from your team there but steel prices did come down a lot so I'm thinking that maybe the drop in steel prices did improve margin?

John Ferriola

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

Jim Frias

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

Brian Yu

Okay, the other part of my question was just that you are guiding for increased profit ability in 16 it sounds like you're getting better prices, above your input cost in 16 versus 15 and then on the volume side are you looking for pick up in volumes out of the downstream business in 16?

John Ferriola

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

Operator

We'll take our next question from Garrett Nelson with BB&T Capital Markets.

Garrett Nelson

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

John Ferriola

You kind of answered the question for me. Imports are coming down a little bit, in addition to imports coming down the service center inventories are down a little bit, so bottom line is yes, we do see our utilization rates increasing as we go into the first quarter and also remember that we are moving into a period where we come out of fourth quarter is usually the weakest quarter in terms of the steel business so we're kind of coming out of that quarter, first quarter, second quarter we see typically see utilization rates and we think we'll continue to see that. You mention the slowdown in imports.

You mention the reduction of the inventory in our service centers but I'd also mention to you there has been quite a few shutdowns from some of our competitors that we believe we'll see some improved utilization as a result of that also. And also, we're seeing a small bounce in pricing and when you see a bounce in pricing typically that gets things going again.

Customers when pricing is going down kind of waiting until they hit the bottom and we've increased pricing in several products and those price increases have been holding so we feel pretty confident we've stopped the slide and we're moving back up. Customers see that also and order entry rates go up.

Garrett Nelson

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

John Ferriola

Frankly our thinking has not changed at all. We still see that as a key long term strategic goal. I've said this several times at Nucor all of our strategies are pointed towards long term sustainable profitable growth and at the end of the day we still believe very, very strongly that I'm not sure whether it's going to be five years, seven years or ten years, but, we believe that as a result of the manufacturing decreasing in the United States and several other things, we will be glad we have that DRI plant. Just remember one other thing. We're very heavy into pig iron and that's very important to us and right now we get about 80% of our pig iron out of Russia. The rest of it is coming out of Brazil. Those are not the most stable places in the world geopolitically.

HBI which is another potential product we could use as a scrap substitute comes out of Venezuela and that's also not a very stable geopolitical area so when you look at all of these facts and you look at our goal of being flexible, long term having flexibility and balance across our portfolio and a cyclical business whether scrap pricing is cyclical, iron ore is cyclical, pig iron is cyclical, steel pricing is cyclical when you look at that I believe the key to long term stable returns to our investors the best way to accomplish that is to have a nice balanced portfolio and flexible portfolio that allows us to move things around as we need to optimize the lowest cost product inputs and optimize our margins coming out of our Mills.

So long winded answer to your question but no our strategy hasn't changed. We believe it's the right strategy and we'll continue with it.

Operator

We'll take our next question from Aldo Mazzaferro with Macquarie.

Aldo Mazzaferro

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

Jim Frias

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

Aldo Mazzaferro

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

Jim Frias

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

John Ferriola

There might be one thing I'd want to add to your comments and that is you have to lock at that by segment, right? Because when you look at our bar Mills we have a lot less scrap on the ground.

In fact some of our bar Mills just because they are geographically challenged, we don't have a lot of room some of them happen as little as two to three weeks of scrap on the ground and then you take a look at our sheet mills and not only do they necessarily have to have more on the ground but it's a different mix and the mix they use will depend upon the mix of products they are producing so it's a very complicated process that you go through but the impact that you mentioned Jim will occur more on a larger plate and sheet mills, just to give you a little more color.

Aldo Mazzaferro

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

John Ferriola

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

Operator

We'll take our next question from David Lipschitz with CLSA.

David Lipschitz

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

John Ferriola

Well we aren't going to answer that question directly. What we will say is that we do it, we do our impairment testing every year and we always look at all of our operations and we're comfortable with where we are with that and I'm going to refer back to what Joe said earlier about the business model at DJ Joseph being different.

We aren't going to comment on what our competitors have done in terms of breakdowns, but when we look at our business model as Joe mentioned, it's much more than recycling and in fact the vast majority is out of recycling and when we look at our brokerage, we look at how they are performing we're very comfortable that we are well within the range of having a level of impairment.

Jim Frias

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

Operator

With no further questions I'll turn the call back over to Mr. Ferriola for any additional or closing remarks.

John Ferriola

Let me conclude by saying thank you to all of our customers. We really appreciate the opportunity to earn your business every day and if we are blessed with your business we won't let you down. And thank you to our shareholders. We appreciate your ongoing confidence and support.

It means a lot to us. And to my teammates, I want to say thank you for creating customer value, generating attractive returns for our shareholders and building a sustainability, a sustainable future for all of us and most importantly, thank you for doing it safely. Thanks for your interest in Nucor. Have a great day.

Operator

That does conclude today's conference. Thank you for your participation.

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