Nucor Corporation (NYSE:NUE)
Q4 2016 Earnings Conference Call
January 31, 2017 02:00 PM ET
John Ferriola - Chairman, Chief Executive Officer and President
Jim Frias - Chief Financial Officer
David Gagliano - BMO Capital Markets
Curt Woodworth - Credit Suisse
Matthew Korn - Barclays
Jorge Beristain - Deutsche Bank
Evan Kurtz - Morgan Stanley
Alex Hacking - Citigroup
Seth Rosenfeld - Jefferies
Timna Tanners - Bank of America Merrill Lynch
Philip Gibbs - KeyBanc Capital Markets
Good day everyone, and welcome to this Nucor Corporation Fourth Quarter and Year End of 2016 Earnings 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 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 unavailable. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future effects 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 10-K 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 either 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.
Good afternoon. Thank you for joining us for our conference call. We appreciate your interest in Nucor. With me for today’s call are the other members of Nucor’s senior management team: Chief Financial Officer, Jim Frias; Chief Digital Officer, Joe Stratman; and our other Executive Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Dave Sumoski, and Chad Utermark.
The leadership team in Charlotte would like to thank all of our team mates throughout Nucor for working together to build a safer, stronger and more profitable Nucor. You are the reason our company’s best years are still ahead of us. Thank you.
We also want to extend a very warm welcome to the newest members of the Nucor family. Our more than 900 Nucor tubular products team mates who joined us with the recent acquisitions of Independence Tube, Southland Tube, and Republic Conduit. Nucor is very proud and excited to have you aboard.
Our Chief Financial Officer, Jim Frias, will now review Nucor’s fourth quarter performance and financial position. Following those comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?
Thanks, John. Nucor reported fourth quarter of 2016 earnings of $0.50 per diluted share and full year earnings at $2.48 per diluted share. These numbers exclude any last-in, first-out or LIFO expense or income. Included in fourth quarter of 2016 earnings were the effects of a change in estimate related to the cost of certain inventories that resulted in a benefit of $0.16 per diluted share.
Additionally, compensation costs in the fourth quarter were $0.09 per share higher than anticipated as a result of effects of the change in accounting principle, the effects of the change in estimate, and slightly better than forecasted operating performance in December 2016. After allowing for these onetime items, fourth quarter 2016 earnings were slightly above our guidance range of $0.30 to $0.35, which assumed LIFO expense of $0.07 per diluted share.
On our October 2016 earnings conference call, we committed to completing a review of our steel mill capacity estimates that have been in place for a number of years. Those estimates preceded the sizable investments we have made in recent years to support a broader shift in our mix to include a greater proportion of value-added steel mill products.
Examples of these investments include, the Berkeley sheet mills wide-wide project, our Arkansas sheet mills vacuum tank degasser, Nucor-Yamato’s wider, lighter sheet pilings and higher strength low-alloy beams; and our Hertford County plate mills vacuum tank degassing heat-treat, and normalizing capabilities.
Although value-added products may run slower on our mills, we expect the richer product mix to support higher overall profitability through this cycle. Reflecting the capacity impact of moving up the value chain, we estimate Nucor’s total steelmaking annual capacity to be approximately 26.7 million tons, a decline of about 7% from a prior estimate of just under 29 million tons. For 2016, our steel mills produced a total of 21.2 million tons.
During the fourth quarter, while analyzing the impact of this shift to value added products on our steel mill capacity, we also revisited the impact that new grades of steel have and our inventory costing methods. We determined that the use of the first-in, first-out or FIFO inventory costing method was preferable for all of Nucor’s businesses.
In addition, consistent with the changes in our estimates of normal capacity, we also changed our estimates on the amount of production costs to be absorbed in our inventory costing models resulting the $0.16 per diluted share benefit. Nucor’s decision at year-end 2016 to use FIFO inventory costing for all of our business units resulted from these factors. Our exclusive use of the FIFO method more closely resembles a fiscal flow of our inventory, and better matches revenue with expenses.
It provides investors and analysts with improved comparability to our peers FIFO also aligns with how Nucor assesses the performance of our businesses. That point is highlighted by the fact that our business segment results have always been presented on a FIFO basis. A quick comment about our fourth quarter and full year 2016 tax rate, as it can be confusing due to the impact of profits from non-controlling interests.
Excluding profits belonging to our business partners, the effective tax rate was 33.3% for both the fourth quarter and the total year. Overall, steel market conditions remain challenging in 2016. Nevertheless, several of our businesses achieved particularly noteworthy results. Nucor sheet mills delivered strong earnings growth, especially over the final three quarters of the year. Our flat-rolled teams continue to successfully move up the value chain.
In an extremely depressed market demand environment, Nucor’s engineered bar mill group achieved solid profitability. We continue to take advantage of recent investments such as the Memphis Mills new heat-treat facility and Darlington, South Carolina mill’s wire rod rolling capability. Despite facing the headwind from a generally flat nonresidential construction market, our Harris rebar fabrication business posted strong year-over-year earnings growth.
The David J. Joseph Company scrap processing business also delivered strong profit improvement. Our scrapper cycling team has put in place significant and sustainable improvements in their cost structure reducing both fixed and variable costs. Another key driver has been DJJ’s successful execution of its mill alignment strategy. This initiative improves utilization and profitability of DJJ’s processing operations, while also allowing Nucor steel mills to better optimize the cost of their scrap requirements.
Nucor’s financial position remains strong. With total debt outstanding of $4.4 billion our gross debt-to-capital ratio was 35% at the end of 2016. Cash and short term investments totaled approximately $2.2 billion. That was after funding our fourth quarter acquisition of Independence Tube for cash purchase price of $430 million. Nucor’s strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn.
This facility does not mature until April 2021. 2016 capital expenditures were $680 million, which included $135 million for the purchase of natural gas leasehold interest from Encana in the third quarter. 2016 depreciation and amortization totaled $687 million. For 2017, we estimate capital spending of approximately $575 million, and depreciation and amortization of about $715 million.
Earnings in the first quarter of 2017 are expected to increase compared to the fourth quarter of 2016. We believe full year 2017 profitability could significantly exceed the level achieved for 2016. We expect our sheet mills to perform more consistently due to the full-year benefit of recent trade actions. Our plate mills are also expected to deliver improved profitability as the pending plate trade cases are concluded in coming months.
Our fabricated construction products order books indicate that the nonresidential construction market is regaining momentum in 2017. We expect strong year-over-year growth in our steel products businesses this year. Beginning in the second quarter, we will realize the full benefit of our tubular products investments. We also expect our raw materials business to be solidly profitable due to stronger demand for iron units.
We are confident that Nucor significant competitive advantages, highly adaptable business model, and proven strategies will allow our team to continue to deliver profitable long term growth, and attractive returns to Nucor’s shareholders.
Thank you for your interest in our company. John?
Thanks Jim. Nucor’s disciplined strategy for profitable growth is working. Our successful execution is evident in our strong cash flow generation and our industry leading returns on capital through the challenging steel markets of recent years. Most importantly, our strategic execution positions Nucor to deliver stronger profitability throughout the economic cycle.
Consistent with our company’s long history of growing stronger during industry downturns, Nucor has a sizable pent-up earnings power that we are eager to realize for our shareholders. We are executing our long term growth strategy by leveraging Nucor’s five drivers to profitable growth. The five drivers are: One, strengthen our position as a low cost producer. Two, achieve market leadership positions in every product line in our portfolio.
Three, move up the value chain by expanding our capabilities to produce higher quality, higher margined products. Four, expand and leverage our downstream channels to market to increase our steel mills base load volume for sustainable results. And five, achieve commercial excellence to complement our traditional operational strength.
I will now update you on highlights of our team’s recent progress implementing our strategy of profitable growth. Over the past three months, we have established a new strategic platform for profitable growth, Nucor tubular products. In October, we completed the acquisition of Independence Tube Cooperation. In January, we completed the acquisitions of Southland Tube and Republic Conduit. Combined 2016 tubular shipments for these three businesses where approximately 1 million tons.
Our aggregate purchase price for the three acquisitions of $900 million is approximately 7 times estimated average EBITDA over the 2014 to 2016 period. Independence Tube and Southland Tube produce Hollow Structural Section or HSS steel tubing. 2016 shipments totaled about 840,000 tons from five facilities located in Alabama and Illinois. HSS steel tubing is predominately used in nonresidential construction. With the acquisition of Independence Tube and Southland Tube, Nucor has immediately established a market leadership position in the HSS steel tube marking.
Republic Conduit produces steel electrical conduit. 2016 shipments totaled approximately 150,000 tons from two facilities in Kentucky and Georgia. Republic’s products are primarily used to protect and route electrical wiring in nonresidential construction. With this acquisition, Nucor has become a market leader in steel conduit. Nucor’s expansion into the HSS and Electrical Conduit segments of the pipe and tube market hits on all five drivers in our long term strategy for profitable growth.
It is also a natural fit with Nucor’s business model and product portfolio. Like Nucor’s other operations, these pipe and tube businesses are built around extremely efficient manufacturing, a highly variable cost structure, and continuous improvements. All three acquired companies share Nucor’s strong emphasis on the value of our team members. Both the HSS and Electrical Conduit products offer significant value-added opportunities.
These factors include quality, reliability, and short lead times inherent in construction projects, but these reasons import penetration in these market segments has been limited, compared to the overall pipe and tube business. Of great strategic importance, our tubular products provide a value-added channel to market for Nucor’s hot-rolled sheet steel.
Hot-rolled sheet is our largest flat-rolled product representing about 60% of shipments by our sheet mills in 2016 or just under 6 million tons. Prior to these acquisitions, our channel to market opportunities of Nucor’s hot band production were limited compared to our broader steel portfolio.
All of the Nucor two-wheeler product facilities are located in close proximity to one or several Nucor sheet mills. In 2016, our sheet mills supplied less than half of the substrate consumed by our recently acquired tubular operations. There is clearly a very meaningful opportunity ahead for our sheet mills to earn additional business from our pipe and tube mills.
Nucor is already North America’s most comprehensive supplier of steel solutions to the construction and infrastructure markets. We hold leadership positions in beams, bars, and plates steels. Steel H-piling and pipe piling manufacturing and distribution, as well as joist, decking, metal buildings, and rebar fabrication.
The addition of HSS and electrical conduit tubing to our product portfolio will further differentiate Nucor from our competitors and our ability to provide solutions to our customers. Nucor is the strongest name in construction steel and steel products.
Our new Korean model structural steel mill team made excellent progress in the fourth quarter and full year of 2016 with the expansion of their value-added product offerings. Shipments of the recently introduced wider sheet piling sections in 2016 exceeded 45,000 tons. After beginning production of the wider sheet piling product in late 2014, we are well on the way to reaching our annual volume goal of 100,000 tons.
Three of the four new sections have been commercialized, with the remaining section to be commissioned during the current quarter. Already enjoying strong marketplace success these value-added niche products are an essential component in numerous infrastructure applications. In the third quarter of 2016, Nucor- Yamato began trial production of its new high strength low-alloy beams that utilize the recently installed quench and self tempering or QST technology.
I am very pleased to report that the Nucor-Yamato team shipped its first load of these high strength beams to a customer earlier this month. We expect to complete trials across the entire range of our high strength beam product line during the first half of 2017. This investment positions Nucor as the sole North American producer of high strength low alloy beams. Nucor-Yamato’s target over the next several years is to grow our high strength beam volume to 50,000 tons annually. That would represent a market share of about 50%.
Nucor’s automotive market shipments increased to 1.4 million tons in 2016. Our automotive shipments have grown by 50% over the past three years with strong gains in both our sheet and our engineered bar businesses. Critical to our ongoing success is Nucor’s work with customers developing advanced high strength steels. We expect to continue our robust growth in the automotive market. As always, our focus is on profitable growth.
Consistent with the plan announced in mid-2016, our Vulcraft/Verco steel joist and decking business has expanded its geographical reach into Canada. Vulcraft, Canada located in Ontario began deck production in December. We expect reduction of joists to begin around the end of the current quarter. For many years, a highly successful customer supplier partnership between Vulcraft and our steel-making operations has proven the value of Nucor’s vertical integration and channel to market strategy.
These are just some of the exciting initiatives being implemented throughout Nucor to drive profitable growth. They highlight the long term focus of Nucor’s culture on continual improvement and technological innovation. Nucor thrives in a marketplace where winners are determined by real economic advantage, not advantages derived by artificial or unlawful methods. We embrace free and fair competition, which is an essential requirement for all trade both domestic and international.
For this reason, Nucor will continue to be proactive and aggressive in pursuing affective and timely enforcement of our nation’s trade laws. We owe nothing less than that to our customers, our employees and our shareholders. It is absolutely necessary, given the greatest challenge facing the steel industry, which is global steel production overcapacity, resulting from the trade distorting practices of some governments.
With the recent actions taken by the U.S. Government to both strengthen and better enforce our nation’s trade laws significant progress is being made. We are definitely headed in the right direction, but there’s a tremendous amount of work still to be done. And Nucor team will continue to diligently work to ensure a more comprehensive and long term solutions to the problems facing the steel industry and America’s manufacturing base.
For a company such as Nucor with its unique position of strength and proven ability to execute its strategy for profitable growth, this is a time of great opportunity. Our team is both ready and eager to demonstrate the pent up earnings power that we have built into our company during the industry downturn. I am absolutely confident that Nucor’s best years are still ahead of us.
We would now be happy to answer your questions.
Thank you. [Operator Instructions] And we will take our first caller. We’ll go to David Gagliano with BMO Capital Markets.
Hi, great. Thank you for taking my questions. I actually have two questions. One is a short-term outlook related question, which I know you love answering so much, but I have to ask it anyway. And then the second one’s relating to the accounting change. First, on the short-term outlook, you provide a lot of good qualitative commentary regarding the expected improvements in the first quarter. But I’m wondering if you could quantify the magnitude of the expectations for the near term, specifically what type of quarter-over-quarter improvements should we be assuming for volumes and metal margins? And also what’s a reasonable assumption for scrap moving forward, embedded in that metal margin assumption. That’s my first question.
Let me start with that. Always good to hear from you and you’re right. We do love getting those short term questions even though we can’t answer them. We do like hearing them. But I can answer some parts of it. Let me start with the scrap. You know outlook for scrap and we think that scrap is one-up, it’s over $100 over the last couple of months. And frankly we think it over shot a little bit, particularly on the obsolete grades. So we see that cutting back a little bit, you know cutting back maybe $20 a ton over the next two months or so on obsolete, that’s our short term view. On prime, we think it’s a little bit stronger. It perhaps over shot a little bit less, probably a small trough back over the next couple months maybe in the neighborhood of $10 to $15.
When we look at pig iron, we’ve seen that’s gone up quite a bit over the last couple of months, current pricings in the neighborhood of $325 a ton, but we think that’s pretty solid. We don’t see that coming back much at all. So on scrap, we can give you a pretty definitive outlook on the short term. In terms of volume, we can answer the question in general terms with what we see going on in the marketplace, and I’m sure we are going to delve into this more deeply as the call goes on.
You see the reports that we see. We see the drudge report going up 6% on construction. The drudge report going up over the next quarter can be up 6%. And we see that supported with our own downstream businesses when we look at the order entry rate. As I’ve mentioned in the past, we see that as an indicator of what the market is doing and we see order entry rates and our code rates up significantly over the last two months.
So, we think the drudge report is probably accurate on that. On the automotive front, you know you will see the ward report. You know that’s going to be pretty consistent there going through the year maybe at 17, 2; 17, 3 as compared to the 17,5 number last year. So that will be down a little bit, but I would ask you to remember that even if the overall build is down, a percentage of that market share continues to increase. So, as we see our position in automotive over 2017, we see it improving.
And then finally energy, energy we see as the picking up during the year also, we think it is going to be a substantial pick-up during 2017.
Alright, great. That’s very helpful. Thank you. Just another switch from LIFO to FIFO, which by the way I think is going to make our lives easier moving forward, my understanding is sometimes when companies make that change they do incur a bit of a cash tax, it can be actually pretty large, cash charge, just sure there is no expectations here should we be thinking about a potential one-time charge coming from this change?
Not a charge, I think we’re really seeing there is a cash, on the statement cash flow is because of taxes, in Nucor’s case that is not going to be the case. We expect a negligible impact, if any at all from changing from LIFO to FIFO.
Did that answer your question Dave?
Yes thank you very much. That’s helpful. Thanks.
Thank you, David.
And we next move to Curt Woodworth with Credit Suisse.
Hi, good afternoon. Two questions, a policy question and a question on your sheet mill business. So, I’m not sure John what level of contact you had with the new administration, but from a policy basis, I wanted to see what Nucor thought as potential tools or changes that the Trump administration could potentially look to utilize to support the domestic steel industry and its workforce, it is the first question.
Well we’ve had personally a small amount of contact with the new administration, but obviously our trade associates have been very active working with them. As a general statement we feel very pleased particularly with the appointment of the Cabinet members who will be focused on trade. We believe them to be very knowledgeable about the steel industry and very knowledgeable about trade laws and policy.
So, we feel good about what we see as the changes coming up in the administration relative to trade and particularly to steal as it pertains to trade. And again, all we are looking for as we have said many times in the past, all that we are looking for is a level playing field. We are not looking for any advantage; we are looking for level playing field. We feel good about the administration’s position on China and with currency manipulation, and we feel very good about the acquisition on China as a market economy status, and not being granted market economy status.
We also are very encouraged by the discussion about a strong infrastructure build. Both President Trump and Senator Brown are both speaking about something significant in the neighborhood of about a trillion dollars over the next 10 years. That has a significant impact on steel consumption. We believe that for every trillion dollar spent you’re looking at about 50 million tons of steel – 50 million over the 10-year period, with the trillion dollars will be spent over the 10-year period. So, we will be looking at about 50 million tons over the 10-year period.
So that could average out to about 5 million tons a year. So now when you look at that and we say our total consumption in the United States is about 100 million tons, rightly in tons is not insignificant. So, the trading policies, the view on infrastructure all leads a positive outlook for us with the administration.
Okay, thank you. And then a quick question on your sheet mill performance, I’m calculating and as many as based off all capacity data that your sheet mills ran around 71%, 72% capacity factor in the fourth quarter, I’m wondering given your ability to leverage, potentially another 0.5 million tons of hot band substrate into your pipe and tube acquisitions, you know as well as market growth, can you comment on where you see utilization rates trending in your sheet mills, I guess into the second quarter?
You know with the comments that I made relative to the automotive market and to your point about the acquisitions that we’ve made into pipe and tube and as you heard in the script, we picked up about 1 million additional tons of potential business. Of course our sheet mills have to earn that business, as we fully expect them to do that. We feel pretty good about our utilization rates in 2017.
We did well in 2016 and given what we see happening as I mentioned in pipe and tube and automotive and particular in energy, we are expecting and we pressed in pipe projections say that the consumption will go up somewhere from about 5 million tons in 2016, up to 7.2, 7.5 million tons in 2017. That’s a significant improvement.
And a lot of that is as you know a lot of product that goes into that his hot band and as you know we are very strong in hot band as it represents about 60% of our sheet business. So, given all of those factors, you know we don’t give out a specific utilization rate, but I would say that we are very excited about the utilization that we will have in our sheet mills in 2017.
Okay, thank you.
We will take our next question from Matthew Korn with Barclays.
Hi good afternoon John, Jim.
Thanks. Following up a little bit on the policy question, I am sure you have been asked this, but how do the risks of any potential changes to NAFTA, regional trade agreements, does that affect your view and the attractiveness of the Mexican JV, with JFE at all and if not, or even if so, when is construction scheduled to begin for that plant?
Right now we are scheduled to start construction sometime around May and June. We have picked up, we’ve acquired and purchased some of the land that we will only need in Mexico, we have no options on the rest. And to your basic question, we are watching the situation in Washington very carefully, we are working with our partners JFE, they have been, as you know it is great steel company, and I have to tell you they have been a great partner to work with and we’re watching what happens and recognizing the fact that we do have some options.
The equipment is on order. We fully expect to take the equipment and locate it. Right now we are still planning to be in Mexico, but if something changes and we have some definitive direction that says that’s not the place to put it, we do have options and we will work, we will look forward with one of those options.
Got it that helps. I think we are all going to see in a little bit more than we have been in previous years. This is your development there.
Just if I may make one more comment on the project itself. Regardless of where it ends up and as I said we still expect to be in Mexico, but we will watch that. Regardless of where it ends up, the project itself we are very, very optimistic about, the opportunity to work with a great company like JFE is going to improve our ability to make, in Ohio value-added products, we’ve working very hard on that. Being recognized as a following producer by JFE, there’s a big positive for us. Working with JFE and their contacts and the new domestics, both in Mexico and in the United States we see that commercially as a plus.
So the project is a big plus. We’ve got some things that we got to walk through now, and there’s been some changes in the administration. And as you know there is a lot of things going on in Washington. The situation is in flux and we are monitoring carefully and make a decision on where to move forward with a very good project?
Very good. Let me fall-up if I could, some of the commentary you made on the M&A, you just completed the tubular division, can you talk at all about your expectations for – the year-over-year improvement in particular for the HSS tubing market or the conduit market for 2017, any ideas around how margins, volumes should look over the next year, and then I’m also curious you alluded just maybe a little bit, but are you able to gain a better foothold with any of your particular buyers via Southland Republic that could improve your ability to place other downstream products that you are not currently shipping in?
Let me tackle that one first and then we would go back to your earlier question. What it does do is it gives us a greater breadth of product offering to customers who buy across multiple products. A great example would be service centers. As you know we sell about 30% to 35% of our product new service centers and they buy large amounts of pipe and tube, particularly HSS. So, this gives a large share of our customer’s wallet and it gives us a close relationship with many customers. It does get us into a more heavily into construction, which we see as a good thing.
We believe as I mentioned earlier construction will be up 6%, HSS obviously goes and conduit both big products going into our construction. We see that those products aim right at the heart of the construction market. And that’s frankly one of the reasons that along with many others one of – but it is one of the reasons why we look forward in this acquisition. Another very important reason as I pointed out in the script is that the cultural compatibility is excellent, you are a low cost producer that focus on continuous improvement, all are important, but the most important issue and the thing that we really liked about and moving forward with this acquisition was the way that they treat their teammates and the way we treat our teammates. So, there’s a lot of good reasons for moving forward with it. We see it being growing stronger as we see construction growing stronger over the next 12 months.
All right. Very good. Best of luck to you. I’ll pass it on.
Next question comes from Jorge Beristain with Deutsche Bank.
Good afternoon gentlemen. Two questions. On scrap pricing, we’ve seen some weakness out of Turkey in the last week and I think investors are fearful that there may be a following steel correction in the U.S., could you just talk about what are your thoughts as to the steal to scrap spread as to how that could evolve in 2017 in the U.S. market?
At the end of the day when you look at both steel pricing and you look at scrap pricing, economics 101 comes into play. Demand will drive pricing. At the end of the day, demand will always drive pricing both domestically and internationally. So, as we go into 2017, and we see the demand improving for the reasons and in the areas that I mentioned a few times now, we expect demand for scrap certainly be steady if not improving over the course of the year.
So we don’t see this significant drop in scrap. Now as I said earlier, we think it got a little bit ahead of itself and we will see a little bit of a drop back as a result of that on obsolete. But I will tell you that the prime scrap remains tight, again it might have gotten a little bit ahead of itself, might be dropped back a little bit $10 to $15. We don’t see a precipitous drop in either obsolete and particularly not in prime scrap.
We think it will follow demand, the demand for scrap follows the demand for steel, and we look at the improvements as I mentioned in energy and construction and the steady past moving forward in automotive. We think demand for steel is going to be improving in 2017. The demand for scrap would follow and pricing would be stable.
Thank you. And if I could have a follow-up, on plates, I think I asked this question last quarter, there have been a big discount of plate to HRC, plate has really jumped up in terms of pricing and is now back at its normal premium to HRC, could you just talk about what you are seeing on the demand side of the plate and especially post Tump’s win we just have been hearing anecdotally that a lot of things are starting to move in the heavy equipment industry and pipelines, if you could just comment, are you actually seeing a real demand pull in plate?
I was seeing a demand improvement in plate. It’s a small improvement. We expect it to actually pick up speed as the year goes on and we’re looking for more improvement in the demand side of plate, as we get into the second quarter. That said, what I think you see in the strengthening of the product is the fact that we have a significant victories in our trade laws. Having said that we still have ongoing trade legislation that’s we are pursuing and cases that we’re pursuing, but what we’ve seen to date in the way of success on plate has improved our market significantly in the first part of the year.
If we get into the specifics of the trade cases, but we have gone against 12. We have issued cases against 12 individual countries and we have been successful on cases that have been against Brazil, South Africa, and Turkey, all with sizable tariffs that have been applied in the neighborhood of 75%, 85%. 42% in the case of Turkey and we’re going, as I said we are continuing to go after the other countries and particularly, frankly particularly going after China, which has been very heavily dumping into our market.
We expect these cases to conclude in the next couple of months and as always happens with these cases as the conclusion stocks to be on the near horizon, these countries being to back away from the market recognizing in particularly if they recognize that they have been guilty and they know what the outcome is going to be, they start to pull out of the market and that’s what we have seen. So, yes we have seen a tiny bit of demand improvement in plate, we expect to see more improvement as we get into the second half of the year, but the improvement in the market and the pricing is a result of the supply change as we have been able to get the dumped and subsidized products out of our marketplace and between fair pricing back to that market.
Got it. Thanks very much.
Next question comes from Evan Kurtz with Morgan Stanley.
Hi, good afternoon John and Jim.
Hello Evan, how are you?
Doing well, thanks. So, first question is on line pipe as obviously been a lot of news on that recently, new administration’s far more accommodated, it would seem on approving our pipeline projects and it sounds like they want to do it with Buy American causes in place for some of these. So it seems like it might be an interesting market from a U.S. producer and I know you guys, I believe you guys in the past have not really done as much as far as hot-rolled sheet that could go into X70, and X80 type product. Is that something that you have looked at maybe getting involved in, and if so, what sort of capital equipment will be required to get into that market?
Frankly we can produce X72 today at two of mills. We can produce X70 up to about 0.625 of an inch, we can do that at our Tuscaloosa plate mill and we can also do it at our Decatur sheet mill. We sold that into the market, so we don’t need any additional capital equipment. That’s all been installed tested up and running and we are selling that product today. So we’re comfortable supplying X70 up to, as I said 0.625. We don’t know what kind of demand we will be looking at for these pipelines, obviously the Decatur pipeline that’s being installed, so there is no additional demand there, and we are hearing various accounts on whether or not there is going to be additional steel needed for the Keystone pipeline.
We will look at it at the [indiscernible]. But if they need it, we’re here to supply it and the other point that I would make on the keystone actually, a lot of the material that was made for the keystone that is on the ground was not produced domestically. Now when they say about having to use made, melted, and rolled in the United States in the Keystone we don’t know if that would then disqualify the pipe that is already on the ground that was not melted and enrolled in the United States. If I get a vote on that, you know how I’m going to go.
Do you know if the keystone gauges higher than the 0.625 size?
I don’t know the specifics of it, but I believe that most of it was expected to be 1.5 inch. So we would be within the range that we can make.
Great, thanks for that color. And then just one follow-up question on trade cases, so rebar is coming up pretty soon and I know it’s a new case, the last case – there were initially some minor duties on Mexico and not much in Turkey, which is a little bit disappointing and there are some remands and some retrying of that same data set over the [indiscernible] really gotten anywhere. How do you think this new case is going to be different than last case?
Well as you all mentioned we are going back after it again. We were very disappointed. We don’t think it was a proper outcome to that case. We are feeling pretty good about presenting this case to the new administration and the people who will be handling it now, we think are better educated [indiscernible] both in the steel world and in trade. So, we are expecting a more positive outcome we certainly hope to get that. That said, if we don’t, I’m here to tell you when to keep going back and keep going back and keep going back until we get a just outcome. It’s being dumped, there is no doubt about it and it’s hurting the American worker and we’re going to keep, we don’t give up, we’re going to be going back until we get the proper outcome and ensure level playing field to our teammates to compete upon.
Great, thanks. I’ll hand it over.
Next question comes from Alex Hacking with Citi.
Hi John and Jim.
Coming back to the acquisitions of the tubular operations, you mentioned that you would have around million tons of capacity and you mentioned some of the trailing EBITDA metrics, I guess my first question is what utilization rate were those operations working at on average last year, we try and figure out how much upside there is there, the future demand of improvement and then secondly as you said that’s going to take some of your hot-rolled substrate. You mentioned that you think sheet demand is going to be improving this year, are you looking at opportunities or where would there be opportunities to increase your finish to steel production, to close or match your mill capacity in sheet. Thank you.
Well let’s start with the utilization. Frankly they don’t work on a utilization rate, they work on, we look at the number of days that they work and shifts that they work per day. So, in all three cases they are working six days a week and they are working two shifts a day and that’s – so if you want to do it in terms of utilization there might be utilization rate of 75% somewhere in that neighborhood 70% to 75%, so there’s always room for expansion in that, we can round around the clock, one of the things that I would say is, these companies that we bought into Nucor family they are very good commercially, they are good operationally, but we do believe that there is some synergies that we can bring both operationally and from a commercial perspective. So we would – our expectations is that we would improve that the utilization and their profitability. Could you repeat that, you had a second question, would you repeat that?
I’m curious, so that those tubular operations, if they earn it, again it would take up more of your hot-rolled steel, and improving utilization rate you mentioned you expect sheet steel demand to be good this year, I guess what opportunities do you have or are you considering to increase sheet steel production to close or match where you have excess mill capacity, thank you.
We are always looking at opportunities, I’m not going to get into specific projects that we have on the books that haven’t been announced yet, but we will remind you that we did announce a whole mill project at our Hickman facility, this is a very specialized coal mill to produce advanced high strength, ultra high strength steel, it’s very light gauge. Ultra high strain were we refer to as third gen steel that will go into the automotive and other applications, motor laminations being another large application to that.
So that’s one of the projects that we have that has been announced. I can tell you that we are considering several others. They haven’t been announced yet, so I can’t share them with you at this time, but just in general, I would say when you look at our balance sheet then we have a strong balance sheet, we have money to invest we’re not afraid to spend it. You know, we talked in a little bit earlier today about the JFE project that will consume 200,000 tons of our product coming out of Berkeley. So, we’ve got other projects going on, we have got the JFE, we have got the cold mill and we continue to look at how we can improve the utilization of our existing downstream businesses or existing galvanizing coal mills.
And as I mentioned earlier, remember that Nucor is long on HRC, on hot-rolled coil. And at the end of the day, the pipe and tube is going to help balance that a little bit also with the improvement that we see coming this year in energy, you know Gallatin acquisition of a few years ago, were very heavily into the energy market and they took a huge hit from energy collapse and we expect energy to come back and the utilization at our mill in Gallatin to come back with it.
Thanks, John. I appreciate the time.
We next move to Seth Rosenfeld with Jefferies.
I had a couple of questions on the outlook for the steel mills division. We were somewhat surprised on ASPs, that came in slightly weaker than we were at least modeling for the period. Can you talk a little about your current product mix what you saw in the fourth quarter? I’m just wondering if there are potentially a shift from – away from the higher-value cold-rolled galv towards our hot-rolled coil, or alternatively a shift away from quarterly contracts toward spot, which might have weighed on the realized prices in light of that period of market volatility? Thank you.
We didn’t see much of a shift in the products on our sheet side. But of course, the contract pricing you always have a lagging effect. And so, you’re going to see an effect in the fourth quarter of the pricing that we saw taking place in the third quarter.
When you look at our total product, I think, we’re about 70%, 75% contract, 65% contract. And of that 65% probably 70% is based on monthly and another 20% is based on quarterly pricing. And as you remember, we saw pricing kind of bottom out in November. So some of that you see happening during the monthly, the average price declining during the quarter was a result of our contract pricing that occurred based upon on November pricing.
So as we see going forward into the first quarter, we see it picking up. I’m not going to give any specifics, but as it has bottomed out, it’s now the CIU sheet in all three galvanized, cold-rolled and hot band is improving. We expect that to carry through on our contracts and see it picked up pretty quickly, given a large portion of our contract business is, in fact, on a monthly basis. Does that answer your question?
Yes, it does. Thank you. And just one separate question looking at your exposure to the auto space. Your growth could have been very robust in the last couple of years taking market share. Can you discuss a bit more what sort of progress you’ve made both from an R&D perspective and also commercial perspective in gaining that share, especially in high-strength steels? At this stage, are you now able to produce and are you supplying to OEMs all major steel grades, or are there certain parts of exterior panels where you’re still not supplying either to technical or commercial events?
It’s safe to say that we can supply virtually all parts and all sections that go into automotive. We find some products and parts more attractive to supply than others. But we’ve also have to prove to the automotive companies that we can, in fact, supply all of the steels that they require. So we’ve done. Again, I would ask you to take a look at our joint venture with JFE, they’re world renowned producer of all the grades, exposed, non-exposed, high-strength, ultra light, third gen, they do it all and qualifying us as a partner, they took a look at our process, materials, and frankly the qualification to become partners with them took us two to three years. But ultimately, it came out very successful.
So, yes, we can supply all the parts that go and virtually all the parts, I don’t know that every single part with on the steel – on the sheet side, and we’re working to advance. On the SBQ side, we’ve added the heat treating at our Memphis facility that will give us more access into some of the more sophisticated parts. As we set up our Detroit office, we’ve got – in Memphis we’ve installed the new inspection line that allows us to get to more of the high-value products that go into automotive.
So we’ve got a lot of things going on to continue to improve out position in automotive. I can tell you that in terms of how we’re being received by the automotive companies, it’s very favorable to know. For several reasons, our quality is good, Our service is excellent. Our long time delivery is very, very good, and frankly, we’re a very financially stable company. And as you know, the parts that they specify on a platform might not have to be delivered for two to three years. They want to make sure that that company that they’re buying from and specifying their platforms of buy from is, in fact, around in two to three years in Nucor with our financial strength, we’re going to be around for a long, long, long time.
Great. Thank you.
We next move to Timna Tanners with Bank of America Merrill Lynch.
Hey, good afternoon, guys.
Good afternoon. Timna, how are you?
Good. How are you? Thanks. I wanted to kind of follow-up on some of the questions about trade cases, because we talked about rebar, we talked about plate, sheet has been done. But there hasn’t been much on the beams and that continues to see imports and some challenges and speak to maybe too complicated maybe something else in pipe, maybe some circumvention there. I mean, is there a possibility for exploring other products and approaches that we haven’t heard of yet?
Yes, yes, and no, it is not too complicated to pursue trading case on SBQ. So, clearly, not being flipped [ph] clearly beam, we’re looking hard at beam. And I don’t want to say too much except that we’re gathering the data. And at the appropriate time, we’ll take the move – we’ll make the move. And beyond beam, we’re looking at structural fabricated products, which have made an inroad into the market here in the United States.
They’re finding every way possible to circumvent the trade laws. And I believe that they’re confident we’re going to have a successful trade case on beams, another time find ways to get around that by going in structural sections, and at the end of the day, we’re prepared to file a case on structural sections working with our customer base. On the SBQ side, wire rod is a case that we’re taking a hard look at, okay, and we expect to be able to move forward on.
So, when you look at – you mentioned beams, we’re ready to move forward. We’re anticipating to be able to move forward on that very quickly. Wire rod, Chinese sheet piling is another one that were going, we’re taking a hard look at. I mean, I can go on and on and on. But you’ve hit the ones that we haven’t gone yet. We’ve focused on the largest ones. We’ve dealt with the ones that were most impactful onto our market and we’ve taken care of them.
Now we continue to move down on all the products and we won’t stop until we’re across more products, more markets, making sure that we have a level-playing field to compete upon. And when we do that, we get that confident, we’re going to be very successful.
Okay, cool, thanks for that. Next a little less sexy topic, I was trying to ask you a little bit more about the LIFO FIFO move and also the tax rate. So the reason, we’d heard from the past that it wasn’t a desirable to move to FIFO is partly, because LIFO allowed you to pay lower taxes in a rising – in a declining price environment I think it was, but anyway and it took off some of – it allowed you to pay less taxes as cost went up and less earnings.
So I’m just wondering, is there anything about the potential changes in tax code that sparked the decision? And then separately, there are something in the language in the press release I want to clarify that that made it sound like, because you reported a higher number because of the change in LIFO that you had a higher compensation expense. And it didn’t sound like a Nucor’s thing to pay yourself more because of a change in LIFO, FIFO, but I just wanted to touch basically on that?
Yes. First, as we looked at LIFO and FIFO, we’re certainly cognizant of the tax ramifications. But as – if you listen to the comments I made in the script in that today taxes weren’t the main driver and they were a side thing that we’re just cognizant of them, we didn’t view, and we don’t believe that the tax implications are changing now. We view that’s being negligible and we’re certainly cognizant that there’s discussions about the possibility of LIFO not being permitted in the future. But again that wasn’t a primary driver for us.
So it’s really more about doing a better job matching revenue and expenses and reflecting the way inventories flow through our process. And it was really just started with this whole concept of looking at our capacities and then caused – they’re causing us to reevaluate over how we value our cost of goods sold in our inventories.
So back to your second question about compensation. We pay 10% of our pre-tax profits to our employees below the level of Vice President. Vice President’s and above do not participate in profit-sharing, and every dollar of LIFO reserve came out of new push pre-tax profit at some point in the history.
So we decided to make that change to LIFO. The biggest portion and as well as change the standard cost, the biggest portion of the compensation impact in the fourth quarter in that $0.09, $0.07 of that total was profit-sharing for employees below the level of Vice President.
Okay. Thanks a lot.
Next question comes from Phil Gibbs with KeyBanc Capital Markets.
Hey, good afternoon John, Jim.
Phil, how are you?
Feeling well. How are you?
Good. Thank you.
Can you provide a status on the Vietnamese circumvention case in the range of potential outcomes that we could see there, because I think many of us really haven’t seen anything like this before. And wondering, but what it could look like either in part or in full in terms of an outcome?
Well, I’ll certainly answer that question and I’ll start by agreeing, we’ve never seen anything like this before. So overt and but Phil before we do that, I do want to make sure I give you credit for working with our team to help us understand the correlation between infrastructure spend and steel consumption. So thank you for that information, that was very helpful, and we’ll be using it in the future also, so thanks for that.
So let’s talk about the circumvention, which we see it’s clearly a case of circumvention. And you look at the galvanize product coming and cold-rolled galvanize coming from Vietnam into the United States and that’s gone up by about 300% right and at the same time there has been no additional hot band produced in Vietnam.
So we’re kind of wondering as you might be how do they do this. And this might be some new magical steel technology that we’re unaware off. But we think it’s more the case of circumvention, but the Chinese recognizing that they’ve got locked into the U.S. market. They’re shipping substrate into Vietnam and Vietnam is then cold-rolling reducing it, galvanizing it, and sending in into the United States.
What’s the range of potential penalties that we can’t really comment on that, but what I can tell you is that, we’re – we’ll be filing a case as quick as we can get it altogether, and we’ll – we’re in the process of doing that now and we’re anxious to get that resolved. We think that this will be just another example to the ITC and frankly to our administration of how blatant circumvention can be and how people are taking advantage of our trade laws and we need to put an immediate stop to it.
Thanks, gentlemen. Is there a possibility that there could be exclusion placed on a part of that Vietnamese important material and not on the other, or as your understanding that it will be either all or none?
It will be all and none we believe. Obviously, we have to see what the rule absorb it. Our position is that, it will be all or none and that clearly should be all.
Okay, and I appreciate that. And then last question for me is that, are you seeing any change in customer behavior because of these call it in place straight cases or even some of the ones that are in play right now in terms of more of a willingness to work with you as the main supplier, or less willingness to go offshore, just any highlight you talk about?
Frankly, we’re seeing that both on the products in which we’ve already had rulings and on those that trade case that are in process now. And frankly, even those that our customers know the data supports filing a trade case in the future. In all of those cases, we do see a change in behavior, as it should be, and they’re recognizing that they can’t count on this steel going forward. They’re turning to the domestic suppliers, Nucor being one, but frankly all competition also, which we expect. We can comment on that by the orders we see – the order entry rate we see and also by the phone calls and inquiries that we are getting on our product. So the answer to that is clearly, yes, and we think it’s appropriate.
So, John, I have a quick one. I think you invited to meet with the recent President here and has he asked for your import in terms of what we need to do as a country to all drive better manufacturing utilization across all our industries, and that’s I have? Thanks.
Yes, along with other CEOs in the manufacturing world, I have been asked to supply to President Trump my thoughts on what were the five most impactful items that were hurting American manufacturing, I’ve done that. I’ve been to – I’ve been invited to participate in his manufacturing forum. And although, we haven’t had a meeting with that yet.
I’m looking forward to the opportunity to share my thoughts on what we need to do to make America great again by bringing the manufacturing back into the United States. So we’ll see how all of that plays out. But yes, I have been – I shared my thoughts and I plan to participate in that forum.
Thank you. Best of luck.
Ladies and gentlemen, that does conclude today’s question-and-answer session. I’d like to turn the conference back over to John Ferriola for closing remarks.
Thank you. Well, let me conclude by saying to my Nucor family, our customers, our shareholders, thank you. Okay, thank you for what you do. Thank you for your business. Thank you for your support. Thank you for your hard work everyday. Your contributions have led us to a position of strength that we enjoy today and ensure a bright future for our company and for our teammates. The most importantly, thanks for what you do everyday. Most importantly, thank you for doing it safely. Thanks for your interest in Nucor. Have a great day.
Ladies and gentlemen, that does conclude today’s conference. We do thank you for your participation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!