Nucor Corporation (NUE) Earnings Call Transcript & Summary

And now we're ready to go. Nucor is up next. Nucor is the largest steelmaker in North America, accounting for about 30% of U.S. steel production, vertically integrated, EAF-based, mini mill producer, assets spread throughout the U.S., primarily in the southeast. They're also in the middle of a pretty significant growth initiative, collectively add nearly 15% to their steelmaking capacity by 2023 and also additional significant upgrades and expansions in their finishing capabilities as well. Meanwhile, in January, Leon Topalian took over as CEO, becoming only the, I think, the fourth CEO of Nucor since 1965. So there's a lot going on in Nucor. Presenting today is the CFO, Jim Frias.

Thank you, David. And good morning, and thank you for your interest in Nucor. As we go through the slides -- as we hopefully go through the slides. Here we go. No. Now we're ahead to -- back. Okay. Thank you. I'm not going to read every word in the slides because there's a lot of extra information that they can review later, but I do plan on mentioning a few things as part of that. There's our forward-looking statements. But first, an overview. Nucor is the largest steel producer in North America. We're also the most vertically integrated. Roughly 20% of the steel that we produce is consumed internally in downstream businesses. 2018 was a record year when steel prices spiked, partly in response to panic in response to the Section 232, but also strong underlying fundamental demand. That strong underlying fundamental demand continued in 2019, but at the same time, there was destocking. And 2018 was a year where our industry saw a lot of the consumers, especially service centers, building inventory. And 2019 was a year of destocking. We think that, that destocking cycle is over. And we're fairly optimistic about what we see as we head into 2020. So let me begin by walking you through some of Nucor's strengths because we do think we are a differentiated company and our most important key strength is our culture. We're also a market leader in most of the markets where we compete. We have the most diversified portfolio and the most vertical integration of any of the steel companies. We have very low costs. We recognize that we're in a cyclical business. And if you're not a low-cost producer, you can't survive. We continually work on improving our cost profile. We generate a lot of free cash flow, and I'm going to talk more about that in detail because lately, there's been concern about our strong CapEx spending, and we are committed to maintaining a strong balance sheet. So let's begin with the culture. We absolutely believe that our teammates are our most important assets. If that's the case, there's nothing more important than their safety. So I'm going take a deeper dive on safety in a minute, but we do many, many things as a company to invest in building trust across the entire platform. That includes great deal of transparency internally about how we perform and how we operate. That includes sharing the success of the business. Our employees earn production bonuses based on how productive they are. They get 10% of our pretax profits set aside every year into retirement accounts as part of profit sharing. Every teammate has a scholarship for all their children of roughly $3,300 a year for 4 years. So we do a lot of things to build on that foundation of trust, but the most important thing we think about is safety. And our safety performance has improved dramatically over the years and it's still not good enough. That 1.34 injury and illness rate that we experienced in 2019 was a record, and it's not nearly good enough. So our new CEO, Leon Topalian, has begun with this idea that the most important thing we need to do under my leadership is take Nucor to a new level of safety performance and make it even better because our employees are our most important asset, and the culture is important. And we're going to pay respects to that and honor the importance of those teammates by focusing on safety. So you should see that trend downward continue in the future. Here's a chart that shows the products where we compete. And we are #1 by volume in most of the markets where we compete, but we're a market leader in all the markets where we compete. And as we go forward, a lot of our strategy is to move up that chain and become a market leader everywhere. We think that we're going to be the market leader in plate once we finish the Brandenburg plate mill. So part of our strategic vision is being a market leader where we compete. We think we can create value through that process of being a market leader. We already talked about the idea that we have a very diversified product portfolio. On the one hand side, you see our mix of products. On the other hand side, you see the markets we serve. We're heavily tied to the construction markets. And then -- and one thing that gives us optimism right now is the strength we see in the construction markets. We have internal customers that buy steel, they are in the construction markets. Our metal building business and our joist and deck business both had record years in 2019 and they're both off to a better start in 2020. Our rebar fabrication business is very strong. One of our most important strategic customer bases is fabricators, and their backlogs are very strong, the strongest they've seen. They tell us that they're having to outsource work because they have so much on their table right now. So we're very optimistic about both the current state of the construction market and what it looks like in at least the short- to mid-term. I touched on the importance of being a low-cost producer earlier. We are in a commodity business, and many of the investments we make are not just about adding capacity, they're about lowering costs. And so we're constantly making investments in our cost structure. But we are in a cyclical business. And one of the things that we think is worth people to understand is that even though our steel prices go up and down, our input costs also fluctuate up and down. And so our metal margins are not as variable as our selling prices are. They do go up and down with pricing, but not quite as severely. So there's a little bit of a variability to our cost structure that responds to lower pricing environments. We have a very strong balance sheet, very low leverage rate. We do a 5-year projection for our Board of Directors every year. We just did that last week, and we basically took the last 5 years of history. And we took out the record 2018, and we took out 2014 when oil prices collapsed and steel prices were in the basement, and we used those remaining 3 years to compute an average. Those 3 years included 2 years where imports were at a significant higher level than they are today. Then we layered on top the capital investments that we have coming online over the next few years. And we said that's our base case, and that created an outlook with significant free cash flow going into the future. Then we said what if we take it down, EBITDA, by 25%, what does that do to the model? And that changed, but it didn't change dynamically. Then it's what if we take EBITDA down 50%? When do we see severe downturn? 25% in year 1 and 50% over the next 4 following years. And we have a debt-to-cap range that we're trying to operate in that supports our strong investment-grade credit rating. And only one year did we barely tip out the top of that range, in the middle of that 50% lower EBITDA projection. So we've got a very intentional and focused eye on the idea of maintaining balance sheet strength. Our return on capital performance has been challenged over the past few years. And we're a little disappointed by that, and there's 2 reasons for that. One is imports. Imports have been doing a lot of damage to domestic market. We'll talk more about that in a minute. But the other thing is we've got assets in our portfolio that have not measured up to what our expectations are, one area has been our metal building business, which we restructured about 2 years ago. We shut down some of our capacity. The market had changed, and they had a record year last year, and they're going to do better this year. We just made the announcement that we're closing one of our Castrip operations. We're not abandoning the Castrip technology, but we've been losing money at both of those facilities for 2 decades now. Well, 1 decade at one and 2 decades for the other. One was built 10 years ago. But we've decided that we've got to focus all of our energy in Castrip towards getting it to profitability. We can stop -- we have to stop playing with it like a [ STAR*D ] project. So I think you're going to see a dynamic change in our performance going forward because the import picture has changed, and we're putting more pressure on a couple of our underperforming businesses to generate a better result. So let's take a look forward. Taking a look forward begins with this idea of what's happening on the import front. These are imports of finished products share of the U.S. market. You can see how they were averaging in the mid- to high 20s for a number of years, and now they've fallen down to 19% in 2019. Your first reaction might be, that's all because of Section 232, and that's not true. Section 232 is part of the story, but it's not the main part of the story. The main part of the story is the long-term success we've had as an industry fighting and winning trade cases. You see 2 heat maps. Our trade attorneys won't let us show you the names of the countries, but on the left-hand side, you see what the heat map looked like in 2014. And then on the right-hand side, you see what the heat map looks in 2019. And the columns are the products, hot-rolled, cold-rolled, galvanized, rebar, wire rod, plate. And then down the left, you can see the countries. You can see in 2014, we're exposed to a lot of imports that didn't have duties on them that were screwing up the U.S. market. That market -- that dynamic has changed dramatically. Trade cases that we won both under the Obama administration and under the Trump administration have started to have a significant effect on the ability of imports to screw up the U.S. market. So that's one of the reasons why imports are down so dramatically. The other reason is new trade deals. The administration used 232 as a platform and a lever to begin negotiating new trade deals. So now Korea has an agreement that limits the amount of imports they can bring to the U.S. based on quotas for 5 years. I think we're in the third year now. We're being in the third year of that deal. The same thing has happened with Brazil and Australia. We now have the USMCA that is affecting the way steel is consumed in North America. OEMs now have to have 75% of their content come from domestic suppliers. So on the trade front, we're excited about the fact that the market has changed. Another dynamic that benefits us both directly and indirectly is tax reform. We used to generate $0.30 of income from every EBITDA dollar before tax reform. Now we generate 50% of income from every EBITDA dollar after-tax reform, and that's just on a book basis. We also get the benefit of accelerated depreciation on our bigger projects. And we'll talk more about that in a minute, but that's going to have a significant impact on the free cash flow over the next few years. The indirect way is a lot of our customers, we think the broader U.S. economy is being benefited by the impact of tax form. So right now, it's recognized that we have a lot of growth investments in our pipeline. They fall into 3 major categories. We have some bar investments that are designed to build capacity closer to where the customers are and to create a lower-cost platform for serving customers with rebar and merchant bar products. We've got a sheet market strategy that's mostly about moving up the value chain. We're overweighted in hot-rolled coil. We're shifting towards more cold-rolled and galv. And we're taking one of our older mills, Gallatin, that was a first-generation CSP built -- mill built in the 1990s. And we're modernizing it and as part of modernizing it, we're doubling its capacity. And it's going to be able to make hot band that's more of a specialty hot band instead of commodity hot band. So it's really moving up the value chain in our sheet portfolio. In the plate world, we've got a $1.7 billion plate project that we think is going to change the face of the plate world. Today, there's 3 major competitors: Nucor, SSAB and ArcelorMittal, and we each have roughly 1/3 of the market. The Brandenburg mill is the first mill being built really close to market that offers the full range of product sizes. The only plate mill that can make the heavy sizes today is Coatesville, Pennsylvania with ArcelorMittal. Brandenburg will be able to make both the heavy sizes and the smaller sizes. It's going to be closer to the customers. And it's going to have an advantaged cost profile. The Coatesville mill was built in 1919 and really isn't able to compete, in our view, with a modern mill. So we're excited about how we think we're going to change our position and become the market leader in the plate world. More broadly on how we think about capital allocation, not just the stuff we have in the pipeline but long term, our #1 goal is to seek investments that create long-term shareholder value, whether it's organic investments or acquisitions. At the end of '16 and beginning of '17, we acquired 3 tube companies, Southland, Republic and Independence. And by rolling those 3 businesses up, we instantly became a strong #2 and consolidated the tube market. And we're able to take our incentive pay system and embed it in those businesses and greatly improve their productivity. And so we've earned returns that greatly exceed what we modeled when we made the acquisitions. So we will continue to look for investments that create value for investors, again whether they're acquisitions or organic investments. We're committed to returning capital to investors. We're going to return a minimum of 40% of our earnings to investors every year. And in that 5-year projection we did for the Board, we showed that continuous return to investors that was not interrupted, even in the most downside case with 50% lower EBITDAs. And we're going to repurchase shares when we have extra cash laying around. At the end of 2018, we were underlevered. We have this targeted debt-to-cap range. We fell well below that targeted debt-to-cap range, and so we did a big slug of share repurchases. We consider dividends or share repurchases, but we use an intrinsic value model based on our forward view of the company's value, and buying stock back was a better value for the investors in the long term. So operating cash flow is something that Nucor has a strong track record on. I think there's 2 things I want to make you aware of on this slide. The first thing is the countercyclical nature of working capital on our balance sheet. 2015 was a year when oil prices collapsed and the steel markets collapsed, imports were flooding in. And our profits fell to very low levels, but we had a record year that year in cash from operations because working capital liquidated off the balance sheet. This year, 2019, was a less profitable year than 2018, yet we increased our cash from operations because working capital liquidated partly in a slightly weaker market. One of the benefits that we see coming over the next 3 years that we think some people miss is a significant benefit of tax reform and how it affects accelerated depreciation and the timing of when you pay taxes. We expect to receive a benefit over $300 million through our cash from operations in 2020 because of the benefits of accelerated depreciation. Over the next 3 years, the benefit is going to be $750 million. So when you think about Nucor going forward, free cash flow and strong operating cash flow are things that you should expect to continue. And we do have a very consistent record of returning capital to investors. The orange line shows the percent of our earnings that have been returned to investors over time. And it's consistently stayed above that 40% minimum threshold, and it's often been much higher than that. So that's it in terms of my prepared comments, and we'd be happy to take any questions you might have.

Any questions from the floor? All right. I'll start out with -- one of the topics lately has been the CapEx for the next 2 years being a little higher. Obviously, we know the plate mill is a big part of that. Can you talk through a little more detail behind the...

Yes. So we put together a slide a few years ago that showed cumulative projects, and their EBITDA benefit cumulatively would come to $600 million per year and the CapEx between $3.5 billion and $4 billion, depending if you include the incentives that we receive, the gross or the net number. But roughly 1/3 of those projects will be completed by the end of this year. And so by the end of '21, we would expect to get roughly 1/3 of that incremental EBITDA on top of our base load. So that's part of the story. The 2 bigger projects are doubling the capacity at Gallatin, that's roughly $650 million, and then building the Brandenburg plate mill, which is roughly $1.7 million -- $1.7 billion, excuse me. So those 2 products are bigger in scale. Most of everything else we're doing is more like in the $200 million to $300 million range, building galv lines, building micro mills, making the Kankakee mill have a new rolling mill that'll allow it to serve the SBQ market in Chicago better. So I think when those 2 projects are finished, there's not likely to be the same level of CapEx. We don't have anything in our sight that's of the same scale that we see going forward, but we will continue to look for opportunities to invest in growth. You could see us do more galv lines, things of that nature.

Okay. And regarding the plate mill, it's a huge project. I think it's the biggest product for Nucor even.

Yes.

Big company with big projects. And can you just remind us again -- and you went through this, I think, in January of '19 when the project was announced. But could you just remind us again the size of the U.S. plate market, the size of this mill?

Yes. I'm going to use the slide that we used in that show for this discussion. The plate market is roughly a 6-million ton per year market, similar in size to the beam market. And right now, it's shared by 3 market participants. And the market suffers from a lot of volatility in margin, and part of the reason is because we think it's still too fragmented. And when we entered the beam business way back in the early -- what is that, 1988? Back in 1988, when we built Nucor-Yamato I, we made about 70% of the sizes with our first beam mill that were consumed by the marketplace. And then a few years later, we came back and built NYS II. And when we built NYS II, there was not a need in the marketplace for more steel, but there were high-cost competitors that could only make the big beams. We couldn't make the big beams. NYS II allowed us to make the big beams, and we changed the face of the market. Within a couple of years, U.S. Steel, Bethlehem and Northwest Steel & Wire exited the beam business. And that green bar shows the profitability of our beam business because we disclose noncontrolling interests on our income statement every quarter. And the biggest thing in there is the 49% of the profits at NYS that go to our joint venture partners, Yamato Kogyo. So you can see the profitability that we achieved in the beam business once we got to where we had that 45% market share. And we're the only guys in the United States that can make the big beams. And then if you look at the more recent years of 2012 through 2019, if you look at the consistency of that profitability, and that's in a market where we're only operating at 65% capacity utilization. Why is that? It's because we're a disciplined market participant. We've got scale. We're the only guys that can make the big beams and every major building that gets built in the U.S. that's a skyscraper needs our beams. And so we provide the entire package. Well, today, in the plate market, we don't have that leverage. When we build Brandenburg, we expect to establish that kind of leverage in the market because when we expect to become the only supplier with the breadth of products that the market wants and needs, then we'll be able to grow our share to 40%, and we think we can change the face of the market to operate more like the beam market operates for us today.

It's a 1.2-million ton per year mill...

Yes. It's a 1.2-million ton mill. Yes.

On a 6-million ton for your industry?

Yes.