Nucor Corporation (NUE) Earnings Call Transcript & Summary

Well, good day, everyone. I'm happy to have started the conference. I thought we'd have some introductory remarks. And in case I missed them, I apologize, this is Timna Tanners. I am the U.S. and North America and Latin America metals and mining analyst. I'm delighted today to start -- kick off our afternoon presentations with Nucor. We have a whole series of North American coverage for you this afternoon. And with that -- me today, I have the CFO of Nucor, Jim Frias. Nucor has been a nice supporter of ours at these conferences over the years, and we're delighted to welcome them back. We're going to embark on more of a fireside chat approach. There are not slides on the webcast, but there are some, I'm sure, on Nucor's website that they can point to. But we're going to do more of a fireside chat discussion. And I did want to start asking Jim to please give us an overview on Nucor's situation with COVID-19 and some of the latest announcements it's made in combating the virus. Jim?

Thanks, Timna. We're in a very good shape as we navigate this time period. First, operationally, when we entered this period and we saw it coming in early February, Leon immediately set up a task force to deal with the issues of the workplace, making sure our workers were safe, and we're doing everything we could to maintain an environment where we could operate and meet our customers' needs as well as overcome and deal with shelter in place orders that were coming up from different states and counties and cities where we had our operations. And I'm pleased to say that right now, none of our steel mills or fabrication businesses are shut down. We briefly shut down our DRI facility in Louisiana because we chose to, not because we had to. The infection rate in that area, not at our mill, we didn't have any infections at that DRI facility, were higher than in other parts of the country. Our workers were concerned. And quite frankly, we didn't think we needed as much of our raw materials at that point in time. So we went ahead and shut down for a few weeks, but now it's back up and running. We've had very few employees that have been tested positive. Only 2 were briefly hospitalized. And so we're very fortunate in that regard. And quite frankly, as we look at the markets, so we're kind of encouraged by some of the signs we're seeing. But certainly, there's a negative effect on Nucor and on the broader economy. We are a GDP company. But we feel like we're navigating this in good shape. Another thing that we did was we stood up a commercial task force that meets 3 times a week that has components of our company from every element of our business, from downstream products, from raw materials to the steel mills that discusses different things happening in the marketplace that affect us directly and indirectly. So we're very connected to the market where we get a report twice a week from that team, outlining exactly when different customers are starting and shutting down operations and getting a sense for what's happening with customers. And quite frankly, during this time period, because we've been able to keep our operations running, we've been building some deeper and stronger relationships with some of our larger fabrication customers and getting more opportunities for quotations and trials with automotive customers. So we're making the best of a difficult situation.

Okay. Fantastic. And on your conference call, you talked about being able to run at some higher utilization than what we're seeing in the overall steel market, which last I saw, I believe, was 53% utilization. So Nucor is able to navigate a little bit better. And I think that's because of the construction-focused market share and because construction, of course, is usually later cycle. But I'd like to hear your thoughts on maybe why you've had that elevated utilization and a little bit more about the end market positioning?

Yes. First of all, our utilization rates were really strong in the first quarter and probably the strongest they've been in some time. And so if you look at the current ASA data on utilization and back out the blast furnaces that have been taken offline, the overall remaining utilization rates are actually still pretty decent. They're not quite as good for us as they were in the first quarter, but they're still pretty decent. And that is a combination of factors. One is that some supply has come out of the market. And so what's left over for the remaining sheet producers is better than it would otherwise be. And that's something that normally happens in the sheet market, is when supply and demand get out of balance, the higher cost competitors feel compelled to take some of their capacity down. And so that's what we've seen happen there. Non-res construction, though, has been fairly robust. Other than where there's been shelter in place orders or other factors that have caused contractors to slow some of the work down, we're still seeing steady workflows, and we're operating at decent rates with our fab businesses and our fabrication steel suppliers, the beam mills, the bar mills and the rebar mills.

And how would you characterize the construction outlook then? Is -- you've lived through these cycles before. Is there yet to come kind of impact? Or do you think that construction can somehow navigate these markets a little bit better than the more obvious drop-off in demand that we're seeing in energy and auto?

Yes. That's a great question. The near term is good. We had the strongest backlog at the end of the first quarter than we had at the end of the first quarter in a number of years. So we entered into this period with a strong position. But you're right, at some point, this is a lagging part of the economy construction, and we do see the potential for that to slow down. And so as we think about that, there's a couple of different factors to consider. One is infrastructure spending. The states have been really doing most of the infrastructure spending and their money for infrastructure spending comes from gasoline taxes to a large extent. And so they've got less income right now. So we would expect state spending for infrastructure to slow down later this year and into next year, until we see a return to work and return to people at normal levels of activity. The rest of the non-res construction market, it's a mixed bag. You have some people, like Amazon, that have very long-term strategic visions. And in fact, their business is being pushed to provide more capacity, not less. So you'll continue to see growth and demand for construction from some elements of the construction market. But certainly, retail, which is not a huge part of non-res construction today, but that's likely to be negatively impacted. And so we think that there's likely to be some negative tail for construction late this year, early next year.

Okay. So the follow-on question to that, since you've flagged the state spending and the slowdown in the gas tax, the risk there, people aren't driving, then they're not spending on gas, and therefore, obviously, to your point, next fiscal year, spending could be impaired. However, there are some initiatives out there you're probably well aware of, and that are flagging maybe a 30% downside to state spending because of this phenomenon, although maybe that's being flagged to get to the outcome of the desired $50 billion stimulus. But in any event, this AASHTO proposal of $50 billion, and then the reauthorization of the Surface Transportation Act, FAST, and then a potential $2 trillion of infrastructure spending. Now how do you see those different initiatives? Do you think there'll be government support that could offset some of the weakness in infrastructure spending?

Yes. I think that it's more probable today than it was -- than we would have said 6 months ago or 3 months ago. We think there's a greater sense of urgency. Even though there continues to be significant animosity between the Republicans and the Democrats, there is a recognition that we have to do some things to keep the economy strong and to keep the country strong. And so we're hopeful that, that pressure will result in good decisions. One example of how that pressure benefited our industry specifically is the USMCA, right? There was a period of time where it was ready to go and [indiscernible] bring it to a vote, the pressure mounted and the utilization [indiscernible] after the economy and it happened. And so I think, hopefully, that, that's the way it's going to play out as people will realize we need to do this, it's going to be a thing that's not just putting people -- money in people's pockets, but it's creating value for the economy long-term by making these investments that need to be made anyways. And so we think it's more probable now than it was 6 months ago, but there's still some uncertainty in terms of whether it will happen.

Okay. Fair enough. So let's stop talking about politics and things that we can't control and talk about what Nucor can control. Let's steer the conversation to Nucor's growth initiatives. So Nucor has embarked on a series of projects to expand or enhance capacity. So if we characterize them, I know you and I have talked about this a lot in the past, the bar mills, we -- I call them a facelift. The plate mill is a new addition. And then there is some expansion of sheet and further capacity enhancements in galvanized and other rolling sides of things. Can you give us an update on the status of these? The timing? And then I know there are some questions I get asked, and I think I know the answer, but I figure I'll ask you anyway. Is there a price or a market condition that makes Nucor rethink any of these projects?

Yes. Great question. So as we've looked at our capital spending, we broke it down into 3 categories. Things that were far enough along that we should just go ahead and finish them and get them done as quickly as possible as well as projects that were either from a safety or an operational reliability perspective, absolutely necessary to be done now. And so we're doing all of those things. No slowdown in those spending. And examples of bigger projects that fit that definition would be the Frostproof micro mill and the Kankakee merchant bar mill and the galvanizing line at Hickman, Arkansas. Those are full-speed ahead projects as well as a number of other smaller projects that weren't separately announced. Then we have a category of projects that were in the bucket of let's slow them down, not stop them, but spread the spending out over a little longer period of time, while doing things to minimize the risk as the schedule gets disrupted. And the Gallatin capacity addition as well as the Gallatin new plate mill fit into that second category. And we're continuing to spend everything we need to spend on getting our permits for construction and getting engineering done so that when we decide to go forward, we can go forward. And finally, we had a number of set of projects that we said, you know what, these aren't urgent that we do them right now. We haven't really started them. Let's just set them aside, and we can bring them back whenever we want to. And as we went through the process of saying where -- how to deal with this situation and slow down capital spending, it was not because we felt like we had to but we wanted to maximize our financial flexibility through this time because there's so much uncertainty. So that's how we're thinking about all of that. You talked about the bar mills being a facelift. I think of them as being growth with a competitive advantage in logistics costs. I think of the Gallatin mill as a low-cost capacity add while upgrading our sheet mill there from a first generation sheet mill that can only make the more commodity grades of sheet steel into a steel mill that can make the most modern and advanced grades of sheet steel. And then Gallatin as a strategic -- excuse me, Brandenburg as being a strategic investment that changes the way the plate market works by creating significant scale for Nucor, 40% share, the ability to make the heavier plate sizes, and hopefully, make that market behave more like the beam market. So all that said and done, these projects can all be accelerated ahead, the ones that have either been slowed down or stopped when we feel comfortable doing that. And the way we're thinking about that isn't based on some expectation of market demand, it's more based on how strong we think our cash from operations is to support those projects over the next quarters and months. So we'll see how we do in the second quarter. And at the end of the second quarter, we'll reevaluate and we'll give guidance on the second quarter conference call about what we're thinking about in terms of timing of those projects, but we're hopeful that both Brandenburg and Gallatin, at this point, can still meet the original schedule. It's just that we've slowed down the pace of some of the spending related to those projects. But there are other projects, which we've not named and we're not going to name, that are off to the sideline, and we'll make a decision about those down the road.

Okay. That's helpful. So it's not about a certain level of demand or a certain price so much as it is preserving financial flexibility, as you said, and maybe trying to match spending with cash flows? Is that -- I don't want to put words in your mouth.

Yes, not exactly that, but it's sort of -- with the idea that maintaining a balance sheet with a strong investment-grade rating while sustaining the dividend, all those things are important to us.

Right. Okay. So -- and as you know, there are some downgrades that have happened in the space, and so it's more about what's happening broadly than what's happening company specific, but it's -- it can't hurt to match the cash flows perhaps a bit more. So the financial flexibility comment makes me think that it's still a question more of timing rather than shelving any of these projects. Is that fair as well?

That's correct, especially for the bigger projects that we've announced and named. Again, there are probably some smaller projects that were in the pipeline that weren't announced that could be shelved for some period of time. But I would think everything that we had in our original 2020 capital plan will eventually happen.

Okay. Now I can't help but ask you. You're not the only ones that are adding capacity. Obviously, it happens to all, albeit time didn't, kind of a one-shot here. And we've talked about this in the past, of course. How does this play out over the next couple of years with, I guess, I've identified 5 new or expanding mills on top of the Mexican capacity? So quite a bit of displaced sheet and plate potentially going forward. Is there a simple solution? Or it just get ironed out over time? How do you see it?

Well, in the bar space, we routinely operate in the 70% capacity utilization range and make really good money. And so we don't think of those mills as having to run full. And having competitive advantage in terms of logistics is long-term a winner for us. And so as we've started up Sedalia, we've not had any negative impact on pricing in the marketplace because of the Sedalia's entry. And we would expect that to be the case for all of our bar mill start-ups. So we'll set the bar slide quickly with that comment. But as we think about sheets, I think what we're seeing today, because of the virus, is the nice microcosm of what's likely to happen in the future. When supply and demand becomes out of balance for whatever reason, whether it's because demand drops or there's new supply, the higher cost competitors that realize that they don't have sustainability will take capacity out. And it will happen quickly. And it will happen more quickly today than it would have been in the past because I think there's more pragmatism in the market, there are more of a realization that there are certain assets out there that just truly aren't sustainable. So we don't think it's a long-term problem. We think it's a very brief problem of supply and demand possibly being out of balance because of new capacity coming online.

So you're saying that a lot of the less efficient, higher-cost capacity, or in other words, a lot of the capacity that has had to shut down just in the past couple of months in response to the weaker demand could stay shut and that would offset the new capacity coming on?

Yes. We'd say there's a combination of things there, Timna. We think that some of it will stay shut, some will come back. The stuff that comes back, if it's -- if there's not enough demand when the new startups come online, it could get shut down again.

Okay. That would be a convenient solution. And we'll see how that plays out, but makes sense.

It's what's happened in the past. It's not a convenient solution. It's the history of what's happened in our industry for a few decades. I'm sorry, I didn't mean to interrupt you, but...

Oh, no, no, I agree with you. It's definitely gone away. It's a question of that much capacity of 13.5%, I think we identified 1 million tons would have to shut down. That would be a lot, but

Yes. I think that's an inflated number. I think it's more like 7% to 9% personally, but -- in sheet.

7% to 9%? Yes. Okay. That's fair. I am getting some questions from people who dialed in that I want to address, and one of them had to do with raw materials. Now I think it bears discussing because in the past month or 2, we've seen an unusual circumstance with scrap prices flat to higher and expected to perhaps move that way again in June. And historically, we've thought that mini mill margins are quite safe because steel and scrap move in the same direction. So is this a one-off circumstance? Or do you think that there's a structural situation with less scrap available going forward?

No. I think it's partly a timing issue. But I do think longer term, there will always be a correlation between scrap and steel prices, but there is a timing dislocation. With the auto guys down, prime scrap is really not available. And so having DRI plants, being able to import pig iron, having most of our sheet and play capacity on deepwater, where we can bring it in on barges, et cetera, to supply our mills, gives us a lot of flexibility in our supply chain. We're actually buying some prime scrap in Europe and importing this well right now to make sure we have enough. But the fact that the scrap prices fell in April, that happened in spite of -- while we were buying much less scrap as a company, we're trying to reduce our footprint. So the fact that we bought less at that time was we couldn't have bought more. The fact that we wanted to buy less worked out well, there wasn't more available. And we would think that the prime scrap supply situation is going to come back quickly. The auto guys are starting to ramp back up in the coming weeks, and that's going to be fine as we go forward. Obsolete scrap, I think, is more of a shelter in place factor as well as lower scrap prices. And if you look at the utilization rates for mini mills, there's decent demand for scrap from the mini mills. And so it's purely supply and demand, and that's why it's been supportive of pricing, and you saw price increase happen in sheet. And if you look at the market indexes, it would suggest that, that price increase was fairly effective. So we think long term that pricing relationship will remain intact. And we think there's enough raw materials, but we do like our position of having a flexible supply of raw materials.

You've obviously decided to build out DRI, and there seems to be a bit more of that in the market with Cliffs adding HBI. So just wondering if you could talk a little bit more about, again, the reason for that. Why have DRI? Not everybody is building out raw materials capability like that. And just wondering if you could -- is this something that's going to be a strategic advantage? Will it help you make higher-grade steels down the road?

Yes. It's really not as -- it's not unimportant to higher-grade steels, but you need some really clean raw materials to make the highest grade steels, whether it's prime scrap, pig iron or DRI or HBI, any of those -- some mix of those will do to make higher-grade steel. So it is helpful to that, but it wasn't the main reason. The real issue was the risk there wouldn't be enough prime scrap to meet the needs of sheet production in the U.S. because we saw this future of more sheet mills being built, whether they were by us or by somebody else, and there not being enough prime scrap available. Today, our DRI plant in Louisiana is running extremely well. Trinidad got shut down by the government, and they didn't treat it as an essential business. Hopefully, that will restart soon. But those plants kept the price of prime scrap from running away from obsolete scrap when demand for sheet spiked in '18, and again, now as we see sheet mills ramping up production that are mini mill based and auto companies being down. Imagine what would be happening to prime scrap if we weren't putting some DRI into the pipeline, if we weren't buying pig iron and if we weren't importing prime scrap. So our strategy is to keep prime scrap prices in line where they need to be to keep our cost structure competitive. The thing -- the one side penalty is our mini mill competitors that use prime scrap benefit from the fact that we have an investment in DRI that helps keep that price down. And in today's market, prime scrap and pig iron are cheap enough that our DRI plants aren't making money with iron ore prices where they're at. So there is a little bit of a dislocation between iron ore prices and scrap prices and pig iron prices today. Iron ore prices, relatively speaking, are too high. So we'll see how that plays out in the future.

And so that's a good point about the divergence between scrap and iron ore. So again, I think it's back to the point of a lot of things over time move together, but in the short term, sometimes there's divergences. There is another question coming in there. I think it's kind of interesting. I'm not sure if this is how I would ask it, but the question is about how do we think about decremental margins versus the past downturn? And I think Nucor has talked in the past about how it doesn't like to let people go when conditions deteriorate. So that would point to a little bit of fixed costs, I guess, that are often variable for other companies. But can you talk a little bit about the decrementals when you think about less volume in the next quarter or 2?

Yes. So for our steel and fab businesses, we don't do layoffs. And so that's -- their base salaries, their base wages are a fixed cost for Nucor, but we do have much less production bonus, and sometimes, up to 2/3 of their pay can be production bonus. So the extent we're operating at lower rates, our costs do flex down for labor. Additionally, when our folks have more time because they're not running, we don't need as many contractors. So we've made a significant reduction in the number of contractors we have at our steel mills, and we're driving costs down that way. And it's probably -- if we maintain this level, it would be hundreds of millions of dollars per year, probably a couple of hundred million dollars per year in savings by having fewer contractors on site. And so those are the -- some of the bigger levers besides scrap prices going down that we benefit from when steel prices fall down. But we are certainly thinking about costs. We always do. When we think about our business model, a key element of success is being a low-cost producer. And so we're constantly working on things to make our cost profile more efficient, lower cost.

Okay. So when we think about the components of costs, we think about some costs with regard to inputs like scrap, maybe graphite electrodes, the zinc for galvanized steel, all those things that are going to move with the market. And then we think about labor, and to your point, you keep maybe all the workers, but there's -- the comp definitely is worse in a downturn and the contractors are down. So there's -- what would you say would be your percent of fixed versus variable then if you add that all up?

Well, I don't know off the top of my head, but the biggest component of fixed is depreciation, and probably right next to it is base wages for the team. But I'd -- yes.

Okay. So we probably have about 5 more minutes, and I wanted to ask a few more things about the overall market, and then we should touch on the balance sheet. So just taking a step back, obviously, Section 232 tariffs now have been in place for a while. And I don't even hear people talking about them. I'm not even sure they would be removed if there were a change in the administration. But what do you think now that they've been in place for a while? Do you think they've done their job? Do you think that imports have fallen sufficiently and kind of gotten to the level playing field that was aspired to?

Yes. There's not very many 232 tariffs left out there, Timna, because they were a leverage to create pressure for negotiations. So what they've been replaced with is the new USMCA, a new trade deal with South Korea, with Australia, with Brazil, with Argentina and a few other countries. And the only place that have significant 232 tariffs left are [Audio Gap] out there. Imports are down more because of the new trade agreements and the long-term success. We've had more traditional trade cases. We've got hundreds of trade cases in the -- on the record right now that are having effect on specific countries for specific products. And so that's the bigger reason imports are down, not 232. But we think they absolutely did their job, and that was creating pressure for renegotiation of trade. And not just for the steel industry, the trade deals were for U.S. manufacturing, which also directs -- so we get a benefit directly and indirectly. It makes the auto companies more able to compete. It allows appliance companies domestically to be more able to compete, et cetera. I'm sorry to add to that, but I thought that was important.

Sure. With the last couple of minutes, if you could give us an overview on kind of where Nucor's balance sheet is? We obviously see Nucor as being pretty solid and a large company with a really solid balance sheet. But in light of current circumstances and some of those increased CapEx that you have detailed already, free cash flows are a little leaner than or negative relative to where they've been. And I just was wondering if you could talk about priorities and capital allocation and kind of give us an overview of the balance sheet.

Yes. When we started the year, we did a significant stress test for our Board of Directors that showed some severe downside scenarios, and we had plenty of liquidity without slowing down projects and without doing anything to liquidate inventory aggressively. And so our expectation is we're going to probably create a lot of increasing cash in the second quarter. We'll see how big that is when we get to the end of the quarter. But this liquidation of working capital, not just through pricing but through reducing volumes on hand, and slowing down CapEx, we would expect to build cash in the second quarter. And we didn't have to do that. We did it because we wanted to maximize our flexibility because we felt like there was so much uncertainty. And as our crystal ball becomes clearer in the coming weeks and months, we could change our posture and reaccelerate some CapEx. But we're in a very strong position. The other thing I'd say is, as part of our quarterly meetings with our Board, we show them a chart on our leverage, and we have a range of debt-to-cap that we're trying to maintain, and we're at the lower end of that range. We've been at the lower end of that range for quite some time. So there's strong credit rating. We've actually got a lot of flexibility in terms of capital sources.

Okay. Great. With that, I think we're pretty much near the end of our time. I want to thank Nucor and thank Jim for the great dialogue. And of course, we look forward to seeing you in Barcelona next year. Thanks again.

Hope so. Take care, Timna. Thanks, everyone.