Nucor Corp (NUE) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Nucor Corporation Third Quarter of 2017 Earnings Call. As a reminder, today's call is being recorded. (Operator Instructions)

Certain statements made during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate and variations of such words and similar expressions are intended to identify those forward-looking statements, which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy. More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest 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 Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Leon Topalian, Dave Sumoski and Chad Utermark.

The leadership team in Charlotte would like to thank all of our teammates throughout Nucor for their excellent work in the first 9 months of 2017 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, the approximately 125 teammates who joined us in September with our acquisition of cold finish bar facilities in St. Louis, Missouri and Monterrey, Mexico. Nucor is proud and excited to have you on board.

Our Chief Financial Officer, Jim Frias, will now review Nucor's third 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 third quarter of 2017 earnings of $0.83 per diluted share. Nucor's third quarter performance represents a decrease compared to second quarter of 2017 earnings of $1 per diluted share and year-ago third quarter earnings of $0.95 per diluted share. Our earnings for the first 9 months of 2017 of $2.94 per diluted share compare to $1.99 per share for the first 9 months of 2016. The first 9 months of 2017 earnings actually exceed annual earnings achieved every year since 2008, a cyclical peak year.

Nucor's disciplined strategy for profitable growth is working. During the steel industry's protracted downturn, we have invested aggressively to increase our capabilities for delivering value to our customers and profitable growth for our shareholders. We're achieving these improved results when large parts of our business, including rebar, merchant bar, special bar quality steel, plate steel, structural steel and DRI, are operating well below peak performance. Our team is encouraged, but not satisfied, by the initial returns we have realized this year.

Compared with the second quarter of 2017, our third quarter earnings decline largely reflected lower capacity utilization rates and metal margins at our steel mills segment as well as the impact of an unplanned outage at our Louisiana direct reduced iron, or DRI, plant. The facility stopped production in late July and resumed operations in early October.

Third quarter earnings before income taxes and noncontrolling interest in the raw materials segment declined approximately $56 million compared to the second quarter. The vast majority of this decline was driven by the unplanned outage at Nucor Steel Louisiana that lasted the majority of the third quarter. The profitability of our steel products segment improved in the third quarter from the second quarter.

A comment about our tax rate, as it can be confusing due to the impact of profits from noncontrolling interests. Excluding profits belonging to our business partners, the effective tax rate was 29.3% for the third quarter and 32.1% for year-to-date 2017. Third quarter of 2017 results included a benefit totaling $0.04 per diluted share related to tax return true-ups and state tax credits. This benefit was incorporated in our guidance issued in mid-September.

Nucor's financial position remained strong. With total debt outstanding of $4.4 billion, our gross debt-to-capital ratio was 33% at the end of the third quarter. Cash and short-term investments totaled over $1.6 billion. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn. The facility does not mature until April 2021. For 2017, we estimate capital spending of approximately $500 million and depreciation and amortization of about $730 million. During the third quarter of 2017, Nucor repurchased 1,591,000 shares of its common stock at a cost of about $90 million or just under $57 per share.

Nucor's capital allocation priorities are clear, and they have been consistently practiced over many years. Our first priority is to invest for profitable long-term growth. Nucor's growth investment strategy is simple and flexible. We are leveraging our 5 drivers to profitable growth.

Our second priority is to pay cash dividends consistent with our success in delivering long-term earnings growth. Nucor has increased its base dividend for 44 consecutive years. We believe that record is strong evidence of both the sustainability of our business and our disciplined approach to capital allocation.

Our third priority is to opportunistically repurchase our stock when our cash position is strong and our shares are attractively priced. From 2004 through the just completed quarter, Nucor has cumulatively returned $8.3 billion to our shareholders via regular dividends, supplemental dividends and share repurchases. These returns to shareholders represent approximately 39% of Nucor's cash from operations generated over that period. We are confident that Nucor's 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.

Approaching the end of 2017, we are encouraged by a number of positive factors impacting our markets going into 2018. We see generally stable or improving conditions for our most important end markets, including nonresidential construction, automotive, energy, heavy equipment and agriculture. Although illegally traded imports remain at unacceptable levels, we are encouraged by the cumulative benefits of the U.S. steel industry's successful trade cases.

We expect fourth quarter earnings to be similar to slightly decreased from the third quarter, exclusive of the previously mentioned tax benefit recognized in third quarter. The raw materials segment's performance should improve significantly, driven by more consistent DRI production. The steel products segment is likely to benefit from margin improvement. The steel mills segment will see some decline, largely due to weakness in plate and typical seasonality.

Thank you for your interest in our company. John?

Thanks, Jim. Nucor's disciplined strategy for profitable growth is working. Jim noted that our first 9 months of 2017 earnings represent Nucor's best performance for this period since the cyclical peak year of 2008. In fact, our year-to-date earnings of $948 million are more than double Nucor's average comparable period earnings of $411 million reported during the 2010 to 2016 time period.

The more than 25,000 men and women of the Nucor team are delivering this profitable growth despite several ongoing headwinds. 2017 has seen a renewed surge of illegally traded imports into the U.S. Through the first 9 months of 2017, finished steel imports have increased an estimated 15% compared to the same period last year. The year-to-date market share for finished steel imports stands at approximately 27%.

Nucor continues to believe significant work remains to be done to achieve free and fair trade for U.S. manufacturers. More specifically, it is time for comprehensive and broad-based remedies that address illegal foreign trade practices that have materially weakened our nation's economic vitality. We applaud the U.S. International Trade Commission's unanimous and affirmative vote earlier this month on Whirlpool's Section 201 petition regarding serious injury from imported washing machines. Nucor and our customers embrace and thrive in a marketplace where winners are determined by real economic advantages earned by efficiency and innovation.

Additionally, growth remains modest in our key end-use market, nonresidential construction. Estimated 2017 nonresidential construction activity, measured by square footage, represents only 67% of the most recent cyclical peak level reached in 2007. Rebuilding America's infrastructure is an absolute prerequisite to the U.S. economy returning to a vibrant growth path that delivers rising standards of living for everyone. Nucor continues to urge bipartisan action on this critical issue. Action is years overdue on a meaningful infrastructure investment plan for our country.

Economic and industry conditions remain challenging, but the men and women on the Nucor team are doers. Our focus remains on what is under our control, execution of our disciplined strategy for long-term profitable growth. The strategy is simple and flexible. We are leveraging Nucor's 5 drivers to profitable growth. The 5 drivers are: strengthen our position as a low-cost producer; achieve market leadership positions in every product line in our portfolio; move up the value chain by expanding our capabilities to produce higher-quality, higher-margined products; expand and leverage our downstream channels to market to increase our steel mills' baseload volume for sustained results; and 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 for profitable growth. During the third quarter, we announced 2 growth investments for our bar mill group. A micro mill project is being considered for 5 states in the Midwest and Southeast: Nebraska, Kansas, Missouri, South Carolina and Florida. We will also be expanding our existing merchant bar operations in either Illinois or Ohio.

Nucor's bar mills are a cornerstone of our company. Capitalizing on our position as a market leader and a low-cost producer of merchant and rebar, they consistently generate attractive returns on capital and free cash flow. Both the micro mill project and the expansion of our merchant bar operations leverage our existing infrastructure and allow us to better serve our customers. These investments will combine the firepower of multiple drivers to profitable growth, enhancing our position as a market leader and low-cost producer, expanding our capability to serve our downstream channels to market and pursuing across-the-board commercial excellence.

In September, we completed our acquisition of 2 cold finish bar products facilities, one in Missouri and one in Mexico, for a purchase price of approximately $60 million. The combined capacity of the plants is 200,000 tons, which increases Nucor's total cold finish bar and wire facilities to more than 1.1 million tons annually. This acquisition advances our profitable growth strategy on a number of fronts. It expands Nucor's market leadership position in cold finished products. It grows our portfolio of value-added products. It creates synergies with our bar mills by providing an additional channel to market for Nucor's special bar quality, or SBQ, products. From a geographical perspective, we are increasing our footprint in the U.S. and gaining entry into the Mexican market. This positions Nucor cold finish to better serve North American automotive and industrial customers.

In his remarks, Jim discussed Louisiana's DRI plant's negative impact on third quarter earnings. When in operation, our Louisiana DRI facility has met and, in many cases, exceeded our expectations for quality and conversion costs. The challenge has been Louisiana's inability to achieve consistent uptime. Various equipment failures and other issues have resulted in a number of unplanned outages. In light of this unacceptable performance pattern, we are currently focused on developing a more holistic approach to achieving system-wide reliability at the plant. As we study potential design and engineering modifications at Louisiana, we will be drawing upon lessons learned from our Trinidad DRI plant. Trinidad is currently approaching world-class productivity levels to complement its long-standing world-class quality achievements.

Nucor's DRI production capacity is a critical foundation supporting our strategy to move up the value chain, and that strategy is working. I am pleased to report that our Decatur, Alabama sheet mill was notified this month that Nucor will be 1 of 3 reciprocants (sic) [recipients] of the Honda Environmental Recognition Award at Honda's Sustainability Symposium on October 24. Nucor is receiving this recognition for supplying galvanneal, cold-rolled, high-strength steel as a replacement for this grade produced by integrated steel mills. Nucor's EAF production process emits roughly 70% less carbon dioxide and equivalent greenhouse gases to manufacture the equivalent amount of steel produced by integrated steel mills, yet has improved formability. Congratulations, and thank you to our Decatur sheet mill teammates for your excellent work. Please keep it going.

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. That is why the Nucor team is both ready and eager to continue unleashing 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 appreciate your interest in Nucor and would now be happy to answer your questions.

(Operator Instructions) And our first question will come from Jorge Beristain of Deutsche Bank.

I just wanted to do a check on the -- your situation with electrodes in the face of the recent 10x spike. How much inventory do you have? And when do you see the price effect kind of kicking in, in 2018?

And let me start by saying that we do not buy our electrodes on the spot market. We have a long-established contractual relationship with our suppliers. And as a result, we feel pretty good about our position. First, the most important thing we take a look at is our availability to make sure that we do have electrodes. And we have, right now, we think, our inventory will get us through the first quarter of next year, so we're feeling very confident about that. And we have letters of intent from our suppliers to be able to supply us with electrodes for the rest of 2018. So for us, supply is really not an issue. And because of these contractual arrangements, the -- all the hype that you're reading about the spot price increases really doesn't pertain to us. We've had pricing through the first half of next year, and we expect to see increases in the second half of next year in pricing. But again, availability is really not an issue for us. Now we buy almost all of our electrodes domestically, rather, let me rephrase that and say we buy none of them from China. And so we don't see any issue with the Chinese issue of supply. The other thing that I would point out that gives Nucor a little bit of an advantage on this is our DRI usage. Through our DRI, we're able to accomplish what we call single-charging, and that reduces our power on times at our EAF and reduces the energy consumption that we have and as well as the electrode consumption by about 10%, which is pretty significant. And that's a result of us not being -- not requiring us to swing the roof off as a result of using the DRI and the heating of the DRI through the roof of the furnace. So for all those reasons, we feel pretty good about where we are, both on availability and where we are on pricing, and, frankly, our position on terms of consumption of electrodes as a result of our DRI usage.

Perfect. And sorry if I could squeak in a second question. Can you just comment? There's been some competitors recently announcing price hikes. Do you believe the market is ripe for a hike right now in HRC?

We announced one last night. And as I've said many times on this call, we don't make price -- (inaudible) announcements unless we believe that they're appropriate and that the market is ready to accept them. So that's my answer to that question. We think it is appropriate, and we think that it will stick.

And our next question will come from Seth Rosenfeld of Jefferies.

I have a couple of questions on the plate market outlook, please. You flagged earlier on the call, I think in the release as well, that plate was a meaningful drag on Q3 and I think -- and in Q4 earnings. But looking through the shipment and pricing data, it looks like your shipment perhaps grew over 20% year-over-year in Q3. Realize price is roughly stable quarter-over-quarter. So can you just help us understand a bit better what's driving the current margin drag? And then with that in mind, perhaps what we should expect into Q4? Obviously, the spot market has indeed weakened. So are you basically expecting a bit of catch-up on margins in the fourth quarter?

I'm going to let Leon, who's responsible for our plate operations begin, and then I'll add anything maybe towards the end. Leon?

Correct. Thank you, John. We have seen some metrics that are better than a year ago. Certainly, shipments are up year-over-year, as you indicated. Our backlogs are a little stronger. And we do see some segments in bridges, mining, military applications that are improving and in -- continue to have strong demand. As we look to the fourth quarter, we would anticipate probably the market stable going through the fourth quarter. However, as we saw in the first half of '17, service centers really began to restock inventory levels. In the last quarter and moving forward, we see that pretty stable and putting a lot of pressure on pricing. So that's -- obviously, the demand is having a -- is tepid at best, and so that'll put some construction (sic) [contraction] on our pricing moving forward.

I might just add 2 quick points to that, Leon. When I look at our Q&T products, our Q&T lines are now full. Now that's an improvement of what was seen in the past. That's good news. The trade cases have helped limit the amount of dumped Q&T imports, and frankly, the return of the mining and energy business has contributed to demand side. My final comment would be on infrastructure. We feel very strongly that this country is in dire need of a very intensive infrastructure program. We have confidence that, at some point in the near future, we will see some action. We're encouraging bipartisan action on this issue. I think if there's one thing the hurricane and this damage caused by the hurricanes have taught us is that we need to really upgrade our infrastructure throughout the United States. When that happens, we expect to see an improvement in the plate demand as a result of that infrastructure we built. So going into 2018, we see some positive things on the horizon.

Just one follow-up question. And I guess a lot of what you walked through outside of the move on inventories and service centers actually paints a more positive picture for plate on the demand side, in particular. Can you give us a sense then of what's happening in terms of your margins, whether or not we're being a bit more dramatic, I guess, in expecting a pullback into the fourth quarter? And then a separate question as well, if I may. On the Louisiana DRI facility, can you please just walk us through in a bit more detail what's really been the cause, you believe, of the recent maintenance issues? What little confidence you have in a more stable Q4? And as you mentioned earlier, you're just in the process of taking more holistic view towards the facility. When should we expect a more complete update on what's happening looking forward?

Well, I'm going to ask Jim to address the first issue on margins. Otherwise, (inaudible) it comes up (inaudible).

Yes, you did. I think when Leon was talking about service center restocking, he was talking about the beginning part of the year, not what we're seeing currently. And so now that time has passed. And so we were getting a bit of a boost in the first part of the year in the plate market because of that. Then as the year progress, scrap price has moved up. And we weren't able to move plate prices up with scrap prices so we start to see a margin compression. And that's where we live now. We're living in a margin-compressed world today, and we think that'll continue on to the fourth quarter. However, when we look at end market demand, it hasn't changed dramatically. It's probably improved. It's just that, that restocking that benefited us at beginning of the year is over.

Since we've racked on play -- on plate, I might just make an additional comment that when I look at the work that we're doing on grades at our Tuscaloosa facility as well as our Hertford facility, we are now a qualified and, in some cases, in the process of being qualified to be able to supply most of the plate that goes into the large pipe and transmission lines, and that's very exciting. One more point on this, because I hear this all the time about the U.S. industry as a whole, and that is that we're not able to produce all of the products necessary to feed the pipe market in the United States. While Nucor cannot supply all of the grades, they are all available within the U.S. market, and there's no reason, therefore, to have any exceptions on the trade cases relative to pipe. So now we'll move on. Your final question was on Louisiana, okay? And I'll make some comments on that. And then Jim, you can jump in if there's anything that you'd like to add to it. One of the things -- as we said in the script, what we were looking to accomplish with the modifications that we have to a long-term process that we have been using, what we call HYL, the new process, we were looking to accomplish improvements in our quality and, at the same time, decrease the amount of issues, of emissions and, therefore, improve the environmental friendliness of the process. And those 2 metrics, we have been very successful with them, very pleased with the quality of the product that's come out of Louisiana, and we've been very pleased with the reduction in emissions by using this technology. The challenge, of course, has been reliability, and we recognize that. And we are now in the process of taking time to look at the entire -- the engineering of the entire process, making the necessary adjustments, as we referred to, and are taking a holistic approach to the entire process from beginning to end and making the changes that we believe are necessary to improve reliability. As we go forward in that study, we, of course, will be tapping into the talent and the lessons that we've learned in our Trinidad facility, which is, frankly, world-known for its reliability as well as its quality, but particularly its reliability. So that process, we expect to take the next couple of months. At the end of that period, we'd be able to give you a better explanation of the time that would be involved to make any repairs that we feel are required.

Okay. John, let me add one other thing and that is that the plant did start its operations up in early October. It's running near full capacity again. We're doing these things proactively, not because we have a problem today. It's running well, and we don't see any reason why it shouldn't continue to run well. However, when you've had the track record we've had, you'd be foolish to put your head in the sand, it's not possible there'd be another problem. So we're trying to be proactive. We're looking at every possibility, should there be other things we could do that make the plant even more reliable.

That's a good point, Jim, because I should have pointed out, we might go through this process of reengineering and taking a hard look at the -- from an holistic engineering perspective and come to the conclusion that the improvements that we have made to the process to date, both in the process gas heater and in the furnace itself, have rectified the issues. I mentioned several times on this call and I'll repeat it, the technology itself doesn't seem to be the issue. It's the equipment that has enabled the technology to result in less emissions, in particular. That's been a major change and has given us the most heartburn with the facility. So we're taking a hard look at that. We want to find a solution that allows us to continue to improve environmental aspects of producing DRI while still having the improved reliability.

And our next question will come from Timna Tanners of Bank of America.

So I wanted to ask you a question I asked earlier, but I'm just fascinated with how much the U.S. market has kind of lagged the global market. And I know the recent price hike maybe addresses that. Is there any structural reason you can think of why the U.S. market wouldn't respond to higher global prices? Or do you think that this has just been a -- something maybe related to this time of year? Or any other explanation you have would be great.

Yes. I definitely do not feel that there's any structural change that is resulting in this. I think it's more or less a question of a lagging and leading cycle. We go through this from time to time with one or the other will make a major move. In this case, we see global pricing move up. And at the same time, because of the -- frankly, because of the import surge that has occurred in the United States, that has had a very negative impact on the demand here in the United States and our ability to meet that demand. Although demand has improved, the improvement in demand is being filled by illegally traded products. So we see that, again, actually coming to an end. We see pricing -- frankly, we think it's bottomed out. We've made our price announcements. And as you point out, a $20 move on off bar, we do believe the market will support that. We'll reduce the gap. So really, Timna, I think it's more of just a case of the lead, lag on what is normally a cyclical pricing environment, compounded a little bit by the impact of illegally traded imports on us, shifting the demand/supply in the United States that had a negative impact on pricing. And now as I said, we believe that it's bottomed. There's a little bit of seasonality to it also. I think, Timna, if you look back over the past several years, you'll see the same kind of thing happening in the end of September, early October, things kind of slow down a little bit. You see an impact on pricing, and that occurs more here in the states than on the global marketplace. So that also might have played a role there.

All right. That makes sense. And then I have kind of a big question, just in this whole topic of capital allocation, how you think about using cash. Clearly, you need to buy back. You hadn't done that for a while. So I was just hoping you could comment a little bit more about how you think about buybacks in your toolkit? And then you're talking about a new micro mill. Do we really need more rebar? If you could explain that a little bit more. And then how you're looking at other M&A and options in a little more detail would be great.

Okay. Well, let's start with the first question. I'll ask Jim to address the buyback issue.

Yes. Timna, we had done a lot of returning of cash to shareholders over the years, and we've used base dividend, supplemental dividends and share repurchases. We also look at what we have in our pipeline in terms of free cash flow as we forecast the future and imminent M&A transactions. So I always have things in the pipeline. We look at what's imminent and about to happen. And so we were encouraged by both the fact that -- we felt like the stock price was a little undervalued. We had a lot of liquidity, and so we'll always opportunistically look at that. And we know that our dividends this year, as we've gone deeper in the year, our payout ratio is going to be above 40%. So as we've talked in the past, that's something that we think about in terms of wanting to make sure we're paying at least that much in dividends. And so that was kind of the way we look at it is it was a good opportunity to use some of our extra cash for the stock price where it was.

And the second question had to do with rebar and our investment in new rebar mills relative to the marketplace, and I'm going to ask Dave to tackle that one.

Yes. Thanks, John. Yes, Timna, Nucor, we are committed to the rebar business and maintaining our low-cost position in the market. We believe the micro mill is a viable technology, and it will allow us to better utilize our regional approach in growth markets where we have scrap available. We're confident that we'll see some increased investment in the infrastructure as well.

Dave, maybe just -- can I add 2 additional points to that?

Absolutely.

One is, and you kind of touched upon it, where we're looking to place these markets -- that we refer to them as micro mills, we're looking to place them in markets where Nucor has a large scrap supply as well as we know that there's a good demand that's being underserved in that particular region. So we look at this being able to give us a good return, basically, based upon logics and the impact that we'll have, like a lower logistics cost in getting scrap to the mill and then from the mill to our customers. And the other point that I would just -- we mentioned this in the script, and I want to just emphasize it again. When you look at rebar and merchant bar in general, long products in general, I mean, that's been a real cornerstone for our company. In fact, I'd like to say that it built our company. And when I look at the rebar strategy and the expansion of it, one of the 5 drivers of profitable growth is to improve and increase our downstream, our channel to the market. And we've got a great channel to the market through Harris. So we feel that although you might feel that there's excess or there's not a need for additional rebar in the United States, we're confident that, based on the location that we're putting them, the geographical locations that we're going to select and our channel to the market to Harris -- through Harris, these are going to be very good investments with good returns for Nucor.

Yes. Thanks, John. That's exactly -- it is a big logistics play. And we've always approached these markets regionally, and we feel that this technology that's proven will allow us to expand on that regional approach and focusing where we have scrap available to us and where there are markets already existing.

And Timna, can I ask you to repeat the third part of the question? I know it had something to do with mergers and acquisitions.

Yes. Sorry it's a long question, yes. So I was just asking about capital allocation broadly and then if you had any more comments about how you're thinking about M&A options or priorities.

I can answer that one without even getting help from Jim. How are we looking at growth opportunities and our capital investments going forward? Tell you what, we've got a full pipeline of opportunities. There's a lot of things that are taking place in the world today, and I'm sure you're on top of most of them. There's a lot of things happening, both in the global marketplace and in the United States, a lot of changes. Some companies are more challenged than others. That provides opportunities. There's -- we're going to continue to invest in our downstream businesses to improve our channel. We're looking at additional upstream opportunities to invest in. So I mean, we -- we're in a great cash position. This is, again, one of those cases we're having a strong -- a very strong balance sheet gives us opportunities to continue to build upon our 5 drivers of profitable growth. And we've got a lot of opportunities out there. Now one thing that I would tell you that we'll look at in every area that we invest, and that is value-added investments, investments that are going to improve the value-added -- we think that the higher we move up the value chain, the higher the margin and the more sustainable the business. So the investments that you see us make going forward will all be in the area of improving our value proposition, providing higher-value products to value-appreciative customers, okay, who are willing to pay for that higher value is what we will be focusing on.

And our next question will come from Curt Woodworth of Crédit Suisse.

So I wanted to drill down into the rebar market as well. It's been somewhat perplexing from my perspective this year, in that metal spreads seemingly continue to trend lower. Yet, you have the Turkish tariff. It seems like a lot of this excess inventory in the Gulf has been absorbed, and the ARB is pretty close. I think Turkey is selling it $520, $530 metric, which is I think about what the price is on a landed basis in the U.S., around like $550, $560, $410. So can you comment on how you see this market sort of evolving into next year? And then I know you've been in Washington. It seems like from sitting in (inaudible) John with respect to 232. Do you think that from your discussions recently that -- I think you've said this to the press, that Section 232 is still going to happen and D.C. rebar playing into that?

Well, let me start, David, and you can add on [232]. Basically, your question is, if I'm hearing it correctly is -- look, there's a lot of things that seem to be changing in the marketplace, but still the margins on rebar alone and pricing continues to drift down. What I think you have to consider is what happened in the beginning part of the year, the surge of imports that came into this country. I mean, there were months where we saw 30% of the market share, slightly higher than 30% of the market share going to imports on rebar. So there's a little bit of a lag in the effects. So we're still seeing some of the negative consequences or the negative impacts, the adverse impacts of that surge of imports that was totally out of control in beginning of the year. And yes, we won trade cases, but frankly, we didn't get the kind of remedies that we felt were justified, given that surge. And we're going back in Washington, as you've noted, and we're going to continue to fight. And we're going to continue to win cases and continue to appeal them if we don't get the right outcomes. So I mean, it's really -- the story of the rebar in the United States this year is all about, we've summed up in a single word, and that is -- well, 2 words, illegally traded imports, I guess that's 3, illegally traded imports, and the need to stop them and get this thing -- get the situation under control. And I'm confident, again, that given the actions that we're taking in Washington, we'll see those positive results. Dave, did you want to add anything to that?

Just -- demand is decent. I mean, you really hit it. Illegally traded imports are the thing that really hit us at the beginning of the year. There was record levels of imports. We're working our way through that. Import level is down about 21% now since we've got the relief. But now we're starting to see rebar come in from other areas besides Turkey. But it's down -- we feel the demand is decent and moving forward.

I guess on the brighter side of all that, as we look forward going into the end of the fourth quarter, the end of the year and into next year, because of the decrease in imports now, it's going to take a while for that surge to work its way through the system. No doubt about that. But we will continue to see the -- we believe we'll continue to see import -- imports lower and that -- and since demand has been holding steady and, possibly, maybe improving a little bit, again, if we see that infrastructure build and other things that are happening, some of the results, frankly, as sad as it was, the devastation from the hurricanes, that might result in a little bit more demand on rebars as they rebuild parts of the areas devastated. So all said, we think it'll pick up a little bit, and we will have to continue to fight to keep the imports down. Now you asked a question about 232. So I think -- so I can take just a minute of your time, and I'll share with you my thoughts. You summed it up well. I've said this many times, I'm getting a little concerned about the length of time it's taking for this to be implemented and I'm concerned about the surge of illegally traded imports that are coming as a result of the delays. With that said, I'm still confident that President Trump will fulfill his commitments to our industry and that we will see 232, hopefully, early part of next year at the absolutely-est. Maybe it'll be a nice Christmas gift to the industry, and we'll see it at the end of this year. But it's certainly needed, and it's been -- we have a commitment to get it. And I think as you look at some of the things that are happening even outside of our industry, for example, with the Whirlpool 201, which is a different action, of course, but still it points to the severity of the imports and the type of holistic remedies that can be offered by Washington. And we're counting on getting one for the steel industry.

And we'll take our next question from Novid Rassouli, Cowen and Company.

Just to stay on imports for another minute. So are you guys surprised to see imports, I guess, as high as they are, given that the import arm is pretty much nonexistent now? And when do you expect imports to return back to a more normalized level as a percentage of the U.S. market?

We're not surprised at all at this surge, not at all. And the reason is that we see all of the countries and companies that are looking to beat what they know will be some form of trade relief. They're looking to get every ton in that they can get in before we even go to the 232 or we continue to win these trade cases that we're winning. Whether we get 232 or not, we are going to continue to prosecute trade cases with the same vigor that we have over the last 12 or 18 months. And I am confident we're going to continue to see the types of wins that we have seen and, apparently, so are these countries that are breaking our laws because they're doing everything they can to get their product in here before that goes into effect. So I'm not surprised to see this surge. I think it's a direct result of a commitment that was made by the President earlier in the year. I believe that it was going to go into effect sometime in the June time period, as was indicated. And with every month that passes that it doesn't go into effect, all we see is a continued surge to get their products in before the -- before something goes into effect. Now the one thing that we've been talking of lately in Washington, and certainly I've been sharing with the administration, is our belief that this should be -- and they should be vocal about the fact that these -- any results of 232 should be applied retroactively to the time period when the President made his first commitment back in the early part of the spring of this year. We think that, that, frankly, is the right thing to do. But also, we believe, that if he were -- or the administration were to make that kind of a commitment, it would put an immediate end to the surge, and therefore, it would -- we would not see the damage occurring to the industry while the administration took the time it needed to complete the study of the 232. So that's something I want to mention because that's something we've been pushing very hard in Washington. I don't know if we'll get it, but we're pushing it very hard with the administration.

And John, that would be similar -- essentially, like critical circumstance on the AD and CVD duty side. I think those are the rules for critical circumstance.

It would be exactly the rules for critical, very important. I probably could've said it easier by just saying we want the same rules applied to 232 that do exist for critical circumstances. And I got to tell you, this is critical circumstances. I mean, even the G20 has come out, and they call the crisis in steel today a crisis, okay? That means immediate action. That's the G20. And the OECD has made a very similar comment. And I'll just point out that this isn't the United States that's suffering through this surge and -- results from overcapacity in China. It's Europe and Europe is, frankly, quicker at taking action than we are. They're moving much quicker on -- to get relief for their steel industry as well as other regions. India, just recently a few months ago, put tariffs on all of the Chinese products that come into the country. So it's a global problem. Other regions are reacting much quicker than the United States, sadly, which means that we remain the market that they can get into while our government is dealing more slowly with the issues that other governments have dealt with more quickly.

Right. And if you don't mind, one quick follow-up. So switching to pricing, we've been seeing HRC prices weakening recently. I would assume, as you said, primarily due to this high level of imports. Can you just walk us through kind of the fundamental drivers and what you're seeing from your seat as to maybe why the market will accept and enable the recent price hikes to stick?

I'm assuming it's not about the price hike on sheet products and...

Yes, correct.

Yes. We watch demand curves very carefully here, and we believe that we've seen it bottom out. A couple of things that are coming into effect here. We see the imports on HRC have been drifting down while demand remains constant to drifting up a little bit. So at the end of the day, it's always about supply and demand, and we see the market picking up order entry. Over the last 2 weeks, we've seen increase significantly. We feel good about the demand level going into the fourth quarter and particularly into 2008 (sic) [2018]. One area that I would mention in particular is -- in the oil and gas, that whole market has -- the energy market has improved much more quickly than we expected it to. And that's a particularly strong dynamic for Nucor after our acquisition of Gallatin, which serves that market very heavily. So with oil and gas picking up a little bit, imports are down a little bit. Although automotive has kind of slowed down a little bit, we expect that to, frankly, pick up again as a result of some of the -- of sadness associated with the hurricanes coming both in Florida and in Texas. We give estimates of anywhere from 700,000 to 1 million vehicles that are going to need to be replaced. The one last point that I would make is -- we didn't touch upon it too much, but in relation to the automotive market picking up. Nucor's participation in that market and the grades that we continue to develop and offer to that market, I feel confident, are going to help our sheet business. And a final point would be that, when you look at the MSCI inventories, the sheet products, they have been drifting down and are at fairly low level now, which we, again, believe bodes well for fourth quarter and first quarter of next year.

And we'll take our next question from Phil Gibbs, KeyBanc Capital Markets.

I just have a clarification on the micro mill investments. You mentioned Illinois and Ohio as targeted regions for expansion. Are we talking about both new (inaudible)?

Phil, I apologize. I got to correct you there. We talked about those 2 states as areas where we look to invest to expand our merchant products. We talked about other states, 5 or 6 other states that we're looking at for the rebar. In Ohio and Illinois, we're looking at as potential areas to invest to expand our merchant product offerings.

So we would be looking at new capacity then in both merchants and rebar, if I'm hearing you correctly. And would this...

You're hearing me correct.

Okay. And would you expect this to displace other capacity within your system? Or is this a thought whereby you want to grow production?

We want to grow production. Now having said that, we have a complete plan that takes into account all of our facilities. There'll be some rearranging of markets. There'll be some plants where we ship products as a result of this new capacity in rebar. We've taken a holistic view of this. We've done a study of all of our merchants and our rebar divisions and how we -- and our markets. And it's going to be -- I don't want to give too many details out to you, and I'm not going to. But yes, this is really a function of more -- fully utilizing our melt in each of our areas and better matching the product offerings in each region to the markets in that region. And as we shift things around, we'll be taking up -- we mentioned the word logistics several times here today because we've kind of done a study and taken a hard look at how do we match our product offerings to the market that the -- from a geographical perspective in which they're located and how can we rearrange that offering to optimize our -- or minimize our logistical costs. And at the end of the day, we've said this how many times? Nucor continues to be the low-cost producer in merchant and rebar and, frankly, in all of our products, and we continue to drive that cost lower and lower. At the end of the day, especially in a world with excess capacity, the low-cost producer is going to be the winner. And given Nucor's belief in continuous improvement, we continuously look for ways to drive that cost even lower. This is an example of it. The team has done a great [data], the long products group has done a great job at taking -- making a detailed market study, and now we're going to be implementing the changes that we -- that result in that study.

And most of the micro mill investments we've seen have been around, I know -- I want to say between 300,000 and 400,000 tons. Should that be what we're thinking about here and...

Yes, yes, in that neighbor. We're not going to give out any specifics at this point. But yes, in that neighborhood, it would be fair to make that comment.

And then if I could ask a second here, just -- maybe it's a good segue in both merchant bar and beam. But a few weeks ago, Nucor had severely cut list prices into the fourth quarter. And I was just thinking about what the rationale was behind that from a timing standpoint. And should we think that there's going to be a little bit of pressure on pricing in fourth quarter?

Good question, and I can answer it very simply. The rationale behind it was the fact that our book price has been targeted by our competitors who offer discounts off of our book price, and our book price was becoming not relevant to the market. And so we've got it, to make it more relevant to the market. And as a result of it becoming a little bit less relevant to the market, we lost the market share in the third quarter. And that greatly upset me, okay? And I could tell you the instructions to the team going forward is that we're going to watch discounting off of our market price -- off our book price, excuse me. We're going to watch discounting off of our book price much more closely and react to any discounting off of our book price much more quickly as we move forward so that we always have a relevant book price. And that pertains to beams, merchant and rebar. Does that answer your question?

Yes, you confirmed my suspicion. I thought you were unhappy with something, and I was right.

Okay. Well, your suspicion was correct.

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back over to Mr. Ferriola for closing remarks.

Thank you. Let me close by -- as I usually do, by saying thank you, saying thank you to our shareholders. We appreciate your confidence and your support. Thank you to our customers. We appreciate the opportunity to earn your business every day, and we will continue to work hard to earn your business every day. And I also want to say thanks to my Nucor teammates for creating value for our customers, generating attractive returns for our shareholders and building a stronger future for all of us and our families. And most importantly, thank you all for doing it safely.

Thanks for your interest in our company. Have a great day.

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.