Nucor Corp (NUE) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the 3rd Quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

Now I will introduce your host today, Dan DiMicco. Mr. DiMicco, you may begin sir.

Thank you, good afternoon and thank you for joining us today for Nucor's conference call.

We will briefly review results for the third quarter and then take your questions.

But first I would like to welcome and say hi to all the members of the Nucor family who listening in to this conference call on the Nucor website and a special welcome to our newest addition to our Nucor family, our Nucor Steel Decatur team.

In the less than 90 days since this acquisition was consummated, our team has already taken a number of significant steps to move our newest sheet mill into production. As always, the nearly 8700 men and women of Nucor walk their talk each and every day as we work together, to build Nucor's position as the safest, highest quality, lowest cost, most productive, and most profitable steel and steel products company in the world.

Terry Lisenby, Nucor's CFO and other EVPs, John Ferriola, Ham Lott, Mike Parrish and Joe Rutkowski are with me this afternoon and will be available to answer questions, as well.

For those of you new to Nucor Corporation, allow me to provide a brief description of our business. We are the United States' largest recycler, recycling over 11 million tons per year. With 2001 steel production of 12.3 million tons, Nucor is North America's largest steel producer. Nucor has operating facilities in 10 states and approximately 8,700 employees.

We are the most diversified steel producer in the United States with products that range from reinforcing bar to motor lamination steel to pre-engineered buildings. We are the largest structural steel producer, the largest steel bar producer, the largest steel joist producer and the largest steel deck producer. Other major products include hot rolled, cold rolled and galvanized steel, steel plate, cold-finished bars, metal buildings, fasteners, [409] stainless steel and light-gauge metal framing.

Our third quarter earnings of 50 cents per share were in line with the earnings guidance range of 45 to 50 cents that we gave on September 23rd. The third quarter earnings are almost double the year-ago quarterly earnings per share level of 26 cents.

Our third quarter earnings also represent the second consecutive quarter of positive year-over-year earnings comparisons, following six quarters of negative comparisons through the turbulent U.S. economic and steel market conditions that began in late 2000.

Nevertheless, our results continue to reflect the very difficult market conditions in many of our businesses that are impacted by the current severe downcycle in non-residential construction activity. U.S. Department of Commerce data indicate that through August 2002, non-residential building spending has declined nearly 27% from the peak seasonally-adjusted rate reached in March of 2001. In fact, in many of the product lines that our largest structurals going into, it is down close to 35% to 40%.

However, we are encouraged to note continued and significant evidence of improved profitability in our sheet steel business this past quarter. We view these encouraging early returns as evidence supporting our view that substantial long-term earnings leverage remains ahead of us as we execute our [lateral] business strategy. We are building market share in sheet steel and broadening our product portfolio into higher value, higher grades of sheet. Nucor continues to build long-term earnings power in all of our businesses as we press ahead with cost reductions, quality improvements and market share gains.

Looking at market share, Nucor once again set new records in the third quarter and first nine months of 2002 for steel production, total steel shipments and steel shipments to outside customers. Our first nine months of 2002 steel production of 10 million tons was up almost 8% year-over-year. And compares against an increase of less than 3% in total North American steel production for the same period. We expect full-year 2002 steel production of approximately 13.5 million tons, which would be another record year. Our growth continues to be -- to be -- excuse me, our growth continues to be rooted and focused and disciplined execution of our three-prong growth strategy.

Nucor's strategy for driving long-term growth and earnings power and raising returns on capital calls for us first, to optimize existing operations,second, to implement new [disruptive and lead fire] technologies to [greenfield] growth and third, pursue acquisitions that have both strategic importance and attractive valuations. We made progress in all three areas in the just-completed quarter.

We plan to remain a low-cost producer and a world class competitor in all of our product lines. As one ongoing example, the bar [metal] group made substantial progress in implementing $200 million capital projects program that was announced earlier this year. While the program is not scheduled to be completed until 2004, already 1/2 of the projects are either completed or currently under way. The final phase of the Texas rolling mill modernization program was completed during the third quarter. We have begun to realize cost improvements in terms of yield and man hours per ton.

We are pushing ahead with other key components of the program, such as the Nebraska rolling mill modernization, the South Carolina finishing end upgrade and the Texas melt shop modernization. Nucor's new facility in Crawfordsville, Indiana, using a Castrip technology to directly cast strip steel completed it's first full quarter of commercial operations. The initial focus on producing carbon sheet steel has yielded significant improvements in both the consistency of the process and the quality of the material produced.

Nucor is now producing prime saleable coils using the CastripTechnology. We can now report our first sales of prime cores to external customers, although small in size to this point, the initial customer reactions are positive. The team at Crawfordsville also successfully broadened the capability of cast strip to include both electrical and stainless steals.

While there is more work to do, we have made significant progress towards achieving full commercialization of the cast strip process. Castrip's process represents a potentially revolutionary technology for the entire steel industry.

Nucor's wholly-owned subsidiary, Nucor Steel Decatur, LLC., completed the purchase of all the assets of the former TRICO Steel facility on July 22nd.

Nucor Steel Decatur successfully produced first heat and cast its' first slabs the week of September 16th, less than 60 days from acquisition. Decatur is now regularly processing pickled and oiled product on a [cold] basis for customers. On October 8th, Decatur rolled its first coil, less than 12 weeks from the acquisition. And over the past week, our team at Decatur has successfully produced prime hot-band coils for outside customers.

This steel mill originally began operations in 1997 and has an annual capacity of roughly 1.9 million tons, of which we plan on improving on. The Decatur acquisition boosts our sheet capacity by nearly one-third or increasing it to 8.4 tons per year. Decatur will support a five roll strategy to build profitable market share and to broaden our sheet product portfolio to include higher quality grades.

In the sheet markets, Nucor continues to push up the value chain with respect to both product and customer mix. At the same time, our more gradual approach to raising sheet product prices, in contrast to more aggressive moves by some of our competitors, provides tangible evidence of Nucor's partnership approach to building long-term mutually beneficial relationships with customers. As always, we have honored all of our contractual commitments.

Moving ahead, our fourth quarter order book is undergoing significant shift in mix towards contractual business and away from spot market business. This results from both our partnership approach and our desire to sustain the benefits to be realized from the return of sheet-selling values to more reasonable levels.

Regarding our pending acquisition of substantially all of the assets of Birmingham Steel Corporation, the Delaware bankruptcy court approved the sale on September 12th. In May, Nucor signed a definitive agreement to purchase substantially all of the Birmingham Steel assets for $615 million in cash, which includes approximately $120 million in receivables and inventory. Primary assets to be included in the purchase are four operating mills that have combined annual capacity of a minimum of 2 million tons of steel bars. Closing will occur after receiving the required regulatory rulings. We expect to close late in the fourth quarter of this year.

Finally, Nucor's involvement in trade issues is also a critical part of our efforts to support the long-term success of our steel-making operations.

During the third quarter, much attention about the press and financial markets was focused on the exclusions granted from the 2001 terrorists. We continue to believe that the bigger picture is that the President rightly put in place an aggressive steel trade program to address the problem of the illegally-dumped and subsidized foreign steel. Most importantly, much more work remains to be done to restore free and fair trade to the world's steel markets. We are continuing to work with the Congress to see that our nation's antiquated trade laws are revamped so that they are more effective with quicker response and with barriers in place to prevent product and country switching.

Longer term, our view remains that the best way to resolve the global steel industry's structural problem is for the United States to help negotiate with other steel-producing countries, the elimination of government subsidies that keep inefficient mills running. Nucor will continue to focus on seeing that rules-based trade puts an end to illegal and unjustifiable advantages for many foreign steel producers. We believe that trade laws mean free trade, not a free ride. We also believe that the long-term health in the industry will be facilitated by further consolidation in the domestic industry.

As you can see, Nucor remains busy pursuing a number of initiatives, all focused in helping us deliver our earnings and shareholder value growth objectives. This is why we are very optimistic regarding Nucor's future. We intend to build upon the Nucor tradition as a successful cyclical growth company.

Terry Lisenby will now review the results for the third quarter. Terry?

Good afternoon.

Sales for the third quarter were $1,166,000,000.00 an increase of nearly 11% over the third quarter of 2001, an increase of 2% from the second quarter of 2002 level. Total steel shipments of 3,321,000 tons set a third quarter record, up 7.5% year-over-year.

Total steel shipments of 9,986,000 tons for the first nine months of 2002 also established a new nine-month record and represented an increase of nearly 8% year-over-year. However, third quarter 2002 steel joist production of 133,000 tons was down 4% from last year's third quarter.

Through the first nine months of 2002, steel joist production is down more than 15% year-over-year, reflecting the depressed non-residential construction market. Our average sales price for steel and steel products increased 3% in the third quarter of 2002 in comparison to the year-ago quarter, rising $10 per ton to $355 per ton from $345 per ton in the third quarter of 2001. The average sales price per ton increased more than 6% or $21 per ton quarter-over-quarter.

This improvement was driven by substantially higher sheet prices, up 23% year-over-year and up 14% from the second quarter. Plate-selling prices increased almost 7% year-over-year and gained 4% over the last quarter. On a year-over-year basis, both bar and structural prices were essentially flat.

Joist index prices remain severely depressed with year-over-year selling price declines of 20% for joist and 10% for deck. From third quarter 2000 levels, joist pricing has dropped $237 per ton or 29% and deck pricing dropped $163 per ton or 23%.

Pre-operating start-up and acquisition expenses of new facilities were $21.7 million, roughly 16 cents per share for the third quarter of 2002, compared to $26.9 million -- roughly 20 cents per share for the third quarter of 2001 and $9 million or 7 cents per share for the second quarter of 2002. Approximately $10 million of the third quarter 2002 costs were for the new Decatur sheet mill.

Pre-operating, start-up and acquisition expenses for the first nine months of 2002 were $54.3 million, roughly 41 cents per share, down from $67 million or 51 cents per share for the first nine months of 2001. Reflecting the improvement in sheet pricing and volume, our gross margin was 10.5% in the third quarter of 2002, compared to a gross margin of 9.5% in the third quarter of 2001.

The average cost of scrap increased $11 per ton from the second Quarter and $17 per ton year-over-year to $118 per ton for the third quarter of 2002.

Earnings before federal income taxes were $20 per ton for the third quarter of 2002 compared to $11 per ton for the third quarter of last year.

Cash and short-term investments totaled $523 million at the end of the quarter compared to $537 million at the end of the second quarter of 2002 and $462 million at the end of 2001. Approximately $186 million of the September 28th, 2002 cash and short-term investment position is held by Nucor - Yamato Steel Company, 51% owned by Nucor.

Minority interest distributions through the first nine months of 2002 have totaled $143.6 million. Long-term debt at the close of the third quarter was $544.6 million, up from $458.6 million at the close of the second quarter. This increase of $86 million is due entirely to industrial revenue bond financings assumed by Nucor for the TRICO purchase. This $86 million debt assumption represented almost 75% of the total purchase price of $116.7 million paid to acquire the Decatur sheet metal.

At the close of the third quarter, Nucor's debt was 18% of total capital. On October 1, Nucor issued $350 million of 4 and 7/8 percent unsecured notes due 2012. We view this as attractively priced long-term capital to support our growth strategy. After adjusting for the issuance of these notes, our pro forma debt to capital ratio at the close of the third quarter would be 26%.

Capital expenditures were $142 million for the first nine months of 2002 and we now project full year capital spending of less than $200 million.

Depreciation expense for the first nine months was $228 million and is expected to be about $305 million for the full year. 2002 is on track to represent the second consecutive year that Nucor's capital spending is below depreciation. Prior to this two-year run, 1990 was the last year where our depreciation exceeded its capital spending. We will continue to focus closely improving returns on our investments and increasing free cash flow generation.

Reviewing the numbers for the 13 weeks ended September 28th compared to the year-ago period, for sheet steel, production was up 19%, shipments up 18%, net orders up 32% and backlog up 66%.

For steel bars, production was down 3%, shipments up 4%, net orders down 10% and backlog up 6%.

For structural steel, production was down 17%, shipments also down 17%, net orders down 20% and backlog down 25%.

For steel plate, production was up 42%, shipments up 60%, net orders up 63% and backlog up 133%.

For steel joists, production was down 4%, quotes up 4%, net orders down 8% and backlog down 10%.

For steel deck, production was up 8%, quotes up 11%, net orders up 27%, backlog also up 22%.

For cold-finished steel, production was up 30%, outside shipments up 25%, net orders up 35%, backlog up 51%.

Structural steel average pricing decreased $4 per ton in the third quarter from both the second quarter and a year ago.

Pricing erosion in the structural markets will likely continue in coming months as capacity additions compound the ongoing problem of weak demand. Steel joists average selling prices in the third quarter were down $17 per ton from the second quarter level and have now dropped $143 per ton from year-ago levels.

Order and quotation activity levels show no evidence yet of any bottoming in the non-residential construction cycle. Bar selling prices increased by $10 per ton in the third quarter from the second quarter and are essentially flat with the year-ago level. Overall bar market pricing and demand remains depressed due to underlying weak non-residential construction activity levels. Sheet steel average pricing increased by $41 per ton in the third quarter from the second quarter and by $64 per ton from the year-ago level. Driven by supply side curtailments over the past year, sheet pricing has been restored to the levels prevailing prior to the import surge in 2000's second half. We will now be glad take your questions.

Ladies and gentlemen, if you have a question at this time, please press the 1 key on our touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for our first question. Our first question comes from Michael Gamberdella of JP Morgan Chase. You may begin, sir.

Yes, good afternoon.

Good afternoon, Michael.

Dan, I wanted to ask you about the structural beam issue and your shipments in the quarter were down 15%.

17%.

Well, 17%. This is before, as you said, before [INAUDIBLE] steel dynamics got into the market. Did you lose any share to Texas industries or imports during the quarter?

No. No, the entire impact was brought about by the drop-off of non-residential construction, which is, as I mentioned, on average across all non-residential construction, down 27%, but specifically, if your take a look at the type of construction where beams are used heavily, it is down 35% to 40%.

Okay. And plate, I was also kind of surprised that plate shipments were down about 15%.

Michael, this is Joe Rutkowski. Yeah, we -- it wasn't for lack of orders. We -- we had a little bit of stumbling around in -- in late July, August, we brought on a fourth crew. We were training people and we did not produce up to snuff. We built a big backlog, we have a nice backlog going into the fourth quarter as you can see and we're producing extremely well there, in fact, we set a record there two weeks ago at I think 25,000 melt casts and 23,500 or something produced and shipped.

Last question, on TRICO, can you give us any guidance on the shipment expectations you have for the upcoming quarters?

We have zero expectations for TRICO, but Nucor Decatur on the other hand -- [Laughter]

Sorry about that!

I will let John Ferriola address that question.

We're anticipating production of about 120,000 tons in the fourth quarter of this year, 1.5 million tons next year.

Thank you.

Our next question comes from Dan Rolling of Merrill Lynch.

Thank you, and first let me say that, Terry I was pleased to see three pages in the disclosure and a balance sheet. It's looking a lot better.

It's a new record.

Well, we did it just for you, Dan.

Well, I'm looking for cash flow next quarter, then.

Little by little, we will get there.

Okay. Just a general question. Clearly, the economy hasn't shown the strength that many of us have been looking for. Are you seeing any major change in outlook from your customers as we're going into the 4th Quarter or just going to be seasonably weak?

The economic conditions have not changed to allow for any pickup in the economic activity or demand and the construction markets, as I've already said, things are down significantly. They don't appear to be dropping off anymore, but they're not coming back, either. Anytime soon by the looks of it.

As far as the fly roll side, it's still going to be governed like we said for the last six to nine months, governed by the supply situation and pricing moves that we've had so far this year have been supported by the fact that supply came down to being balanced with demand. Not that demand has picked up. We don't necessarily see any drop-off in demand, but we don't see any significant improvements, either.

Thank you much. Good quarter.

Our next question comes from Wayne Atwell of Morgan Stanley.

Good afternoon.

Good morning, Wayne.

A couple of questions, do you have any thoughts on what's going to happen to scrap costs in the fourth quarter?

Yes, in that they will come down from the third quarter purchase levels, anywhere from $2 to $3 a month for the first couple of months, probably ending up down about $10 for the quarter.

So, on average, they might be down 6 or 7?

Yeah.

Any thoughts on your strip volume, how much you're going get out the door in the fourth quarter and next year?

John, what do you think we're going to ship in sheet for the fourth quarter?

Uh - for the 4th Quarter?

And that would be, I guess, including Decatur. Oh, you said cast strip.

Yeah, cast strips.

Okay!

Today, we produced about 7,000 tons on the facility. We would anticipate maybe 20,000 tons for this, for the fourth quarter. It's -- it's tough to predict exactly what we will do next year. We would anticipate over 100,000 -200,000 tons.

100 to 200?

Yes.

Okay. Any guidance on the fourth quarter earnings?

Yeah, we think it's going to be in the 45 to 50 cent range, Wayne, because we're looking at start-up costs that could be $32 to $35 million total for the quarter and because of what scrap pricing has done for the year, we're expecting a life of charge in quarter that could be as much as $10 million or $11 million.

Okay, great. Thanks so much.

Our next question comes from Frank Banell of Addich Cockril.

Hi, guys.

Hi, Frank.

Got a couple of questions. About what percentage now of your sheets move in on contract?

To date, I'd say probably 60% of our total sheet sales are contract sales. That's close to the goal that we would have. We think that the final number should be somewhere around 65% contract.

And what's about -- what the average length of the contract?

I would say the average length is one year.

Okay. And a contract prices now above or below or equal to spot or...

Well, I would say that contract prices right now are below spot.

Okay. And, um, --

By a small margin.

Okay. And the cash -- are the cast strip sales profitable yet?

No!

No! I didn't think so!

We're pleased that we are -- we're please that we're selling, that we are producing and selling prime fab off of the cast strip facility, but we are not profitable yet.

About what type of volume do you have to run over the cast strip facility before you think it would be a profitable proposition?

Frankly it is too early to say. We don't have a real good feel for the consumable costs at this point. We're in the process of making that determination. We feel that we'll have a much better handle on that by the end of this year.

That's it. Thanks.

Just a point of clarification to Frank's question on cast strips. I know a lot of you know that we've emphasized and continue to emphasis that this is a radical new technology, that is very much in the commercial experimental stage. Our progress has been excellent. We're extremely happy with that progress.

The fact that we've produced prime to ship anything at this point in time is way above expectations, but this technology has a long way to go yet before it is proven commercially. It's one of those cautionry words, that say things look great, we're progressing fantastic, but, you know, don't get too carried away until we tell you it's a done deal.

We are learning how challenging the process can be in terms of the tolerances in respect to chemistries and inclusions and atmospheres in our hot box. It is a very, very sensitive process.

The good news is all of those with today's technology are achievable and controllable. The other thing I would add on the question that Frank had on the contract percentage, a year ago, John, what do you think our percentage of contract business was?

35% to 40%.

Thanks.

Our next question comes from Aldo Mazzaferro of Goldman Sachs.

Okay. On the start-up costs or maybe Terry, on the start-up costs next fourth quarter coming up, how much of that would be at TRICO and maybe you could break out a few of-- I mean at Decatur! [ Laughter ]

Very funny, Aldo! [ Laughter ]

Probably $20 million or so that will be at -- at -- at Decatur. And a good chunk will be at Castrip, of course. Those are really the two big items.

Yep. So, Terry, how do you figure the cost at Castrip, I mean -- I mean can you give us like a little bit of a -- of how many people you have involved in that budget and -- and, you know, like other major cost components -- I mean you don't really have any melting expense. Right? And, I would think, all the material you don't sell you can run back through the furnaces.

That's not entirely true. Some of the material that we attempt to cast ends up as scrap material. We can run it back through, but there is a cost associated with that. You also have the cost associated with the lost available tons for the CSP process in the time period where we can use all the tons we can get out of Crawfordsville. So, there is cost associated with that, also.

So, you -- so you would deduct some margin then from the CSP mills and add it into the start-up costs?

No.

No.

No. I'm just pointing out that there is a cost to the Corporation by the lost opportunity cost of the CSP production at Crawfordesville.

Of course, we charge the cost for the hot metal that goes to it. They're not getting the hot metal for free, either. You asked how many people are there? We're adding a fourth crew right now. Today we have about 70 people. In November we'll be adding a 4th crew and we'll begin a 24-7 operation.

That will put the number of people at what level, John?

About 85.

85 people.

Okay, so that doesn't include any key people in the Crawfordsville melt shop, just starting with the Castrip, right?

That's correct.

Okay, thanks.

You're welcome, Aldo.

Next we have a question from Mark Parr of McDonald Investments.

Good afternoon, gentlemen.

Good afternoon, Mark.

I had a couple of questions, just to kind of follow on to the scrap question, what's the current market you're seeing for pig iron and how do you expect to unfold over the next couple of quarters?

John Ferriola will take a shot at answering that one. He's been intimately involved in pig iron.

I think, in fact, we will see a decrease and have seen, actually, a decrease with our last buy into the first quarter of about $5 to $7 per ton. We think that during the course of next year we will be stable or down slightly during the course of the year.

What kind of levels are you -- I mean what's -- what's kind of the delivered pricing that you're seeing?

Between 120 and 125 a ton.

Okay. Is that a -- is that a short ton or a long ton?

Long ton.

125 a long ton? Okay, thanks. I wondered if you could -- Dan, give us an update on high smelt, in terms of how that, you know, how that program is progressing?

Actually, I will turn to Mr. Joe Rutkowski who just came back from Australia during the quarter and has first-hand knowledge of that.

Yeah, we're in what I would call a deconstruction phase, Mark. We are -- actually the entire old vessel has been torn out of the facility. Some of the older infrastructure has been torn down and it will be starting on the construction actually after we get the permits.

The permits are, I would think, would be finalized within the next, oh, let's say before the end of the year. And so then we would start construction and we'll be in construction through all of next year.

Okay. Is there -- how much of a -- of an impact will that be on your P&L? Is there any P&L impact we should expect from that next year?

Probably none next year. So far our contributions to it have been minimal, I think have been $3 million.

All right. And just another question and if you could talk a little bit about what your expectations are regarding realized prices in fourth quarter relative to the third quarter?

With respect to our long products and joist and deck and really all of our construction products, they will be -- the realized pricing outbeams will be down and on everything else sideways. I will let John speak to what he thinks we will see on our flat-rolled products.

On the flat-rolled side, we think that hot band will be hot band will be sideways. Cold and gal, we see slight improvements in both of those products over the course of the quarter.

So, the implication there is that the price increase that you had scheduled for October was not successful, is that fair?

It's not -- that's to the accurate. I would say that on hot band we see it up from today's levels, maybe $10 a ton, but flat for the rest of the quarter. And on cold and gal, we would see it up $20 to $25.

Okay. All right. So...

Remember, Mark, you asked for price realizations, keep in mind, we still have contractional business through the fourth quarter at prices that have not gone up, so, on average, that's what John is referring to.

Okay. All right. Okay. I'm sorry.

I -- just -- just one kind of question that I had, with the significant increase in contract business that you are, you know that, you have obtained, I mean what is the -- what is your ability to, you know, hedge those prices against possible ships and scrap costs, you know, ships into raw material inputs. I mean, is there any way that you can - like I say You know, if say scrap went up $20 or $30 a ton, I mean, can you pass that through?

We have a scrap clause in all of our long-term contracts.

How does that work? Can you describe? Is there any general format that you can share with us to tell how that works?

It is based upon different indexes depending upon, you know, what the customer prefers or is more comfortable with. Usually there is a certain spread, which we call a no-blood zone, where it can go up or down by a certain amount without effecting the price. That's a general statement. Generally we use quarterly pricing adjustments, if there is a ratchet effect, it is done on a quarterly basis, so, we're not changing the price a monthly basis. Those are some general terms.

Okay. All right. Terrific. I -- I appreciate that. Again, thanks again for the update and congratulations on, you know, staying profitable in this environment.

Thank you, Mark.

Our next question comes from Jared Murdock of Prudential.

I was just wondering if, on those contract sales you could lay out a little bit which chief products are covered, are they mainly in hot-rolled, mainly cold-rolled or --

Mainly in cold-rolled and gal -- galvanized products. Although we have some in the automotive side on hot band.

You said those are slightly below what you're seeing in the other businesses, those prices are slightly below what you're seeing now in our other businesses?

Correct. As the contracts play out, remember, some of the one-year contracts were signed 10 months ago!

The contracts going forward; that what you're referring to?

Yeah, I'm talking about more the contracts going forward.

Oh. I'm sorry. Contracts going forward we would see significant -- significant increases over the present contracts.

And those are based scrap prices you saw in the third quarter?

They -- they'll have fourth quarter would be the quarter we'd be looking at and into the first quarter. However, again, that's just one component of the term, so it's not accurate to say that the price is based on scrap. Scrap is an element that we use to make sure--to provide some protection insurance on both sides for the customer and for us.

Great. Thank you.

Our next question comes from Barry Vogel of Barry Vogel & Associates.

Good afternoon, gentlemen.

Good afternoon, Barry.

I have a couple of quick questions for Terry. You'll just very astutely raised $350 million in long-term debt at an incredible rate for the shareholders and your employees. I must congratulate you on that.

Thank you.

You had -- you had $523 million in cash short-term investments on your balance sheet at the end of the quarter.

The question is how are you going to handle the $615 million purchase price for Birmingham in terms of utilization of the cash on your balance sheet? Could you give us a -- an indication on how you're going handle that?

I'm not -- I'm not quite sure I follow you, but obviously we're going pay cash for that acquisition.

Right. But you're going -- you've also added $350 million in cash approximately for the new debt.

Right. Well, remember of the 523 at the end of September, 180 -- roughly $186 million of that is Nucor-Yamato's.

You mean it's Yamato's or it's both of you?

Well, it is really both of ours, so, 51% roughly would be ours, but, of course, that's dependent on distributions.

Is all right, so $93 million is theoretically Yamato's. If we take the $533 and we deduct $93, you'd have about $410 million of your own cash before you did the $350 million deal.

Right, but they have $433.

We will call it $433, I wasn't trying to be specific. Thank you, Dan! $433, plus you have just raised $350.

Yes, we raised more cash than we need.

So, you have $885 million in cash after the deal.

Not -- not quite that much because we have other cash needs in the fourth quarter, too.

All right, but before the fourth quarter, in other words, you did this on October 1st and raised approximately $350, you had $433, excluding Yamato's share.

That puts us about 8--

No, $785.

$785. Very good!

So, you have $785 on October 1st in cash that you can use and you have $650 million, $15 to pay for Birmingham's assets.

Yep.

Is- the question is are you going to take the $615 million right out of that $685 to pay for Birmingham's assets and lower your cash position by that amount?

Yes.

Okay. Thanks. I have another question, on LIFO, what was your LIFO charges cumulatively, if any, through the nine months --

Through the nine months, $18,680,000.

Okay. You said you will have a charge of $10 million in the fourth quarter.

That's always a guess, but that's our guess today.

Okay. So, you will have to $29 million in LIFO charges for the year. Do you remember what it was last year?

Last year it was actually a credit of $11 million.

Okay, so it's a negative swing of $40 million, possibly.

Yeah, possibly.

Okay. And as far as capital expenditures next year, considering you've had two years in a row of -- where you've had capital expenditures less your depreciation and will be below $200 million this year, I know it's early, but what's your best guess at capital expenditures next year?

We do our capital budgeting in November, so, we're a little early, but it's going to be low again next year?

You think it will be around $200 million maybe?

More than that, but maybe not a great deal more than that.

Maybe $225.

That's for complete operations, separate of any acquisitions.

Yes, yes. And as far as P&A? What is your best guess for next year Terry?

Maybe 320.

Okay. And as far as acquisitions, Dan, --

No comment! [ Laughter ]

If you had to pick an area that you'd like to add assets looking at your overall company, where would be the first area from here given the fact that you've acquired the Decatur assets and given the fact you're going acquire Birmingham assets. Where would be the next logical place to acquire assets?

Something profitable.

We know that!

I can't speculate. It wouldn't be appropriate for me to speculate, Barry.

Great. You're doing a great job, guys, keep it up.

We're working hard at it.

Good. Thanks.

Our next question comes from Luca Oblero of Chessapeek Partners .

Actually. Thank you. Actually, part of it you just answered, but I wanted to follow up on the Birmingham acquisition. I gather there is an -- an adjustment to the purchase price based on their receivables and other I guess working capital-type issues. And -- such that given the negative winter seasonality, you might be better off delaying that purchase. Is that something you would consider doing?

No. It really doesn't come in. There is a -- there is a clause within the terms of the contract which are public, as to how you handle working capital. And they -- within our purchase agreement, I think we have 117 or 120 -- $122.5 million or something like that that we assigned to working capital value and then there is -- if they're above that up to a certain point, we will pay for that, but only to, I think, another $5 million over that. Anything else would come gratis.

And if they're below that, we will start deducting after we hit sort of a $5 million differential. So, anything that was below $117.5 would be less.

But quite frankly, that's not really an issue in the way you're looking at it. We'll pay for good inventory. I mean, you know, that's -- that's fine with us. I mean that's not really material.

Okay. And -- and what is the status of the anti-trust review?

It's ongoing. It's progressing as expected and we remain confident that it will go through successfully and the acquisition will go through as kuxtly set up.

Without divestitures or is a divestiture possible?

Without divestitures. We believe that the acquisition of Birmingham will go through without divestitures.

Thank you.

Our next question comes from Anthony Risutto of Bear Stearns.

Thank you very much, good afternoon, gentlemen. Just a question on the pre-operating and start-up costs.

For the full year, looks like you're targeting somewhere in the $90 to $95 million range. Can you give us an idea of what it could be for next year?

No. I guess that's the short answer. It is so difficult to tell because it is so much market conditions dependent and depends a lot on how Castrip ramps up, how Nucor Steel Decatur ramps up, what, if any other projects could get under way. Just too hard to hazard a guess this far out.

My understanding was you're basically trying to get a lot of the Nucor Decatur outside of the way this year, but that's not necessarily the case given that however market conditions may play out, then.

Actually, what we did is accelerated the start-up of Nucor Decatur, which moved more of the start-up cost from 2003 into 2002, third quarter in particular. So, you know and generally you could say there would be less than there would be in 2003. But how much less is not something that we're in a position to really give you a good number on yet.

Okay. Fair enough. Thanks, Terry.

Our next is a follow-up from Wayne Atwell of Morgan Stanley.

Thank you. When do you think you might get into black at Decatur, maybe second quarter of next year?

I would say the second half of next year.

Okay.

And depending upon market conditions and how quickly we start up. How well we ramp the facility up.

Right now things are going ahead of expectations. If that base continues, we should have a more favorable earlier profitability picture, but exactly when is going to be market-dependent.

Okay. And I asked you this question, I think, on the last call, but I was curious what you're doing there to fix it or modify it. I had understood that the -- the motors on the rolling mill were a bit under powered. Have you found that and what do you think you will do to put it into a Nucor-type style?

The issue actually wasn't with the -- with the motors. It was -- there was were some issues with the -- we had some concerns over the gearing in the drives and that might be what you're referring to and we have addressed that issue.

Successfully addressed that issue.

Successfully addressed that issue.

And the other thing, Wayne, that we talked about, which is really the big issue, which is the tunnel furnace. That was the big expenditure we anticipated making. It was grossly under designed. Certainly we had to double the heating capacity of that tunnel furnace and that is progressing very well. One furnace is already converted over, John?

One furnace is converted over. We will have the second one converted in about three weeks am and to make a comment on the condition of the slab, I was there last week I saw them run product, the heating looked excellent through that tunnel for us.

Fantastic. We were very impressed with the shape, which was the number one issue we had, or was the number one concern they had previously with the facility. We are very impressed with the shape coming out of the tunnel furnace and coming out of the mill.

Given the short amount of time that we had to -- to rebuild that entire plant, the team had done an excellent job, a remarkable start-up it was something like the second attempt two borrow all the way through the middle of the quarter, which is a phenomenal accomplishment.

I know that the old operators had an arcing problem, I think between the top of the furnace -- the top of the metal and top of the furnace. Are you having that or have you solved it?

We're confident we've solved that. We've addressed it two different ways. We've changed the design of the roof itself to put more of a dome into the roof, dome shape into the roof. We also, as you might recall, it was stated in the last call, we converted from a two electrode to a single D.C. electrode system.

Oh, okay, great. And lastly, Dan, you sort of commented on this, maybe if you could just sum up the strategy from going from a lot of -- from small contract business to greater contract business, that to add stability, to pricing and profit, to upgrade your product mix, upgrade your customer mix, can you sort of summarize your strategy?

You did a good job, Wayne! All of the above. Our strategy has always been, Wayne, to move up the value of quality chain in term of our product and our customers. And to do that, you to get more into the contract business.

And I would make the observation and maybe I'm right or wrong, but you're sort of penalizing short-term for long-term stability and maybe a longer-term higher profit for-

Absolutely, speaking for the sheet side, we recognize that, we always think long-term. We plan long-term. We're setting ourselves up for a long future.

Wayne, the issue there is, you could say tongue in cheek a little bit the tortoise and the hare approach to things.

We have deliberately and always in Nucor taken a long-term approach to doing business and certainly in the flat rolled area, we've had a unique opportunity in the last nine months to move strongly into that area of higher value-added business and customers that we haven't been working with in the past. Some unique opportunities opened up and we did sacrifice short-term earnings for long-term earnings.

Now, I assume that a lot of this would be with the auto industry. Are you able to do exposed auto body or not?

We do not do exposed auto body at this time. We are -- we are doing some -- we do supply steel to some other over the road vehicles on the skin of those vehicles, without getting too specific. I would just suggest you watch our advertising campaign for the next few months to see what I'm talking about.

Great.

But, Wayne, there are a lot of cold-rolled, fully-processed, galvanized, higher-value-added customers that are not tied to automotive skin. That's nothing new for the industry and it's -- Nucor has made some major strides in that direction in the last six to nine months.

And just to summerize, you said a year ago you might be at 35. You're now at 60 and your goal is to go to 65?

I would say 65. Again, that's kind of a fuzzy number, you know, I can't say it's going to be exactly 65, but somewhere in that neighborhood, 60% to 70% would be good -- again, depending upon the market and the opportunities that come forward in the market.

As we continue to move up the quality ladder and get more opportunities in appliance and HVAC, some tool applications and some automotive applications, we might have to change the number.

Great, thank you very much.

You're welcome, Wayne.

Our next question is a follow-up from Aldo Mazzaferro of Goldman Sacks.

I wondered if you could tell us if you're still comfortable with the capital costs of a Castrip machine at $110 million? And what that capital cost might be if you were to build a free-standing facility with a furnace?

We're very comfortable with that number. In fact, we think we could probably do better in terms of an exact copy on the second version. In terms of the complete free standing, it is, again, somewhat market-driven depending upon the equipment market at the time of the purchase, but we think probably in the neighborhood of $150 to $160, somewhere in that neighborhood.

Great. And then, as you do stainless steel, does that -- does the rolling of stainless in that machine, does is slow down the rolling at all?

Actually, no, one of the nice features about the -- the Castrip is that the thinner you get, the faster you go and more tons you can get out. So, stainless is typical light gauge in those kinds of applications and we found the stainless to frankly run better than the carbon product in that machine.

And that, quite frankly was not unexpected.

Yeah, so, I mean I might be going out on a limb here, but seems with the selling price of stainless and the spread between raw material costs that is inherent in that it makes more sense to go after stainless first, right?

Well, there's two ways to approach that. One is from an individual division perspective and the answer there could be yes. However, we won't -- we've set a goal of establishing the technology in all three products, stainless, electrical steels and in carbon steels. We're continuing to move along those lines, we're doing trials and experimentation constantly to improve our success in all three areas.

The key there, Aldo; that short-term, you know, you might say, yeah, just go after stainless and stop at that, but our plans and goal for Castrip is not one facility or two facilities. And so the development of the carbon steel route along with the other products like electrical steels is critical to the long-term successful strategy behind Castrip.

Great. So, Dan, do you have any -- you know, the stock is trading down about 10% here, I wondered if you could make comments about what you think Nucor could earn in what you define as a normal steel market, even if you just said in terms of what you think the company might earn in terms of profitability per ton or even if you wanted to give us a forecast for '03 of what you're thinking?

Listen, you've heard me say this before, so, I will repeat it again.

But when we had our record earnings year in 2000, we were firing on 4 out of 8 cylinders. Our earnings that year were $3.80 a share. We've since added a couple of more cylinders to our engine, so you might consider us a 10-cylinder engine instead of an 8-cylinder engine. And, so, you know, you can extrapolate that as easily as I can. But, you know, it takes all segments to be clicking at one time. The odds of that happening in any given year are not fantastic. Maybe three out of 10 years you -- you're going to have everything clicking together. But the earnings potential is significantly greater than the $3.80 a share that we saw in 2000.

Okay, Dan. Thanks.

Our next question comes from Andrew Schwartz of Grossman Capital. [PAUSE] You may begin, sir. [ BEEP ]. The next question comes from Dan Rolling of Merrill Lynch. Go ahead.

You dealt with Nucor-Yamato, if I understand this correctly and got my math right, the $94.86 million of cash at Nucor -Yamato that is effectively is yours, you can't really draw on it or spend it unless Nucor-Yamato actually distributes it, correct?

Technically correct. We can always borrow it, but in terms of unfettered access to it, it is dependent on us making distributions out of Nucor-Yamato.

But that is not a complicated process, by any means.

Have you ever distributed all the cash and if you -- if you distribute, must distribute equally to the partners or does it require you to do an arm's length borrowing agreement?

We distribute it equally, well pro rata to the partners, 51/49 just like the ownership.

So to get your $94.86, Nucor-Yamato would have to distribute 100% of its cash.

We've never done that, obviously. We leave them with operating cash.

You guys have plenty of cash, that's not the issue. I just wanted to understand the math here.

You got it.

Thank you.

Our next question comes from Doug Pooly.

Hi, again.

Hello, Doug.

Question on the Birmingham Steel transaction. Can you just -- and I missed a little bit of the beginning of the call, so if someone already asked, I apologize. Can you just tell me what the potential outcomes here are here in terms of closing the DOJ and which plants you might be able to keep and let you know about that?

The question was asked earlier and our position and our thoughts on that is that the deal will go through in its entirety and we look forward to close at the end of this year. Maybe it might go into January or so, but we believe it will close before the end of the year.

Okay, thanks, sorry for the repetitive question.

That's okay. No problem.

Our next question comes from Mark Rogensinger of Merrill Lynch.

Good afternoon, gentlemen. Thank you.

Good afternoon, Mark.

I just wanted to ask you in terms of the marketing surge you might have developed for Decatur. Would the Worthington facility right next door be in the picture? Do you see collaboration with those people going forward?

Certainly with the Worthington facility right next door it makes sense to develop them as a customer. Other than that, I'm not prepared to comment.

Thanks, Dan.

Our next question comes from Wayne Atwell of Morgan Stanley.

Thank you. Sorry it ask so many questions.

Hello, Wayne.

It's me again! Birmingham, what's the tone of the business? I assume since a lot of that is non-residential construction, it's been under some pressure?

I will let Mike Parrish who's intimately involved in that give you an answer to that.

Hi, Wayne. Yeah, the bar market right now is -- is pretty much depressed due to the construction business being off. So, that -- their business is -- is like most other in the bar business, it is -- it's hanging in there and hanging tough but it's a tough business.

So, would it be problem or price or both, the problem?

I don't think it's volume right now, as much as it is price.

And what might it have been down over the past 6, 12 months, 5%, 10%?

Yeah, pricing, over the last quarter has actually gone up a little bit, but also scrap has gone up, as well. See would say the net effect has been sideways.

But over the last 6, 12 months, it's deteriorated?

Yes, the metal spread has deteriorated.

Okay, great.Thank you.

Next question comes from Ladd Hall.

Hello, Lad. Hello?

Mister Hall, you may begin, sir. He may have stepped away from the phone.

We have a practical joker in the group!

There appears to be no further questions, sir.

With that, I'd like to say thank you to everybody for participating. Thank you to our employees, again to our Decatur team, congratulations, keep it going and our best years are in front of us. Thank you all very much.

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the program. You may now disconnect. Good day.