Nucor Corp (NUE) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Nucor Corporation second quarter earnings release 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. If anyone requires assistance during the conference, please star then zero on your touchtone phone. As a reminder, ladies and gentlemen, this conference call is being recorded.

I'd would now like to introduce the host for today's conference, Dan DiMicco, CEO of Nucor.

Good afternoon, and thank you for joining us today for Nucor's conference call. We will review results for the second quarter and then take your questions.

First, I would like to say hi and thank you to all the members of the Nucor team who are listening into the conference call on the Nucor website. In the face of anemic demand, depressed selling prices, and surging raw material costs, the 9800 men and women of Nucor worked hard, worked safely, productively, and, as always, worked together to keep our company profitable and moving ahead as a leader in the U.S. streel industry.

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

Nucor Corporation is the largest and most diversified steel producer in the United States, and Nucor is the United States' largest recycler with over 16 million tons expected to be recycled in 2003.

Our second quarter 2003 earnings of 11 cents per share are down sharply from a year ago quarterly earnings per share of 76 cents, or 54 cents after consideration of the 22 cent per share of nonrecurring income from a graphite electrodes anti-trust settlement in the second quarter of 2002.

Results for the just completed quarter are disappointing and are below the guidance we gave for second quarter earnings, which was to be similar to earnings guidance in the first quarter of this year of 20 to 25 cents per share. Nucor Corporation second quarter 2003 performance reflects higher than expected raw material costs, as well as higher than expected startup and equipment downtime costs.

On our first quarter 2003 conference call we estimated that second quarter scrap usage costs would range from flat, to up as much as $4 per ton, over the first quarter level. Instead, scrap usage cost increased $9 per ton, quarter-over-quarter. An increase of about $22 million over our forecast forecast. We expect scrap to increase by another 8 to $10 per ton in the third quarter, but we will work hard to keep that lowered with the help of our David Joseph partners.

Energy costs for the second quarter also exceeded our expectations. Finally, higher than expected startup costs at our new sheet mill in Decatur, Alabama, combined with an unanticipated equipment and power-related downtime at our Hertford County North Carolina plate mill, penalized our second quarter of 2003 performance. Together, the Decatur and Hertford difficulties reduced our second quarter earnings by an estimated 6 cents per share. Environmental reserves decreased slightly during the quarter, and the net earnings impact was a positive $260,000.

While these costs pressures and challenges are short-term in nature, we are moving aggressively to reduce their impact on our profitability in future quarters. Consistent with our actions in the first half of 2003, Nucor will continue to implement price increases when warranted by cost increases and supported by the marketplace.

As the largest North American buyer of scrap and pig iron we continue to explore opportunities that leverage our buying power and reduce our metallics cost. One promising project already underway is the joint venture with CVRD for the environmentally friendly production of pig iron in Brazil. We expect operations at Green Pig to commence before the close of 2004.

Another is our HIsmelt joint venture with Rio Tinto that is currently under construction and slated for startup in November 2004.

On the energy front we are currently examining potential natural gas purchasing cost deficiencies to supplement our ongoing use of forward purchase agreements.

Start up costs at our new sheet mill in Decatur, Alabama were higher than expected during the second quarter of 2003. Equipment problems reduced production capacity of the mill by 50% for most of the quarter, while also negatively impacting yield and reducing the range of products, both from a width and thickness standpoint that could be produced during May and June. Importantly, we have identified the fixes to these equipment problems, they are being implemented, and will not require significant outlays. John Ferriola will speak to this in more detail later in the call.

The bigger picture at Decatur remains the same; an attractive investment that will allow to us build profitable market share in the flat-rolled business and broaden our sheet product portfolio to include higher quality grades.

Pre-operating and startup costs of new facilities increased to over $60 million in the first half of 2003, from approximately 32 million in the year ago period. While our growth projects have placed a heavy burden on our short-term results, we believe our focus on building long-term earnings power will deliver attractive long-term returning on our shareholders' capital. This approach to managing and building our business over the years has placed Nucor in an unrivaled position of strength in the North America steel industry.

Disappointing results such as those posted in this quarter, serve only to intensify our already strong focus and resolve on getting the job done. We have worked our way through this past quarter, and it is important to note some significant payoffs realized from our growth stage over the same period.

You will recall that we completed earlier this year a virtually seamless integration of the four operating mills at Birmingham Steel that we acquired in December 2002. The $615 million purchase of these mills and other assets is the largest acquisition in our history. The four operating mills have a combined annual capacity of approximately 2 million tons, which raised our bar mill group's total annual capacity by more than 50% to 5.8 to 6 million tons.

I am pleased to report that our new teammates from Birmingham, Jackson, Kankakee, Seattle, and Florida generated a very significant operating profit for the second quarter of 2003, and contributed strongly to our overall profitability and earnings. As these results were achieved in a still very challenging bar products market, our excitement over this acquisition continues to build from already high levels. I made this same statement in our last conference call, so clearly the bar continues to be raised by our teams at these facilities. Mike Parrish will talk to this more in a moment.

Moreover, this success follows and builds upon the ongoing payoff being realized from our earlier purchase of the Auburn, New York bar mill in 2001, which also has been a very successful acquisition. These results have supported our disciplined approach to acquisitions. We have rigorously applied the key criteria of that discipline. One, don't overpay. Two, stick with the businesses we understand. And three, make sure there's a strong cultural compatibility with the acquired company.

Nucor's sheet mill group implemented last year strategic shift toward contract business and away from spot market business. This action reflects our ongoing work to push up the value chain with respect to both product and customer mix. Our objective is to raise long-term returns in our flat roll business, Nucor's single largest product group.

Nucor's quarter-over-quarter decline in average sheet sales price per ton of $7, or 2%, compares favorably against more dramatic declines reported over this period in both spot market pricing and in the sheet steel price realizations reported by some of our competitors. Most importantly, our sheet mills in South Carolina, Indiana, and Arkansas posted solid profitability in the face of the sheet market's overall soft conditions and turbulent raw material trends in the second quarter of 2003.

While we have made significant progress over the past 18 months, in implementing sheet steel strategy, we have more opportunity and attractive upside earnings leverage still ahead of us. John Ferriola will also talk of that later in the call.

Nucor's new facility in Crawfordsville, Indiana continues its work with the revolutionary Castrip Technology to directly cast strip steel. After starting operations a little more than a year ago the Castrip operation is running at a 24/7 operation. Most importantly, we continue to make progress in resolving technical problems that come up as our team explores what are uncharted waters. As we encounter problems we face them head on, analyze them, and then resolve them one by one.

Technical innovation remains a key competitive strength of Nucor. Our firm has both the financial resources and the mindset to require to adapt and continual to improve ourselves through the years. We currently have a very strong technical team at Castrip in Indiana.

Another key component of our strategy for building growth in Nucor's long-term earnings power is to take advantage of economic downturns to gain market share. Our second quarter 2003 volume numbers speak for themselves. Total steel shipments up 27% over a year ago, joist volume up 11%, and deck volume up 19%.

Nucor's volume growth has been realized in a nonresidential construction market that has continued to weaken. U.S. Department of Commerce data for May 2003 show that construction spending for industrial buildings declined 24% year-over-year, and construction spending for office buildings fell 15% year-over-year. That's on top of the previous year's decreases.

You have heard us say many times that our goal has never been to be the biggest, it is to be the most profitable. We do see a strong correlation between profitability and market share leadership in our core products. Market leadership is the critical underpinning to building long-term earnings power and earning attractive returns on our shareholders' capital. As always, our objective is to build profitable market share. Nucor's continued profitability through the current downturn provides strong evidence of our commitment to that goal.

Finally, it is worth reiterating that Nucor's strategic growth plan is being implemented at a time of both significant steel industry consolidation, and turmoil in U.S. manufacturing sectors. Consolidation and rationalization of this steel industry capacity will continue to take place. This will increase the probability of a healthier, more stable industry. One where efficient producers can earn at a minimum, their cost of capital.

However, consolidation alone will not do the job. There must be, and will be, significant rationalization as part of the consolidation process. Inefficient capacity must be allowed to die. In other words, we need to let free markets and fair competition determine the winners and the losers, and not government loan guarantees.

We gave our press release today, third quarter earnings guidance of between 15 to 20 cents per share, and in view of ongoing uncertainty in the scrap and energy markets, we are deliberating conservative in setting forth our expectations for the current quarter. However, there are far more positives that appear to be developing that could impact the current quarter. A change in marketplace psychology seems to be unfolding with respect to a more disciplined and rational approach to the market, as many steel producers continue to focus more on improving the returns on capital and less on volume.

In addition, we are seeing increased global demand which is being driven by China and other areas in Asia. Terry Lisenby will share with you in his report a number of price increases we have announced this past week. We believe there's currently sufficient pricing strength to allow us to recoup, at a minimum, any increase in raw material costs. And in some markets there are initial signs of an improving economy and demand.

While much work is still ahead of us, the Nucor team has made substantial progress implementing our strategic growth plan. This is why we are very optimistic about Nucor's prospects for the future. We know Nucor's best years are ahead of us.

At this time, Terry Lisenby will now review the results for the second quarter. Terry?

Thanks, Dan, Good afternoon.

Sales for the second quarter of 2003 were $1billion, 520 million, an increase of 27% over the second quarter 2002 level. First half 2003 sales of $3 billion, 32% higher than the year ago period, were up 3% over the first quarter.

Total steel shipments of 4,297,000 tons in the second quarter of 2003 were up 27% year-over-year. Total steel shipments of 8,643,000 tons established a six-month record while increasing 30% over the first half of 2002 level. Second quarter 2003 steel joist production of 128,000 tons was up 10% from last year's second quarter. First half 2003 steel joist production of 235,000 tons increased 12% over the first half 2002 amount. Our second quarter 2003 average sales price for steel and steel products, $357 per ton, increased $6 per ton, or 2% from the second quarter of 2002. An increased $15 per ton, or 4%, over the first quarter of this year.

The year-over-year gain was driven by increases of 8% in both sheet and bar pricing that more than offset a 12% decline in structural steel pricing. The quarter-over-quarter gain was largely due to an 11% advance in bar prices. However, the average usage cost of scrap and scrap substitutes for the second quarter of 2003 was $131 per ton, up $24 per ton, or 22% from the second quarter of 2002, and up $9 per ton, 7%, from the first quarter of this year.

A LIFO charge of 6.5 million for the second quarter 2003 compares against a year-ago quarterly charge of 5.7 million. First half 2003 LIFO charges of 12.9 million compare against charges of 11 million for the first half of 2002.

Second quarter 2003 earnings were also reduced by an accrual of 6.7 million, or 6 cents per share after tax and profit sharing, for compensation expense to be paid under new incentive compensation plans approved by stockholders at the May 2003 annual meeting. These plans cover Nucor's 43 general managers and officers. Approximately 40% of this amount was attributable to the first quarter 2003 compensation, however, GAAP does not permit accrual of these expenses prior to plan approval by shareholders.

Pre-operating and startup costs of new facilities increased to 33.5 million for the second quarter of 2003, from 8.9 million in the year-ago quarter, and from 26.7 million in this year's first quarter. These costs are primarily from the Decatur sheet mill and the Castrip facility at the Crawfordsville sheet mill. For 2002, the costs were largely attributable to the New York Vulcraft plant in Castrip.

For the third quarter we expect Pre-operating and startup costs to be 25 to 30 million. Reflecting these cost increases, our gross margin was 4.4% for the second quarter of 2003, compared to 10.7% for the second quarter of 2002.

Earnings before income taxes were $2 per ton for the second quarter 2003, down from $29 per ton for the second quarter of 2002, and from $6 per ton for the first quarter of 2003.

Capital expenditures were 94 million for the first six months in 2003. In addition, we spent roughly 35 million for the acquisition of the Kingman, Arizona bar mill. We plan to spend approximately 30 million for an equity capital contribution to the HIsmelt joint venture project. Excluding the Kingman acquisition, we project full year 2003 capital spending of less than 300 million.

Depreciation expense for the first half of 2003 was 183 million, and is expected to be approximately 370 million for the full year of 2003.

Cash and short-term investments totaled 182 million at the close of the second quarter of 2003, the same as at the end of this year's first quarter. Approximately 112 million of the July 5, 2003 cash and short-term investments position was held by our 51% owned joint venture, Nucor-Yamata Steel Company.

Effective with the dividend paid in the second quarter of 2003, Nucor's quarterly dividend rate was increased 5% to 20 cents per share. Nucor has increased it's dividend every year since we began paying cash dividends 30 years ago.

Total debt at the close of the second quarter of 2003 was 879 million, 26% of total capital.

Reviewing the numbers for the 13 weeks ended July 5, 2003, compared to the year ago period, for sheet steel, production was up 15%, shipments up 21%, net orders up 6%, backlog down 37%. For steel bars, production was up 59%, shipments up 64%, net orders up 73%, and backlog up 59%. For structural steel, production was down 3%, shipments down 2%, net orders down 18%, and backlog down 19%.

For steel plate, production was up 1%, shipments down 1%, net orders down 13%, and backlog down 9%. For steel joists, production was up 11%, quotes down 2%, net orders up 1%, and backlog up 2%. For steel deck, production was up 19%, puts down 8%, net orders down 10%, and backlog up 9%. For cold finished steel, production was down 2%, outside shipments down 5%, net orders down 20% and backlog down 9%.

Sheet steel average pricing increased by $25 per ton in the second quarter from the year-ago level, but declined by $7 per ton from the first quarter of this year. This week we announced sheet steel price increases across the entire product line. Hot-rolled up $20 per ton, cold-rolled up $10 per ton, and galvanized up $10 per ton. Price increases are effective September 1.

Bar selling prices increased by $24 per ton in the second quarter of 2003, from last year an increase of $32 per ton from the first quarter of this year. We have announced a $10 per ton price increase in rebar to be effective in early August. Structural steel average pricing decreased about $47 per ton in the second quarter from last year's second quarter, but increased by $9 per ton from the first quarter of this year. While we have been able to implement price increases this year, this market continues to be burdened by excess capacity and depressed nonresidential construction activity.

Plate prices for the second quarter of 2003 increased by $11 per ton over last year's second quarter, an increase by $4 per ton over the first quarter of this year. We added $10 per ton this week to the previously announced $10 per ton September 1 increase. We also announced this week a plate price increase of $10 per ton for October 6 shipments. The net result is up $20 per ton for September, and another $10 per ton for October shipments.

Steel joist average selling prices in the second quarter of 2003 were down $16 per ton year-over-year, and were down $2 per ton from the first quarter of this jeer. We believe we are gaining market share in the joist business during this downturn.

Thank you, Terry. Before we go on to John, I just would like to point one thing out. I know there are some folks out there that are interested in these things. The first quarter had 95 days of shipments, the second quarter had 91 days in it for shipments and productions. Just as a clarification.

Having said that, Mr. Ferriola, do you have a few things you'd like to add?

Thanks, Dan.

In late April we had an unexpected failure of our R2 reducing mill pinion stand gear. We were not operational for about one week and then proceeded to run with R2 out of service. This reduced our product range capability to less than 20% of our designed capability. In late May, one month later, we installed a newly manufactured soft gear for the R2 pinion stand. We have been operating with this configuration since that time. Currently, we are able to run about 60% of our product design capability.

We currently have on order a replacement reduction gear for R1 and the permanent pinion gear for R2. The cost of this gearing is less than $2 million. Additionally, there are some equipment enhancements that will further improve the reliability, performance, and capability of our facility. The cost of these enhancements are approximately $2 million. The replacement gears will be installed in mid September, and after brief break-in period, we expect Decatur to be at its full product capability by early October. The enhancements will be done in first quarter of 2004.

The gear failure negatively impacted our second quarter financial performance. This impact will be appreciably reduced in the third quarter as a result of product coordination between Decatur and our other sheet mills. This coordination has also enabled us to continue to meet our customer obligations. We had anticipated producing 1.5 million tons at Decatur in 2003. As a result of this failure, we now anticipate producing 1.2 million tons this year. Today we are running at an annualized rate of 1.1 million tons. By the end of this year, we will be running at an annualized rate of 1.7 million tons per year.

On a brighter note, our group continues to enjoy success with our strategy of aggressively cultivating automotive opportunities that match our strategic growth plans and enhance our position as a value-added steel producer. Today, we are selling on either a direct or indirect basis to most of the U.S. automotive producers. We continue to receive positive feedback regarding our product quality. Recently, we had some very positive feedback concerning a very challenging stamping application.

We continue to work towards developing a full range of advanced high strength steels. These steels are becoming increasingly prevalent in the automotive market as they offer a viable means of improving vehicle safety and fuel efficiency.

The addition of a vacuum de-gaser at our Berkeley division will enhance our ability to produce these steels. The construction of the vacuum de-gaser is on schedule and will be producing deep-drawing steels in the fourth quarter of this year.

The Nucor sheet mill group is demonstrating its commitment to the automotive sector through investment and state-of-the-art equipment and technologies. As a result, we are positioned to gain additional automotive business next year. This year, we will do over 325,000 tons in the automotive market. For next year, we have secured over 600,000 tons in automotive business, and we anticipate securing over 200,000 additional tons. The successful implementation of our automotive strategy coupled with our continued focus and success in securing higher valued contract business, will provide a strong base for our sheet mill operations.

Thanks, Dan.

John, just one point of clarification on the, when you said U.S. auto producers, you meant all producers in the United States, domestic and transplants?

That's correct.

Thank you.

Mike Parrish, would you like to talk about Birmingham a little bit?

Yeah. Thanks, Dan.

As Dan said earlier, the Birmingham acquisition, the integration of these new mills, continues to go extremely well. In the past quarter, numerous records have been set at most of these divisions. We've set quarterly, monthly, and shift records. And really, records in all the areas in production and produced tons and sales tons and in shipped tons.

Also, these operations are very efficient, overall, with a good cost structure, and they continue to improve on this.

Finally, we have seen a real positive attitude from the employees as they are making a strong and positive contribution to the bar mill group. So, all in all, they are doing very well. Really pleased. Thank you.

Thank you, Mike, appreciate it.

At this time, I'd like to turn this over to questions. I have one request, as I do every time, for the most part, we stick to it, but not always. Please, as we go around with all the people who have questions, please ask one question per person each time, and we'll come back around to get everybody's questions answered, but we want to give everybody a chance to get their shot at asking the first questions. Thank you very much.

Ladies and gentlemen, if you have a question at this time please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key .

Our first question comes from Mark Parr with McDonald Investments.

Hey, Dan. What is your assumption for sheet price realizations in the third quarter in that 15 to 20 cent guidance?

We're forecasting somewhere in the vicinity of 10 to $12 a ton at this point in time.

Okay. Thank you.

A lot will depend on how well supported this last price increase that we're putting into place, we announced that week, how well supported that is.

I think everybody shares that view. So good luck with that, I hope it works out.

Thank you.

Our next question comes from Michael Gambardella with J.P. Morgan.

Yes, good afternoon.

Hello, Michael.

Hi, Dan. I have to ask you, why didn't you preannounce the quarter, given that the results were so poor compared to your original guidance?

It's really pretty straightforward, Michael. When you're sitting down, we go through this on a quarterly basis, as does everybody, when you're at these kind of numbers it doesn't take a lot of things to change in order for you to fall in or out of guidance. The uncertainty surrounding this $2 or $3 a ton total swing, either selling price realization up by that amount, or scrap down by that amount, scrap usage, or a combination of the two, and you're hitting the guidance or above it.

So we felt very strongly that no guidance update was better than an incorrect guidance update. So we chose to wait until we had the numbers and we knew exactly what we were talking about before we made any indication, and that's what we're doing today.

So even, like after you got the second month in the quarter under your belt, you felt you still had that much leeway to make or miss the number in the third month of the quarter?

Absolutely, Michael. When you're dealing with 4.5 million tons of shipments, and you're looking at one-third of that falling into your final month, and it's a five-week month on top of that, and people close out things, shutdowns get done during the five-week month in June, you don't know exactly how the charges are going to come through, again, we're talking about a 2 to $3 swing in prices either way, or scrap either way, and you are hitting or exceeding that guidance. So yes, the answer's yes to your question.

And on the tax rate of only 11% in the quarter, why was that so low, and what are you looking for as you go out with your guidance in the third quarter, in terms of a tax rate?

We talked about it in the first quarter, some of the state tax credits are fixed amounts. They're not percentages. So as net earnings decreases they become much larger in terms of a percentage.

As far as guidance for the next quarter goes, what Terry just said about the fact that they're fixed, those numbers will stay fixed, as they have been, and a lot depends on where the actual operating earnings come in, as to how that will impact the tax rate.

Okay. I'll hold my other questions for later.

That was more than one, Michael, but that's not unusual.

Our next question comes from Charles Bradford from Bradford Research.

Good afternoon.

Good afternoon, Charles.

I'd like to talk a little bit about Castrip. When Dick Wextner (ph) was in town, he gave some numbers as far as production and sales. And he said sales had only been 10,000 tons through June. And when asked about the kind of customers, were any of those subsidiaries of Nucor, his suggestion was to ask you. That's what I'm doing now. Have most of the sales out of Castrip been to the decking plants or to anything connected with Nucor?

I'll let John Ferriola give you the details on that, but certainly, when you're working with a new revolutionary technology, you do work those things through your own internal divisions first, and -- but we've been doing a little bit of both. I'll let John talk to that.

In addition to sales to our Vulcraft divisions, we have also sold outside the company and to pipe and tube applications and culvert applications.

Is it mostly to the decking?

I wouldn't say it's mostly to the decking. I don't have the exact breakdown. But it might be 50/50.

Thank you.

Actually, here of late we have been supplying a lot to our Vulcraft divisions, and we're using the material in the building of our new melt shop in Jewett, Texas. So we have been focused on supplying material to them for that job.

But overall, you say, it's about a 50/50 split?

It's about 50/50.

Thank you, Chuck.

Our next question comes from Kent Newcomb from Bank of America.

Hey, Dan, at the beginning of your prepared comments, I think you made mention of your environmental reserve. I was wondering if you could repeat those comments?

Yes. $260,000 environmental reserve impacted our net earnings. To the positive.

Okay. So net impact was 260K?

260,000 after taxes impact on net earnings to the positive.

Okay, thank you.

Our next question comes from Brian Rayle from Midwest Research.

Hello, Brian.

Mr. Rayle, your line is open.

Good afternoon. The question with scrap prices here is the kind of reason behind the lower earnings. You commented that you expect the CVRD and HIsmelt to be up and running in late '04. How long after the implementation of those do you expect to start getting the substantial part of the benefits? Is it right away? Is it 12 months out, 18 months out?

It's certainly not immediately. I mean, we're talking about -- I'll let Joe Rutkowski speak to both of those points as to what kind of ramp-up we're talking about at those facilities with those dates.

On the green pig project, every technology there is known, there's no technological risk.

Okay.

We expect blast furnace -- mini blast furnaces, we'll probably bring up one before the other, the way we're talking right now,. So I would say we will get, in the full year of '05, we'll get probably close to 80% of what we hope to get out of capacity in that neighborhood, 75 to 80%. In HIsmelt it's a different deal because you're really commercializing something that was in the pilot stage, so I think it's premature at this point to try to figure out what we would get in, say, '05.

But we'll be getting -- first of all, we have an agreement to take 25%, our share of that production facility, and with some options, maybe, to take a little bit more than that. So it won't make a huge impact on our raw material right away.

What would the benefit be for the green pig project?

Which benefits?

Sort of the -- in driving down your raw material costs, or making them less volatile?

Well, number one, we've had some [INAUDIBLE] materials that what we think will be realistic cost numbers, or selling price numbers, and also, we'll certainly know the market very well in Brazil and the costs and things. So from a tonnage perspective, we'll have access to approximately 375,000 to 400,000 tons of pig that will be under our control.

Let me put it to you this way, Brian, the pricing today that you see out there for pig iron, and the pricing that we'll be getting the pig iron from the green pig project at, are -- the green pig project is significantly lower in terms of the agreement that we have on the takeoff pricing for the pig iron from that project, than what you see on the marketplace today. A lot will depend where the market price for pig iron is.

Right. Thank you.

And on the HIsmelt project, I didn't clarify in the text, but there will be pig iron produced off of that process. Is that right, Joe?

That's correct.

Now, whether we use the pig iron ourselves or off sell into the Asian market, is yet to be determined. It just depends on the dynamics of the pig iron marketplace.

Great. Thank you.

Our next question comes from John Tumazos from Prudential Financial.

Hello, John.

How you doing, Dan? On the 1.23 million ton sheet backlog in place as of June, some of that might be, I guess, gone and replaced by new orders, subsequently. But in terms of your current backlog, a portion of it will be contract steel at a different average price, and then there will be different traunches of it from before the $30 price hike to August 1, and inclusive of the $30 price hike to August 1, then inclusive of the September price hike you've just announced, which, I guess, none of it in place now would be.

Could you describe the average pricing basis of the sheet you have in backlog at the moment, or as of whatever time you can describe?

The question is, of the current backlog tonnage, do we have an average pricing number on that backlog?

Right. I realize it's a complex question.

It is. You know, the backlog is made up of about a dozen different grades of steel pricing structures, and I don't know that the exact mix of it. John, do we have any feel nor that?

I really don't. There are so many different variables that go into that, I'd have to sit down and really work through that.

Every order's different, too. We just don't attempt to track it, overall, by selling price per ton.

If I can ask you another question, John?

Sure.

I know that your employees are paid on the unit output of the work team, and it's unusual for Nucor to have a 300,000 ton production miss at one of its plants.

That's very true.

Did anybody end up in the melt furnace? What happened? On a personal level?

Well, we have made a change in the top position. At the current time, the individual has not left the company. We have other opportunities in front of him but we did make a change at the general manager position and also in the -- we are in the process of making a change in one of the department manager positions.

In terms of having acquired eight mills that someone else built, how can you possibly verify nuts and bolts, or if you will, pinion gears, at all of them? Is there a systematic maintenance program to try to verify equipment condition at the acquired mills?

The answer to that is all those things are in progress. As you take over a plant -- first off, the existing plants that were running, already have maintenance functions in place. They already very their, you know, all that information there in front of them.

The problem for us with Decatur was that that was not a running operation. We went in there, made our best assessment of what we saw, we were pretty darn close to -- in everything that we thought we'd have to do. This $2 million issue here was something that was unexpected. Maybe not in its entirety, but over the last month and 1/2 and going forward, a very systematic approach is being applied to the nuts and bolts and the maintenance program. That was one of the things that we were lacking over the last -- prior to that last month and a 1/2.

Thank you.

John has some further --

I was going to just going to add to that that we have done a detailed engineering study of all of the drive trains at the Decatur facility. We have a clear understanding of their condition, and we see no other major problems in any of the drive trains.

I'll make a comment, too, this is Mike Parrish, about the bar mill group. There's a lot of redundancy in the bar mill group as far as duplication of different types of stands throughout the different mills, even the ones that are acquired, have a lot of same types of equipment that the ones we have in our existing operations. So something like that is very unlikely to happen at the bar mill groups, because we have that redundancy, knock on wood.

Thanks, Mike. Next question?

Our next question comes from Frank Deni (ph) of H&H Capital (ph).

I've got a question, guys, about the incentive compensation thing?

Okay.

The --

Senior officers and general managers?

Yeah. The 6.7 million. Is that incremental to whatever people were earning last year, or is this in replace of something you all were earning last year?

It replaced the old plan. This was an all new plan.

Okay, so -- I think I understand what happened in the first quarter, but in the second quarter, which, whatever, the 60% of the 6.7 million, if you didn't have -- I mean, did something go away? So, you know, yeah, yeah, you spent about 4 million more, whatever that number works out to? On the new plan? And then, but did something go away under the old plan, or is that net? Or -- I'm trying to figure this out.

No, the old plan was actually terminated, it just no longer existed, it was zero.

Okay.

One thing to keep in mind, Frank, on this plan is that it's a three-year average plan on the long-term component of it, and so, we actually took 2003's at 2004's component of 2003's, and 2005's component of 2003 into this. Am I saying that right, folks? So it also takes some forward years back into the current period, which is the way it has to be done, according to the accounting rules.

Does that mean that in a feature period that there's nothing there? I don't really get it.

No, it just means that to get on the cycle, to get on a three-year cycle, you end up penalizing the first year.

Okay.

To get on the cycle, because you're accruing for two years and three years out.

This year will be the biggest, next year there will be a component of it as well. Now as far as what goes on in the future, depends on how well the incentives, the performance standards stack up to the plan. It could be zero. No bonus will be paid if there's not a profit made after consideration of profit sharing and the senior officer bonus.

I know this is more than one, but it's a follow-up, it's a true follow-up. So --

You're one up on Gambardella now.

That's okay, he's a good guy. Assuming you didn't work for nothing last year's second quarter, is there some number, you know, I got 4 million, incremental this year.

No, there was nothing in last year's second quarter.

I know, but you still earned -- I know there was nothing in there for this program, but you must have some --

There was nothing in there for the old program either, second quarter.

A year ago. What happened, Frank, is at the end of last year the board made a decision, as we indicated in our reporting, indicated that they had approved a discretionary bonus. So that didn't actually hit until the fourth quarter after it was approved by the board.

Okay.

Up until that point, it was was 0, 0, 0, 0.

Okay. Now you're doing it quarterly?

Yes.

All right. That was more than one, but it was all on the at the same topic.

Okay. Next question.

Our next question comes from Chadrick Christie (ph) from Maverick Capital.

Hello, Chadrick.

Hi, how's it going? Just a quick question. I mean, when I read like American Metal Market Daily, seems like scrap is off its highs, but yet you're predicting your scrap costs are going up. I mean, I know there's usually a one or two quarter lag between your scrap prices and when they actually flow through your P&L. Are you actually going to get a boost from the lower scrap prices for Q2? Are you taking that?

What we're saying, and we're actually projecting scrapping usage costs being up in Q3. Typically, in the July timeframe, we find a lot of industrial operations shut down. So the generation of prompt industrial scrap disappears or gets greatly reduced. On top of that, there was an influx of some orders from, increased orders from Turkey and China, so there was an uptick in scrap pricing for July, in the purchase side.

At this point in time, whether that maintains itself for August and September is somewhat of an unknown. So at this time, we're projecting an 8 to 10 overall increase over the quarter. That may change. It may go down, it may go up, but that's our best evaluation at the present time.

And I guess as a follow-up, I know we're only supposed to stick to one, since Mike set tone, so we're allowed to have one follow-up, right?

We show only five questions holding, so go ahead.

I guess, following up on John's question, maybe another way to look at it, or ask it rather, is if I'm not mistaken, the sensitivity of your earnings, every $10 move in average selling price for you guys is, basically, 1.50 in earnings.

I'm trying to figure out, here you are saying you're going to raise prices across the board on both flat and long, or at least attempt to, rather, and yet, it seems that your guidance for Q2 EPS wouldn't -- would imply that you're not going to be getting all the price increases that you're announcing.

There's two things. The first comment you made about the, you know, an announcement of a price increase and the actual acceptance of a price increase from the customers and the other -- and the competition in the marketplace, whether it be domestic or foreign, that's one thing, and that's an unknown on those increases, although we've gotten, you know, we've seen published reports of a lot of support for a number of those moves.

The other thing is, there's a timing issue on the actual price realization. The price -- the orders on the books are guaranteed for a certain period of time, and then it takes time for the new orders coming into the new prices to work themselves actually into our shipments, into our production and our shipments. So there's a lag from that standpoint, as well. That's always there, whether -- whenever prices are going up. Unfortunately, when prices go down, they don't -- there's not usually a lag, it's usually immediate.

Okay, got it. Thanks a lot.

You're welcome.

Our next question is from Aldo Mazzaferro from Goldman Sachs.

Hey. Good afternoon, Dan.

Hello, Aldo.

A point of clarification on the startup costs and the Decatur and Hertford averages. The 7.2 million, I assume, is not in the 33 million or so startup costs, right, that you just closed separately, is that true?

And the second question, the second part of that is, can you break down for us how those startup costs were divided between plant, and how they are generated? I mean, if I take a look at the labor head count at each of the facilities, I can't come up with more than 5or $7 million in the quarter, which would assume zero revenues and just expensing the labor. I'm wondering if you could help me understand a little bit about the size of the startup costs?

Well, the first part of the question is that about 6.2 of those, of the 7.2, is in the amount disclosed as pre-operating and startup, it's the amount of the outage at Decatur. And about a million was Hertford, which is not included in pre-operating and startup. Also, you have depreciation, which is a big number, which tends to drive these. So out of the 34 million, over 21 million of that was Decatur, a little bit less than 9 was at Castrip.

And how much of that was depreciation?

I don't know offhand.

A lot of it, you know, we use a 10-year, 11-year --

Average is probably about 12.

About 12-year depreciation schedule, so there's a significant amount of that that's depreciation related.

But I think --

-- up right now. Go ahead.

Didn't you pay 120 million for Decatur?

Yes, roughly, yes. And then we put some more into it during the startup phase early on with the tunnel furnace being reworked, and the electric furnaces have some work done to them. John, do you --

About 70 million.

About 70 million. So a total of 190 million. Which is what we -- we talked about all of that. We purchased it for 116 something, probably put another 60 or 70 million into startup.

But there's still another 15 million or so in there that's expensed that, I don't know, what is it, just operating losses on -- I mean, you must be able to recycle the raw materials you use even if you make scrap, right?

It's all of the losses. There's about, total in that, about 4 million of depreciation in the two for the quarter.

For the quarter.

It's either got to be material costs or labor costs.

It's everything. All the operating costs, all the raw material costs, all the labor costs, all the utility costs, everything.

So that would imply that you had a loss then, per ton there, about what, 75 to $100 a ton?

You're heading in the right direction there, yes, I don't know if that's the right number, but it's substantial. When you're running that plant at half the capacity for a full quarter, and then you have all the other expenditures associated with the --

Okay. Do you have a forecast for startup for '04?

Not '04, no.

'04 or third quarter? What are you asking?

Third quarter, I got.

Okay.

I'm just wondering about the 12 months out from here. What do you think your run rate should be on startup costs? You don't have a lot of new projects coming down the pike, right?

It's hard to forecast that far in advance. As we get closer to it we'll update it.

Okay. Thanks.

Okay, Aldo.

Our next question is from Leo Larkin from Standard and Poors.

Good afternoon. Do you have a preliminary estimate for cap ex for 2004, let's say if nothing new is added?

We really don't yet. We do that in a fall meeting that's coming up, so probably next conference call we'll have an update on it. But we don't know offhand of any real big projects right now, but expect it to come down quite a bit.

Without the new projects could it be in the area of 250 million?

Could be less.

Yeah. It could be less.

All right. Thank you.

This year we're forecasting, what is it, under 300 million.

Under 300 million.

And we have a major -- several major projects at our bar mills we've done this year. Those will all be gone in 2004.

So it could be between 200 million and 250 million, assuming nothing new?

You're asking me to take a guess. I think the best answer we can give you right now is that it will probably be significantly lower than this year. But again, we don't do our, as Terry said, our capital expenditure evaluation until November.

All right. Thank you.

You're welcome.

Our next question comes from Daniel Roling with Merrill Lynch.

Thank you.

Hi, Dan.

Hi, Dan. Good name, by the way.

My mother thought so.

Could you elaborate on your comment earlier about natural gas, and what you're considering doing? I mean, it seemed a bit cryptic, and I was almost wondering if you were thinking of buying a natural gas well itself?

We actually, just, we invested in a big piece of land in Saudi Arabia. Only kidding, Dan. Only kidding.

Okay.

No, we already buy forward, and there are some other instruments that we're evaluating, ways to minimize our exposure.

And Jim, do you have anything you want to add? Jim Friosh (ph) is working on that.

We're also looking at the way we structure our physical side buys, the contracts and agreements we have in place. We think there are some opportunities to do a better job in managing those than what we've done in the past.

Okay. And a follow-up related, have you had much interruption to your electric supply at the various plants? And if so, have the -- has it run its course to where they've taken as many days as they can and now they have to provide you, so we should not look for any more interruptions?

It varies mill by mill. I'll let John Ferriola and Joe Rutkowski and Mike Parrish talk to individual situations they're aware of.

In the sheet group, the division hardest hit this year was Indiana, our Crawfordsville facility. And we have seen quite a bit of interruption, particularly the last two months.

Have they exhausted the interruptible level of hours or is it a rolling thing?

It's a rolling thing. It recycles, I think August 1, so, it's about to come up again.

The Hertford County plate mill we've had a number of interruptions that, for the springtime, you wouldn't have expected. And certainly we have not exhausted all those. You expect more in the summertime. But the power company had taken some nukes out for repair. That's normally what happens. Therefore, we're not able to meet demands on their side. We bought through some of those interruptions, or some of those curtailments, but we couldn't buy through all of them. So we did have times when we were interrupted.

We also had a very strange thing at Hertford, which is really the main impact from Hertford on the earnings, and that was a power outage, totally unannounced, which caused us quite bit of damage on the Castrip trying to deal with a solid slab inside the machine. So that's really what the impact was in the second quarter.

That was a power outage, Joe, throughout the whole area, not just at the plant?

I can't answer that specifically, I just know that it's extremely unusual for us to have that happen. They had us down for eight hours, so we had no way to come back up and get the slab out.

Okay. Mike, do you have any bar mills?

Nothing real serious, but I do know that in Nebraska they've had some issues just recently there with some outages that have been penalizing them in the melt shop. It comes and goes in different areas.

Thank you gentlemen.

Next question comes from Chris Olin from Long Bow Research.

Good afternoon, guys.

Good afternoon, Chris.

Question on Vulcraft. Can you give me a feeling for what you're seeing on both the demand side, as well as the supply side, for the second half of the year? Are both these businesses profitable right now?

And finally, any reason to believe the fourth quarter earnings can get materially better for the third quarter?

On Vulcraft or overall, the last part of your question?

Both.

Chris, first of all, the business does seem to be firming up, the joist business, we produced considerably more this year. We quoted and sold more this year. Our backlog is up somewhat, and we've seen the price move up in the last quarter rather nicely. But it is a very, very difficult environment. As you probably know, CanAm declared the other day, they're going to sell their five U.S. and their two Mexican ventures.

The deck business is not quite as difficult as the joist business, but it's, from a historical point, it's bad. And as you know, we don't reveal whether we made or lost money in given groups or in given plants.

As far as overall for Nucor in the fourth quarter, we don't project out that far, haven't and won't.

Thanks.

Your next question come from Thad Salomon with Nucor.

Hello Thad Salomon.

Hello, I don't have a question, Dan.

Well, thanks for dialing in. Any other questions?

Next question come from Anthony Rizzuto with Bear Stearns.

Hi. Good afternoon, gentlemen.

Good afternoon, Anthony.

I have a question to follow up on natural gas, can you give us an idea of what average gas cost was in the quarter? And what --

I think so, yes.

And what you guys are building in as far as your assumptions to get to the 15 to 20 for the third quarter. We've seen a downturn, I was wondering if you guys are going to feel that?

The second quarter gas cost was $5.63 at Deck Star (ph), and the divisions at June had forward bought about 50% through the winter strip, and I think that since June they've added more forward buys, but I don't know their exact pricing levels, so our forecast heads are total projected profits, but we don't know specifically what they're forecasting for gas. But I would agree with you, the gas prices are dropping, and we should see lower gas costs in the third quarter.

And I would assume consumption guidance was not meaningfully different than what it was in the first quarter, given where the market was?

No, it's running about 7.5 million decatherms a quarter. It was 7.5 the first quarter, 7.6 the second.

Follow-up on some of the market, Dan, you kind of alluded to, you kind of gave a cryptic outlook, and some of you guys have given a more cryptic outlook about the different markets. But, Dan you also alluded to some bright spots and talked about a little bit better activity levels you see in joists, but still very difficult.

I wonder if you can expand a little bit as to, you know, are you seeing any other areas within non-res construction, or any other markets that you guys are seeing better on the margin, and that you you think we may be surprised and, maybe, expectations are too watched out at this point, for the back half of the year?

On the demand side of the equation, which is determined by, basically, the level of economic activity in this country, we're not seeing anything significantly change for the better or for the worse. We have, like Ham said, we have seen an uptick in our business on the joist side, which many times is a precursor of an upturn for some of our other business segments, but it's still in the early stages of it ,and as far as construction goes, we haven't seen the June numbers yet, the last ones we have are for May. As we said they're showing down, year-over-year down. This is like the third year in a row.

So from at that standpoint, no, the optimism that I expressed had potentially -- the better news going forward has more to do with what we see out there in the marketplace and the ability to be able to implement price increases and recoup the costs, and then some. And we think that that psychology is building, going forward, as opposed to shrinking. But those are one of those things that we'll be able to report on positively, hopefully, on our next conference call.

All right, Dan. So in other words, because of the producer restraint, a little bit better discipline in the markets, maybe some of your competitors are dropping out of the market, you're picking up some market share gains, and just the ability to be able to be able to, certainly, cover the higher scrap and energy to that standpoint, those are the major factors driving some of --

Yeah, and I would add to that, you know, the 201 is still having a positive impact, although not as big as we originally hoped for when we went into it, but more than that now, you see steel prices globally are increasing. In the United States, our pricing is still, on average, lower than the rest of the world. And China is beginning to pick up demand, and do it in a way, right now, that looks like it's not a bubble, just getting back to normal in terms of having gotten through the bubble stage that we had a couple months ago. And that's allowing steel pricing to increase.

Raw material prices have been going up globally, not just here in the states, iron ore prices, scrap prices. Historical, as those things go up, it's because demand's going up, and pricing has a tendency to follow and follow, and then some. And I think we're seeing some benefits of what's going on globally here in our market. We're seeing significantly less imports of rebar and a few other products, and that's helping us to do a better job of holding on to price increases, as well.

Thanks very much, Dan, I appreciate it.

You're welcome.

I'm showing no further questions at this time.

Thank you very much, and I have one final thing to say in closing, if I could.

I would like to, again, thank our employees for their commitment to Nucor's continued success. These are tough times, and we are making of most of them. Let's work safe, produce a quality product, be aggressive on cost and improvements in our productivity. And most of all, let's take care of our customers. Thank you and have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program, you may now disconnect.