Nucor Corp (NUE) 2005 Q2 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the Nucor Corporation second quarter of 2005 earnings release conference call. As a reminder, today's call is being recorded. Later, we will conduct a question-and-answer session and instructions will come at that time.

Certain statements made in this conference call are forward-looking statement that involve risks and uncertainties. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy. Some of the important factors that may cause actual results to differ from our predictions are listed in Nucor's SEC files. The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligation to update them.

For opening remarks and introductions, I would like to turn the call over to Mr. Dan DiMicco, Vice President, Chairman, and Chief Executive Officer of Nucor Corporation. Please go ahead.

Thank you. Good afternoon and thank you for joining us for Nucor's conference call. We will first briefly review our results for the second quarter of 2005; second, provide an update on our progress implementing Nucor's strategic plan for growing long-term shareholder value; and third, take your questions. Terry Lisenby, Nucor's CFO, and our other EVPs, John Ferriola, Ham Lott, Mike Parrish, and Joe Rutkowski are with me this afternoon and will be available to answer questions.

First and most importantly, I would like to say hello and thank you to all the members of the Nucor team who are listening in to the conference call on the Nucor website. I also would like to extend a very warm welcome to the newest addition to our Nucor family, our team at Nucor Steel Marion. Nucor's employees, the right people, are our firm's most valuable assets. They will ensure our future success. The more than 11,000 men and women of Nucor are working hard and, as always, working together to take care of our customers. The Nucor team is moving forward to our goal of being the safest, highest quality, lowest cost, most productive, and most profitable steel producer in the world.

Our second quarter of 2005 earnings of $2.03 compare against year-ago quarterly earnings of $1.58 per share. These results represent record second quarter earnings, breaking the record established in last year's second quarter. Also at a record level is first half of 2005 earnings of $4.23 compared with prior-year period earnings of $2.30. Our second quarter earnings are consistent with our update issued on June 20th. We reported our expectation that the June quarter earnings would be near the lower end of the $1.95 to $2.15 range we gave in April and would include a significantly higher than originally forecast LIFO inventory credit.

In reviewing our earnings report it is worthwhile to comment on the impact of four items: first, LIFO inventory accounting; second, energy costs; third, purchased accounting inventory adjustments related to our acquisition in June of Nucor Steel Marion; and fourth, the ongoing critical importance of Nucor's product line diversification. For the just completed quarter, Nucor recorded a LIFO inventory credit of $69.9 million. This represented an increase from our first quarter of 2005 LIFO inventory credit of $26.1 million, and for the year-ago second quarter we incurred a LIFO inventory charge of $67.1 million.

The objective of LIFO inventory accounting is is to match the most recently incurred costs with current revenues. Generally, in times of decreasing costs, such as experienced in the first half of 2005, Nucor will record a LIFO credit. And in times of increasing costs, such as experienced throughout 2004 and 2003, we will record a LIFO charge. In fact, we recorded full-year LIFO charges of nearly $376 million for 2004 and nearly $115 million for 2003. And reflecting those LIFO charges over this period, Nucor's LIFO inventory reserve increased from less than $43 million at year end 2002 to more than $533 million at year-end 2004. At the close of second quarter of 2005, the LIFO inventory reserve was $437 million.

Rising energy costs also had a significant impact on our results compared to the prior-year periods. Our total electricity and natural gas costs were up about $5 per ton for the second quarter of 2005 and up about $4 per ton for the first six months of this year over 2004. The biggest factors driving these costs up are higher natural gas prices and lower production levels at our steel mills.

On June 3rd we completed the previously announced acquisition of a bar mill located in Marion, Ohio. As we recorded inventory acquired from Marion at market price under purchase accounting, we recognized $9.8 million less in margins in the second quarter 2005 than if inventory had been valued at cost. We will also recognize approximately $4.9 million less in margins in the third quarter 2005 as the remainder of the purchased inventory is sold.

Nucor's second quarter and first half of 2005's earnings performance again proved the value of our position as the most diversified steel producer in North America. Our product line diversity is important in that Nucor's short-term performance is not tied to any one market. Much of the steel industry, press, and analytical commentary over the first half of this year focused on the weakness in flat-rolled market spot pricing. By contrast, our record second quarter and year-to-date results benefited from Nucor's diversified product portfolio.

A look at the composition of our first half of 2005 sales tons is important; 40% was sheet, 29% bars, 13% beams, 11% plate, and 7% downstream steel products, that is the total of joists, deck, cold-finished bars, building systems, and fasteners. And comparing product mixes for the second quarter of 2005 versus the first quarter of 2005, sheet dropped to 39% from 41%; plate dropped to 10% from 12%; and bars increased to 30% from 27%. The performance of Nucor's bar mill group was particularly impressive, setting earnings records in both the second quarter and the first half of 2005.

Having examined these key details of our performance over the just completed quarter, let us now step back and also review Nucor's performance since the current steel market cyclical upturn began in 2004. Over the past year and a half, Nucor's greatly expanded platform for generating earnings has posted cumulative net income of approximately $1.8 billion dollars, or an average of about $300 million per quarter. Prior to last year, our record annual earnings performance was net income of $311 million recorded in the year 2000. And over this same six-quarter period, Nucor has generated cumulative cash provided by operating activities of approximately $2 billion.

It is worth noting that our first half of 2005 cash flow from operating activities of $949 million nearly equaled full-year 2004's cash flow from operations of just over $1 billion. Through 2004 and 2005's first half, Nucor's strong earnings and cash flow performance has been driven by successful implementation of our strategic plan. The objective of our long-term approach to building our business and raising our returns on shareholders' valuable capital is to generate higher highs and higher lows in profitability through economic and steel market cycles.

I will remind that you that the keys to executing the strategy have been and remain: first, Nucor will optimize our existing operations; second, Nucor will pursue strategic acquisitions; third, Nucor will continue green field growth via the commercialization of new technologies; and fourth, Nucor will grow globally through joint ventures. These encouraging results are just the initial payoff from our strategic plan. As we remind ourselves on a regular basis, the Nucor team's journey is that of climb ago mountain with no peak. We are moving ahead with our disciplined execution of our growth plan.

I will now highlight progress our team achieved during the second quarter of 2005 on several important initiatives focused on further building long-term earnings power and raising return on shareholders capital. Nucor's acquisition in June of substantially all the assets of Marion Steel Company enhances our leadership position in the bar business, which has been a major part of Nucor's success in the steel business for more than three decades. Nucor Steel Marion has annual capacity of about 400,000 tons and has a prime location in close proximity to 60% of the steel consumption in the United States.

Principal products of our newest member of the Nucor bar mill group are angles, flats, rebar, rounds, and sign posts. The purchase price was approximately $109 million, which included about $28 million of working capital. With the addition of Nucor Steel Marion our nationwide network of ten bar mills has total annual capacity of nearly 7 million tons. It is worth noting that six of our bar mills have been acquired since March of 2001.

Similar to our experience with Auburn Steel and the Birmingham Steel mill acquisitions, we are again excited about what we see at Marion: a good combination of talented people and solid assets, which will only get better. Already proving my point, our teammates at Nucor Steel Marion set a new monthly production record in June, and work is is underway to integrate Marion into the Nucor bar mill group consistent with our objective of enhancing the level, reliability, and quality of service to our combined customers.

Our growth strategy also calls for building market leadership positions in attractive downstream value-added businesses. Nucor's downstream products have consistently generated very attractive returns on assets through the economic cycle. In May, our rebar fabrication joint venture with Ambassador Steel Corporation completed its first acquisition, that of Lulich Steel. Lulich Steel is a rebar fabricator serving the market of Louisiana, Mississippi, and the Florida panhandle.

As you may recall, we formed our joint venture with Ambassador Steel earlier in 2005 to build a rebar fabrication business in the Central and Southern regions of the United States. Nufab Rebar LLC will grow through both the acquisition of existing assets and greenfield projects. Ambassador Steel is the nation's largest independent rebar fabricator. Nucor is the largest producer of rebar in the United States. Our partnership with Ambassador complements the work of our other rebar fabrication joint venture established in 2004 with Harris Steel Group in the Western and Northern regions of the United States.

We continue to be extremely pleased with the performance of our Harris steel rebar fabrication joint venture, strong results that continue to exceed expectations. Our strategic plans also calls for Nucor to develop attractive supplies of high quality scrap substitutes. We are implementing a raw material strategy to control about one-third of our iron use consumption, or between six to seven million tons per year of high quality scrap substitute at our current consumption rate. The strategy is driven by Nucor's ongoing expansion of our sheet steel mills product portfolio into higher quality grades.

Quite simply, limitations in the supply of high quality, industrial grades of scrap, highlighted by the ongoing volatility in scrap markets, demand that Nucor successfully implement our raw material strategy. The strategy will allow us to optimize growth opportunities and returns realized from our sheet mill group. I am pleased to report we made good progress in the second quarter 2005 in implementing three raw materials projects that should provide Nucor control over a minimum of more than 2.5 million metric tons per year of high quality scrap substitutes.

Our [High Smelt] joint venture with [Rio Tinto], Mitsubishi, and [Shogun] completed construction earlier this year of a facility in Western Australia that converts iron ore finds and coal finds to liquid metal. The High Smelt process is both a blast furnace replacement technology and a hot metal source for [electric R] furnaces. Initial annual capacity will be 800,000 tons, which is expandable to over 1.5 million metric tons at a very attractive capital cost per ton of incremental capacity.

High Smelt has begun the start-up of operations and has produced its first pig iron. While they are still in the early stages of start-up, we are very encouraged at High Smelt's first sustainable run of pig iron production yielded output with carbon content above 4%. Our talented team at High Smelt remains focused on resolving the challenges inherent to commercializing new technology. They are well on their way.

Our [inaudible] joint venture with [CVRD] is an environmentally friendly pig iron project using cultivated eucalyptus trees as the charcoal source. The first module we utilized two conventional mini blast furnaces to produce 380,000 metric tons of pig iron annually. Mechanical and electrical construction is nearing completion, and our team at [inaudible] will shortly begin to check our phase of the project. We expect start-up of the furnaces to begin later this quarter. With our new iron project we are relocating to Trinidad from Louisiana, a direct reduced iron, or DRI plant that we acquired last year.

The Trinidad site will benefit from a very cost competitive and long-term supply of natural gas, as well as favorable logistics for receiving iron ore and shipping DRI to our sheet mills in the United States. Approximately 70-plus percent of the equipment from the DRI plant in Louisiana has been transported to Trinidad, and our team is well under way with construction at the Trinidad location. We expect DRI to begin operations in the second half 2006 with annual capacity of 1.8 million metric tons at DRI.

Our growth strategy recognizes that technical innovation must remain a major strength of Nucor. In 2004 our team [castor] in Crawfordsville, Indiana, successfully commercialized revolutionary new technology to directly cast sheet steel into final shape and thickness. In the first half of 2005, our team at Crawfordsville developed additional grades of carbon steel that could be produced applying the castor technology. At the same time, product quality and customer acceptance of the castor products continued to improve.

Nucor is pressing ahead with our other initiatives to capitalize on this breakthrough technology. Our team has narrowed a search for a location for Nucor's second castor production facility in the United States to two sites in the South-central region of the country, and we continue to expect to establish before the end 2005 at least one overseas joint venture partnership utilizing the castor technology. As you can see, the Nucor team's strong focus remains fixed on continuing to build sustainable earnings power and returns that reward our shareholders. Knowing that our team has the right people and a sound strategic plan, Nucor's best years are still ahead of us.

At this time, Terry Lisenby will provide additional information on our just completed quarter and our financial position. Terry?

thanks, Dan. Good afternoon. Sales for the second quarter of 2005 were $3 billion 145 million, up 14% from the year-ago quarter, but down 5% from the first quarter of this year. The first half 2005 sales of $6 billion 468 million were 28% higher than the prior-year period. Total steel shipments of 5,103,000 tons in the second quarter 2005 increased 4% from the year-ago quarter.

Excluding the tons sold from our Alabama plate mill acquired in July 2004 and just acquired Nucor Steel Marion, total shipments decreased about 1% from the year-earlier level. First half of 2005 total steel shipments of 10,146,000 tons increased 1% over the first half 2004 level, and again, excluding the tons sold from our Alabama plate mill and our Ohio bar mill, total shipments declined about 4% from the year-ago period.

Investors are appropriately focused on the response by steel producers to this year's sharp decline in sheet market spot pricing. For the second quarter 2005, production at Nucor's sheet mill group declined by 9% from first quarter of 2005 output. Nucor's goal is to generate a reasonable profit per ton of steel sold and an attractive return on capital. Second quarter 2005 steel joists production of 139,000 tons was up 2% over last year's second quarter.

First half 2005 steel joist production of 262,000 tons increased 4% from the first half of 2004. Steel deck sales of 101,000 tons gained 7% over the year-ago quarter, and first half 2005 steel deck sales of 181,000 tons advanced 8% year-over-year. Nucor is well-positioned to benefit at both our downstream businesses and our steel mills from the trend developing for 2005 to be the first up year in five years for nonresidential construction markets.

Second quarter 2005 cold finished bar sales of 87,000 tons were up 23% over the prior year quarter, and first half 2005 cold-finished bar volume of 176,000 tons advanced 21% year-over-year. Our sales growth in cold-finished steel reflects our acquisition of Nucor Cold Finish Wisconsin in February of this year. With our expanded network of four plants, Nucor is is now the largest U.S. producer of cold-finished bars, an attractive, value-added business.

Our second quarter of 2005 average composite sales price for steel and steel products of $621 per ton was up $46 per ton from the year-ago level, but was down $42 per ton from first quarter of 2005. The quarter-over-quarter average selling price decline was driven by lower scrap market pricing and the ensuing impact on our steel mills' raw materials surcharges. Comparing Nucor's average raw material surcharges for this year's second quarter with this year's first quarter, the sheet surcharge dropped by more than $70 per ton; the bar product surcharge dropped by more than $40 per ton; the beam surcharge dropped by nearly $40 per ton; and the plate surcharge dropped by nearly $30 per ton.

Looking at the quarter-over-quarter changes in realized sales prices by product, sheet decreased by $66 per ton; bars decreased by $15 per ton; beams decrease by $31 per ton; plate decreased by $55 per ton; joists decreased by $18 per ton; deck decreased by $48 per ton; and cold-fired bars increased by $55 per ton. These numbers reinforce the point made by Dan and his comments. Nucor's diversified product mix has allowed to us benefit from the relatively more stable pricing of long products and fabricated product.

Our average usage cost of scrap and scrap substitutes for the second quarter of 2005 was $246 per ton, down $26 per ton from the first quarter 2005 and down $32 per ton from the most recent peak level reached in the fourth quarter of 2004. From a peak level reached in November last year, our purchased monthly scrap cost has declined by $94 per ton through June of this year. Our spread between the average steel mill selling price and the usage costs of metallics was $333 per ton for the second quarter 2005. Metal margin spread declined by $24 per ton from the first quarter of this year. In the short-term as scrap prices fall, decreases in our surcharges and selling prices move ahead of the usage of lower cost scrap.

Second quarter of 2005 earnings before income taxes of $104 per ton declined from the first quarter's level of $115 per ton. Nucor's effective tax rate was 35.4% for the second quarter and 35.5% for this year's first half. Our cash provided by operating activities for the first half of 2005 was $949 million, up sharply from the $372 million of operating cash flow for the prior-year period Cash and short-term investments totaled over $1 billion at the close of the second quarter of 2005.

For the first half of 2005, capital expenditures were $147 million, and depreciation expense was $185 million. For the full year of 2005, we project capital spending of approximately $415 million and depreciation expense of approximately $400 million. The 2005 capital budget includes expenditures of more than $150 million for greenfield projects primarily for the new iron plan. At the close of the second quarter of 2005, our debt-to-capital ratio was 19%. We view Nucor's strong balance sheet as an important, competitive advantage in a consolidating industry.

On our last conference call in April we announced our intention to reactivate our stock repurchase program. During the second quarter of 2005, Nucor repurchased approximately 4 million shares of its common stock at a cost of approximately $206 million, or an average cost of $51.46 per share. Approximately 4.5 million shares remained authorized for repurchase under the current program. Nucor's ongoing focus on the careful allocation of our shareholders valuable capital is demonstrated by the stock buyback program, this year's supplemental cash dividend, and our disciplined approach to acquisition.

Our news release this morning gave third quarter 2005 earnings guidance of range of $1.60 to $1.80 per diluted share. The decline from second quarter of 2005 and the year-ago quarter earnings is largely due to the weakness experienced in sheet market conditions through the first half of 2005. However, we are currently seeing improvements in the sheet market and expect this recently developing trend to continue. Additionally, we are encouraged by increased nonresidential construction activity.

2005 is on track for being another year of strong profitability for Nucor, with very solid prospects for being a second consecutive record earnings year. We believe Nucor is well positioned to continue delivering attractive returns to our shareholders as we move through the economic and steel market cycles, and we firmly believe our best years are still ahead of us.

Thank you, Terry. At this time I'd like to ask Mike Parrish to talk a little bit about our bar business. Mike?

Thanks, Dan, and good afternoon. First, let's look at the individual bar markets. Rebar demand and transaction prices remain solid throughout the second quarter. Imports for rebar increased over the second quarter compared to the first quarter, but they were not out of line when compared to normal seasonal trends. Year-to-date imports for rebar in 2005 are 15% less than they were in 2004. We continue to see the market for rebar as positive and look forward to continued success in the second half of the year.

Merchant bar demand continues to remain stable. As we said last quarter, we still feel that the market for merchant bars and annuals will pick up in the second half of the year with increasing demand from an improving nonresidential construction market. SBQ and cold finished products were not quite as strong as they were in the first quarter. In general, there has been a period of inventory reduction throughout the supply chain,and the impact has been much heavier on the service center related items and rod markets.

Automotive-related customers at this point remain steady with business; however, some extended shut downs and the strength of continued automotive incentives pose some potential concerns. We feel that SBQ pricing is stable and our contract strategy has been beneficial.

Looking at the operations, as Dan mentioned earlier, we are very proud of the production records and operating performance at our newest division, Nucor Steel Marion. Congratulations and thanks to the entire Marion team for setting these new records and making a successful transition into the Nucor bar group. We know from experience in our other acquisitions there will be more and more records broken in the months and years ahead in Marion, Ohio.

Finally, I would like to congratulate the entire bar mill group team for their record performance in the second quarter and first half of this year through numerous best mark in projects in team meetings we continue to successfully integrate all ten bar mills into one cohesive team. Congratulations to everyone in the bar group for their focus and relentless pursuit on continual improvement. Thank you.

Thanks, Mike. John Ferriola will now discuss sheet, plate, and beam product groups. John?

Thanks, Dan, and good afternoon. Despite a challenging market in the second quarter we remain optimistic concerning the balance of 2005. End use demand remains strong, and many of the issues adversely affecting the market in the second quarter have been reversed. Service center inventories are finally returning to normal levels. In fact, many of our service center customers are telling us that their inventories are under historical levels. Oil country tubular goods, an industry in which we have a very large market share, remains one of the hottest steel consuming markets.

Current levels of steel imports are down, and import license requests have decreased. Appliance customers are doing well, and after a slow spring HVAC appears to be returning to normal levels. Nonresidential construction is showing strength and should add to the demand in the third quarter. The automotive market will be a major determinant of the third quarter's sheet market strength. With the aggressive discounts offered by the big three automakers we expect to see the demand from that sector rebound.

The sheet mill group, order entry levels have increased significantly over the past four weeks. As a result, we are seeing lead times starting to increase. We believe that increased lead times will result in a higher order entry pace. We presently have our books open through the end of August and are 85% booked through the end of August. Our firm contract business, while slipping slightly in the second half to 58%, continues to provide a solid base load of quality business for our sheet mills. We expect demand and pricing to improve during the third quarter.

Throughout all market conditions we remain focused on our strategic direction of supplying value-appreciative customers with high quality, value-added products on time and with great customer service. Operations continue to improve at our castor facility in Crawfordsville. New equipment installation and trials have expanded the number of products we can offer to the market. We have expanded the number of sizes and chemistries we can now offer to our customers. The castor team continues to meet our customer's increasing quality expectations.

Later this year, we will be installing new x-ray gauges to improve the shave control of our castor product. A team has been assembled to determine the location for the second domestic castor facility. They're expected the make a decision shortly. Concurrently, a third site is is being explored overseas as part of a possible joint venture.

The beam market started to show signs of improvement at the end of the second quarter after being essentially flat through April. Similar to our sheet business, the improvement in demand is coming from all of our major customer groups. Many customer -- many service centers reported improved shipments in May or June. They were reporting that these two months were their best shipments months of the year. This has resulted in strong order entry activity at our beam mills from the service center segment in June.

Fabricators are also reporting improving market conditions. There are reports of good bidding activity for new work with fabricators building strong backlogs. Our piling business has been very strong in the second quarter. With the addition of two new sheet piling sections this spring at our Nucor [Yamato] facility, both our sheet piling and eight piling businesses have improved over the first quarter and on a year-over-year basis. With signs of improvement in all of these areas, June was our best order entry month of the year for beams.

I also want to recognize a milestone at Nucor Yamato Steel. During the second quarter, NYS produced its 30 millionth ton of product. Teamwork and taking care of the customer is what it takes to reach such an accomplishment. Congratulations to the entire NYS team.

The domestic plate market has held firm during the first half of the year, with end-user demand remaining healthy. Construction equipment, heavy machinery, rail, barge, and bridges have all provided strong demand throughout the year. The distribution sector was overstocked at the start of the second quarter and has gone through an inventory correction. This adjustment, along with increasing import pressure, has had adversely affected plate pricing.

Another source of pricing pressure on plate was the drop of the domestic hot band price in the second quarter. The declining price of hot bands allowed end users who are willing to accept lower yields to substitute sheet metal for plate. This option lowered the apparent demand for plate domestically. As hot roll pricing improves, we expect this pricing pressure to subside. We see the current base pricing levels to be firm throughout the third quarter with increases possible in the fourth quarter.

In summary, we see demand improving and expect the price environment will improve in all three product lines throughout the second half of the year. Thank you.

Thank you, John. At this time, we'd be happy to take questions.

[OPERATOR INSTRUCTIONS]. And we'll take the first question today from Michelle Appelbaum, Michelle Appelbaum Research Incorporated.

Hi. Nice quarter.

Good afternoon, Michelle. Thank you.

Which question? It's stress. Okay. I think that John said -- went very fast through his products -- and I don't write fast -- and he said a price increase possible for plate in the fourth quarter? Did he say anything about sheet?

What I said was that we expect demand to improve and that usually leads to the possibility of price increases, and we expect that as we move forward in the second half of the year.

For plate?

Well, Michelle, what John did is he tied some of the plate price decreases to the decreases in sheet products. Here we're talking particular coil plate, which does compete with sheet. And as the sheet prices have gone down it's put pressure on the coil price market. And what we're saying is as demand for sheet continues to improve, and we've seen almost a 200% uptick in orders over the last seven weeks compared to the previous seven weeks, that we should see plate prices also begin to move back up.

Okay. But you're not saying anything about sheet prices?

You're not listening, because I just went through. I said it would be the sheet pricing --

That would cause --

-- that would drive the plate pricing increases in the coil plate market.

Okay. So you think there will be sheet price increases?

We think that as demand improves that that will take place.

Okay. Thank you.

We'll take the next question today from Chris Olin, Longbow Research.

Could you talk a little bit about your contract business in sheet? I understand it's probably expiring in September. I'm wondering how much they will be renegotiated down given the slide in the spot market pricing.

Actually, Chris, most of our annual contracts run January through January, with a small percentage running June to June. So what we've seen and has already ended, and our contracting -- number of contract percentage of our total business will remain constant at 58% through the end of the year.

For the the business that expired in June, what was the delta that you re-signed at?

We're in the process is of negotiating most of that right now.

But it's safe to assume it will be down?

Well, that depends on how good we negotiate. It's obviously a tougher negotiating environment today, so there probably will be some moves down from contract pricing. However, I want to be clear on this, that the percentage of contracts we have this year was the result of where contract pricing was at last year when we signed the contracts. So if the contract pricing is not adequate, if we don't feel that it's strong enough to hold up during the course of 12 months, we won't sign the contracts.

Okay. Just quickly on the sheet question. If demand is really picking up like the 200% that you threw out there, wouldn't we start to see scrap prices begin to move as is the mills begin to prepare for ramping up production schedules? I mean, isn't there some kind of leading indicator out there?

What happens with scrap prices will depend on where the demand for scrap come from. Mini mill versus integrated or both. And at the present time we have seen scrap prices move up. Prime grade's moved up an average of $30 a ton based upon the AMM numbers just recently.

Whether that continues or not remains to be seen, but the uptick in demand that we're talking about is not necessarily an uptick in the end use of steel. It's an uptick in orders due to the fact that people have got their inventories adjusted probably to the too lean side, as a number of our customers have indicated.

So the demand that we're talking about is not an end use demand in the marketplace, it's a demand that's coming from our customers because they got their inventories back in line. But in general, the fact that the demand goes up and continues to go up strongly and stay up, it's entirely possible to see scrap prices move up as well. So the raw material surcharge may come back into play again.

Where I'm getting confused is --

That's two questions. Thank you. Next question. You can come back, Chris, on the next queue. Anybody else?

We'll take the next question from Aldo Mazzafarro from Goldman Sachs.

Hi, Dan.

Hello Aldo. How are you?

Fine. Can you comment on the strategy you're using in buying scrap today? I noticed your inventories remained pretty high, they downticked a little bit sequentially. But I'm just wondering did you do any more scrap buying as the price declined during the quarter? I mean more than average?

That's not something that we usually talk about openly in the public as to what our buying strategy is because, obviously, we are a marriage player in the marketplace, we can have a tremendous influence on it, and we certainly don't want to telegraph to our competitors what we're doing.

Some of that inventory that you see hanging in there is some of the higher priced iron units brought in from offshore to pig iron on the HBI, and that's a totally separate situation than the scrap market and what we might be doing or not doing there.

Okay. And so I guess since you didn't answer my first question I get another one?

I did answer your first question. It just wasn't what you wanted to hear. Ask one more. I cut Chris off after two.

Okay. For John, the Purchasing Magazine says hot row prices were four-ninety-five in June. Can you say where they are right now and where they will go before they start to turn up and when they will turn up?

Well, I would say that they're a little bit turned four-ninety-five mark today. I think though today we're seeing the bottom numbers, we're at the bottom of the trough on the pricing cycle and we expect it to improve as we go forward.

Thank you, Aldo.

We'll take the next question from Frank Dunau, Adage Capital.

Hi.

Hey Frank.

How are you doing?

Good.

I think this question is for Terry. I'm looking at the marketing administration and other expense line and that was down pretty significantly year-over-year and sequentially. Is there a reason for that?

I'm sure there's a reason. I don't know that I know it right offhand, Frank.

Okay. Other than incredible cost control or something? The other question is many years ago I learned a theory that sometimes happens -- and usually doesn't, but get your opinion on this -- is that the three players in the beam market have been really disciplined, and as orders tick up and demand picks up, sometimes people say the discipline goes away, because prior to that there was no reason to cut your price because you wouldn't get an incremental order. But when there are incremental orders to be had, when there's new people buying, people start to cut price. What do you think about that theory?

You can put that in the garbage can, the round one. Put the cover on it. The same people say that when prices are going down that whatever pricing discipline, the marketplace is going to disappear. So you take your pick whether -- because my prices are going up and demand's going up, or prices are going down and demand is going down that the discipline breaks down. Basically, Frank, I think that's -- whoever is making those points spent too much time up way too late at night.

Okay. Thanks.

Wayne Atwell of Morgan Stanley has the next question.

Hello Wayne. And Frank, we're still working on your first question. Thank you, Wayne.

Thanks. Can you give us guidance on your average pricing in scrap for the third quarter versus the second, please?

Average pricing in terms of what we would purchase or what we would use?

Right what would your guidance be for scrap and product pricing across board? You gave us what they were for the second versus the first. Do you have an estimate on what we should model in for the third versus the second, for scrap and average product pricing?

I'll make a general comment, Wayne. That is, as we've already said, we expect that pricing has bottomed going forward. How much it increases from here is is not something that really anybody is geared to speculate on, and I certainly don't wish to telegraph anything to anybody out there on the selling price side. On the scrap side, we believe the scrap prices will hover in the range of plus or minus $20, $30 a ton for the rest of the year.

Okay. And could I just clarify, the 58% contract, was that across the board or flat-rolled?

That's flat-rolled.

Thank you.

we'll now hear from Daniel Roling, Merrill Lynch.

Thank you.

Hello, Dan.

Hi Dan, thank you. The comment on OCTG, I found that very interesting that you have a big market share there. Can you elaborate a bit more on who your customers are, how do you price that off the OTZ price or is it just incremental demand for your sheet? I could use a lot of help there.

It's all of the above. First of all, the customers we sell to, we sell to basically everybody in that industry to different levels, of course. And the pricing is a combination of spot or contract, depending upon what the particular customer chooses to do.

Would your price be tied to his end product?

No.

No. And you see that's still strong for next year or two?

Frankly, I see it definitely for the next year or two. I think oil is going to be strong for a while, and I think that industry will also be strong as a result.

Yes, the energy markets, in general, looking forward I don't know how anybody could say they're not going to be strong. Thank you, Dan.

Thank you.

Before we go on to the next question I think we have an answer for Frank.

Frank, most of that change, some was an extraordinary bonus that we accrued for last year in the second quarter, and some of the bonus calculations decreased because of change in stock price.

Okay. Next question.

We'll now hear from John Hill, Citigroup.

Thank you. Congratulations on a strong quarter.

Thank you.

I was hoping we could shift gears to the long product side. It was interesting to watch pricing there, indeed more resilient than in the sheet markets. But at the same time, obviously, we're all hearing a lot about the whole Chinese import displacement theory and I'm just curious what your sense is as to how much import pressure those products are likely to feel as we move through the rest of the year.

Well, the last -- I'll ask Mike to comment on that, then I'll maybe add a thing or two. Mike?

Well, like we said, year-to-date, imports for rebar are 15% less than they were in 2004. Now, we have seen an uptick just this last month, but it matches seasonal trends so we don't expect imports in the rebar. That's where we see more of our import pressure, is on the rebar side. We really don't expect it to be out of line with seasonal trends throughout this year.

The other issue on long products in some cases there are still some orders in place that rent, a certain amount, is coming in at very reduced prices and China, I think, is one of those but I'm not absolutely positive about that. And right now we're seeing action over in Europe where people are working to raise long products, bar products, prices, last -- just saw this yesterday, somewhere around 40 to 50 euros a ton.

So it definitely looks like that whole situation, globally, may be bottoming. Of course, there's always that issue of whether or not people will try and export out of their problems. That's an unknown at the present time, but right now we don't see anything that would indicate that.

Great. Thanks for that explanation. And if I could just follow-up with a question on financial policy. Great to see the buy backs. Obviously this is all at the board level going forward, but do you have in mind any sort of target ratios in terms of debt to cap or target cash balances above which you don't feel you need go?

No real targeted cash balances. It's all going to depend on our stock price in the market and what we see as possible use for cash. And I think we've said in the past we'd be comfortable going debt to total capital up to 35% or so.

Depending on what we saw as an opportunity out there with an acquisition we might go up to 40%, but our long-term strategy is to keep that number below 25%.

Very good. Thank you.

Thank you.

CRT's Capital Ken Silver is up next.

Good afternoon, Ken.

Hello? Hello?

Yes, we're here.

Hi. Just a quick question. When you say that the order entry rates are up 200%, I think you said over the past seven weeks, or versus seven weeks ago, obviously that's a huge number, but what kind of base, I mean, is it off of? Can you quantify it in a different way at all?

Well, certainly, everything on this is relative, let me put it to you this way. The order entry level rate that over the last several weeks has gone back up to where it was throughout the first 14 weeks of the year and where they were at the end of ast year.

Okay. And have prices -- that's very helpful, by the way -- thank you. Have prices been coming down during this period, or I guess the orders getting booked at a faster rate because the orders are lower. Could you give us any feel for that?

I think, relative to the market price out there, we are not the lowest price out there by any means. And most of our pricing moves have been in reaction to some heavy discounting by some of our competition, particularly single mill operations. And so really it's more, in our estimation, due to the fact that the inventories of a lot of our customers, OEMs, but particularly service centers, have probably over-reacted taking things too lean.

And they see demand still strong out there, they see imports have fallen off, they see the instability in pricing is questioning their willingness to take risks on imports long term, at least at the present time. And so we're seeing this as a result of the inventory correction that we've all been forecasting for much too long. Now it appears to be taking place. Of course, we'll know more in the next seven weeks.

Okay. And then one last question --

That's two.

I only get two? Okay.

You have to come back.

That's cool. Thanks a lot.

Okay. Next question.

We'll take the next question from Michael Willemse of CIBC.

Hi, Michael.

You give a sense of inventories at the service centers. Could you give us a sense of inventories in each of your product lines, not including the scrap, just most favorable to unfavorable?

Our inventories are -- we keep our inventories at a minimal level throughout the company, particularly on the sheet side but also on the bar side. We don't build inventories to any excessive level at all. So our inventories are running about what they always do, good times and in bad.

So even with the non-res construction level, usually you build up some inventories. Given that the first half has been a little bit weaker, you still don't have excess inventories in your long products?

No, absolutely not. Mike, want to comment?

You're exactly right. We try to keep the balance consistent, and we really don't have any excess inventories right now.

Okay. Thank you.

Up next we'll hear from [Timna Tenners] of UBS.

Hello, Timna.

Hi. Just one quick question, please. Terry made some comments on the sheet metals responding to the market and being down 9% quarter over quarter to generate reasonable profit per ton return on capital. But I was wondering given the decline you've seen so far in scrap prices and, obviously ,the sheet market, what can we expect in terms of volumes? Like if we were to look at the current market, would you still be in the mind-set of controlling volumes a bit?

Our whole strategy will be to continue to optimize profitability and to pretty much match our production through our order entry, coupled with our -- obviously with our contract business. That's something that hasn't changed for some time now.

So could you comment on whether or not you'd be seeing a reasonable profit per ton in the current market? Like if you'd continue to be operating with the mindset of being disciplined or cautious with volumes?

I think the answer would be yes to that.

Okay. Great. Thank you very much.

We'll now hear from [Deborah Fine, Fine Capital].

Hello, Deborah.

Congratulations on the quarter.

Thank you, Deborah.

I have two quick questions. On the Steel Dynamics call, [Mr. Buffy] commented on how he had had high scrap inventories and his perception was that you have high scrap inventories as well.

He must be flying over our scrap yards, I guess.

Well, you're closer to them, what do you see?

I'm sorry, I couldn't resist. Sorry, Keith. Do we have high scrap inventories? We probably do on the stuff we import, which is not unusual; the pig iron and the HBI, but on the scrap side we're in good shape. I won't comment as to whether they're too high or low. We're just in a very comfortable position.

Okay. And could you give us your thoughts on the [Remen-B] revaluation today?

Too little, appeasement are good words that come to mind; not serious, a lot more to be seen, very disappointed that more informative layout of what's going to happen going forward, but a 2% revaluation is Tolkienism, and tying it to a basket of currencies that we don't know what they are yet and only allowing them to vary by .3% is, to me, no different, really, than the peg they had previously, so I am very disappointed.

I am encouraged by the fact they did something, but I think it was meant more to appease folks and people need to realize that and continue to put the pressure on them to get serious about it.

And now you want to tell what you say you really think, Dan? Thank you.

I have to keep the conversation clean.

Thank you.

Thank you, Deborah.

Up next we have Mark Parr, Keybanc Capital Markets.

Hi. Thank you.

Hello, Mark.

Hey, Dan. Congratulations, guys.

Thank you.

I had -- first, before I ask my question, I've got to be honest, I'm having trouble reconciling a 10% reduction that you've been talking about, but my real question relates to --

That's production.

Okay. That's production. Okay. And my question relates to backlog. So I think, John, you had mentioned that your backlog in the sheet products was out somewhere between four and five weeks now. Could you talk a little bit about some of the other product areas and where your backlogs are now compared to where they were several months ago?

Our backlogs are very solid in all our other product lines. Probably if we go back to when things were really extreme on the plate side, the backlogs were considerably higher than they are now, but they're not so low that it's going to impact our overall performance going forward. And we actually see a little uptick already with respect to the short-term inventory work off that took place. Not nearly -- an order of magnitude less than what we saw in flat-rolled. But in plate, the backlogs are definitely lower today than they were, say, six months ago.

Okay. What's the implication for total production in the third quarter then based on what you're seeing on the backlog side?

Good question. Right now we're making assumptions that they're going to be fairly flat with second quarter or slightly better.

Okay. Thank you very much.

And Deutsche Bank's David Martin has the next question.

Yes, thanks.

Hello, David.

How you doing'?

Good.

I want to touch base on bar volumes, if we may. Bar volumes were up 150,000 tons, I think, from the first quarter; even more year-over-year. I know Marion had some impact on that. What else was going on there?

Bar market's been good, rebar in particular. Certainly, as you go through the year here, move out of the winter into the spring and summer months, that activity increases.

But even if you strip Marion out, it's still probably 10% year-over-year growth.

Good deal.

It's growing that well?

Growing well at very good pricing and certainly very strong margins.

Okay.

We'll now hear from Jonathan Goldberg, Hahn Capital Management.

Hey, guys, good afternoon. Hello?

Yes.

Just had a question on the long product side, on metal spreads. Given the decline in scrap are you -- how should metal spreads on long products compare in Q3 versus Q2?

Same, maybe a little better.

And does that differentiate by product, by long product, or is it all kind of similar?

Well, certainly when you talk long product, are you including beams in that?

Yes.

I think the comment is generally the same for both, probably a little stronger for the rebar side of the house.

Thanks.

You're welcome.

We'll take the next question from John Tumazos of Prudential Equity Group.

Hello, John.

I'm tying to ask --thank you -- the question asked earlier slightly differently. What will your cost of scrap used, roughly, be in the third quarter, and in providing your guidance, roughly how much of a LIFO credit did you budget?

The last part of your question is about $44 million for LIFO budget, and the first part is they will be lower than they are today but we're not giving any absolute numbers for where we think our scrap usage will be. That can vary by $10, $15, $20 a ton depending upon what mixes we use, what grades --particularly on sheet side -- and a few other things, but we definite would see our scrap pricing coming down because we really haven't experienced the lion's share of it yet.

If the scrap price falls more, wouldn't it be logical that your LIFO credit would be much larger?

Could be.

Could be.

But ask youked us what we're budgeting; $44 million is a pretty healthy budget.

We'll take a follow-up from Michelle Appelbaum.

Yes, Michelle.

Hi. Well, I think I get three because I only got one and everybody else got two, and now I get two. But, having said that, Chaparral is is being spun off and I'm wondering, where do you overlap with them and what will it mean [inaudible]as an independent public company?

First off, we overlap on just about everything they do from a beam standpoint.

Tell where you say they overlap with you.

Everywhere.

Your shape business?

We make stuff they don't make on beams, and they make it a little bit of sheet piling that we don't make, but it's like probably a 90% overlap. What it means for them as a stand-alone business, certainly, they will be beholden to the financial markets as a stand-alone business and the credit markets and their ability to borrow money to keep things going. [Tommy Valenta]is is a pretty sharp businessman so I assume he'll do a good job and run a good business, so they'll be a tough competitor as they always have.

Can I ask my second question?

Go ahead.

Thank you. You know, I'm surprised with all the negativity and equity values coming down and stuff that there hasn't been more mergers and acquisitions in the sector. Can you comment on why that's been? It seems like there's lots of talk and rumbling, but not much has happened since the [HILSA] situation.

Well, I would hazard a guess that these things happen in their own time. There probably are lots of conversations going on out there. I'm not commenting on what we're doing or not, but there's a lot of speculation about conversations going on; whatever conversations are going on probably haven't gone to conclusion. I think the HILSA deal was a little rich for people, and I think there probably might be some disagreements as to what things are worth --

Oh, because of HILSA?

-- and so there's always activity going on. Whether something gets concluded or not is a matter of people coming to terms with one another, but in general, I think there's still lots of conversations going on out there in the steel world on a global basis as well as domestic.

You know, if we're past this bottom as you're --

That's three.

-no, it's the same one -- the Singleton mills have been, as you point out, kind of the -- Keats's "desperate acts of desperate men." That behavior in the sheet business has been the same behavior as we've seen in the past. And is there something that can be done about on the sheat side, some of that kind of more aggressive --

Let me just say that there's been a lot done on the sheet side and things have not nearly deteriorated to where they may have in the past by a long shot. Prices certainly have come down considerably, but nowhere near like it has in the past, particularly with the flood of imports coming in. The folks that had the most trouble were folks that were stuck in the spot market and didn't have much contractual business or who had people walk away from some of their contractual business. Those things are always going to be issues.

Do I think that there's more consolidation domestically and globally that will take place in the future? The answer is probably yes. Whether it will have an impact on that or not, most people think that the bigger you are, the more control you have over pricing in the marketplace; the reality is the little guy usually is the one -- the weakest player, let me put that it way -- that drives prices down.

We've seen that this cycle, I'll tell you, in spades.

That will never change. The question is how much of things are controlled by the weaker players.

Okay. Thanks.

You're welcome.

Wayne Atwell of Morgan Stanley is next.

Thank you. I wonder if you could handicap how aggressive you're going to be in terms of share buyback? Is this a high profile for you, or is this low profile? Is this sort of where the extra cash ends up?

It's a low profile as it always has been. We still have a little over four, maybe four and a half million shares left to authorize. We haven't been buying since we made our earnings guidance from last time, which is standard policy for a blackout type situation for us, so we were buying previous to that. Whether we buy in the future or not will depend on what our uses of cash are and how we see our stock valued relative to what we think it's worth. But we still have another four and a half million authorized at present.

Could we look for your cash flow to be pretty strong over the next several years. You certainly have some growth projects but they're not going to consume a lot of capital, so based on our model you should have a lot of excess cash over the next several years --

Well, it would seem -- I'm sorry, Wayne. Finish up.

So I would think this would be an area where you could put capital that investors love to see returned to them in a rather subtle but productive fashion.

Well, we've done more in the last six months than we've probably done in our history other than one other time, and that was in the last -- that was about five years ago. As you know, this year we came out with a substantial dividend increase based upon basically our standard Nucor culture of pay-for-performance and sharing that with our shareholders; quite sizable increase in dividend payout. And that type of thing is always there in the future for us to evaluate and use as well as share buy backs, but we still see other opportunities for our cash.

I've been through this exercise with all of you on previous calls. You start adding up our special projects, you start adding up opportunities globally, you're using a lot of cash, too. And as you know, our preferred position is to stay under 25% debt to capital. So we will have a net debt that is either controlled either through lack of debt or through a heavy cash debt balance. So that's a conservative way of approaching things, but we remain optimistic that there's going to be plenty of uses for cash that will return more than our basic metrics for our shareholders.

Thank you.

We'll now hear from Brian Rayle, FTN Midwest Research.

Good afternoon.

Good afternoon, Brian.

Question about the order book. Did you alter the length of that during the quarter in any way? Like did you -- I know that you've been keeping it short to benefit from the price moves and the volatility, but as prices started to fall were you able to sort of lock out longer term orders months ahead as opposed to the shorter four to five-week order plan?

The price fall has not been as significant in long product as it has been in sheet, or -- and I would put plate in the same category as the long products. And as we've already shared with you, up through June we had 65% of our business tied up in contracts, and since June, and through the rest of the year, we will have 58% tied up in contracts. Other than that, we have not lengthened out -- we are not going to multiple months opening of our order book. It's a month to month situation still. So we haven't changed any of that on the spot side.

Okay. Great. And then a follow-up on the expected bottom in pricing. Are you talking about current spot market positions or your August order book? Current selling prices or what's in your order book right now?

Well, we would classify pretty much what's on our order book as being current pricing.

Okay. Great. Thank you.

You're welcome.

We'll now hear from Daniel Roling, Merrill Lynch.

Thank you. Just a comment to start with, Dan. I think growth is the best use for your cash, be it acquired or organic, but I like that approach. But the question I have, and it ties into that, is what you're talking about spending new equipment you said at the castro facility in Crawfordsville and looking at sites going forward, can you sort of elaborate on does this new equipment raise the capital cost versus what you were expecting at those sites, or what does it do to the capital cost to those proposed sites?

It doesn't raise the capital costs significantly at all. These are more refinements in some of the equipment that is there as opposed to additions of major equipment that will raise the capital cost significantly, in terms of what John was talking about earlier.

Okay. Thank you.

You're welcome.

Up next we have Tony Rizzuto, Bear Stearns.

Thanks very much. Hi, gentlemen.

Hello, Tony.

Most of my questions have been answered already, but I did have one just to follow-up on conversion costs. When we look at and back away the LIFO impact, and in your text -- and you guys talked about the energy impact -- I presume the bulk of the remainder of conversion costs, why it rose, would be related to lower operating rate?

Yes, bulk of that, we'd also mention that we had some special charges that hit us this in this quarter. And with respect to the Marion acquisition we already wrote off -- we also wrote off some additional equipment, nothing significant. And alloy costs are still considerably up there and that has been a major driver, along with what we already indicated from an energy standpoint.

By the way, congratulations on your production restraint.

Thank you.

You're welcome.

Up next we'll hear from Mark Parr, Keybanc Capital Markets.

Thanks. Dan, I was wondering if you could give us an update on the vacuum degasser projects going on at, I believe it's Decatur and Hickman.

Decatur and Arkansas, yes.

Yes. [Blyville], excuse me. And also if you have identified end market -- what's the marketing plan for the output of those degassers I guess is what I am asking.

Sure. John Ferriola can address those.

Thank you.

In terms of your first question, where we are in the project, we're involved in site engineering today and equipment selection. We've had had teams going out as we speak looking at different manufacturers of this equipment and they'll make a selection on which equipment they want to use. In terms of the products that we'll be able to do, there's a bevy of them, really: automotive, appliance, electrical steels we see a very large opportunity in electrical steels, especially in the Southeast. So we see a lot of applications for the new products that we'll be developing.

And we're talking about the type of things that we're doing in Berkeley now, interstitial three, dual phase, deep drawing, high formability materials that will go across different product line applications from automobiles to appliance, you name it. So those are the type of markets we're talking about.

Okay. Terrific. Thanks again.

You're welcome, Mark.

And we have time for one further question. We'll take that from Aldo Mazzafarro of Goldman Sachs.

Hey, Dan, when you start up the pig iron projects in Brazil in the third quarter, are you planning to replace pig iron that you're buying today or are you planning to replace more of your scrap purchase with pig?

Yes. It depends on the pricing in the marketplace. It can do both. Obviously, our plan originally would be to replace some of the pig that we're buying in the market, but it could replace scrap. It just depends on what the relative pricing is between the two and the availability.

Okay. And how many workers are there at Marion?

About 320 people, so we should say 11,320 people now.

Thanks very much.

Thank you, Aldo. Thank you, everybody. And before we close off I just want to say thank to you our entire Nucor team that's listening today and to the support from all our shareholders and our customers. Thank you all very much.

Thank you. That does conclude today's conference. We would like to thank you all for your participation. Have a great day.