Nucor Corp (NUE) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the Nucor Corporation first quarter 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 statements that involve risks and uncertainties. Although Nucor believes that we -- believes they are based on reasonable assumptions, there can be no assurance that future events will not affect the accuracy. Some of the important factors that may cause actual results to differ from our predictions are listed in Nucor's SEC filings. The forward-looking statements made in this conference call speak only as of this date and Nucor does not assume any obligations to update them. For opening remarks and introductions

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

Thank you, Paul. Good afternoon, and thank you for joining us for Nucor's first quarter conference call. We appreciate your interest in our Company. Joining me for today's call are the other members of Nucor's senior management team, Chief Financial Officer Terry Lisenby; Chief Operating Officer, of our Steelmaking Operations, John Ferriola; and Executive Vice Presidents, Keith Grass; Ladd Hall; Ham Lott; Mike Parrish; Joe Rutkowski; and Joe Stratman. After reviewing Nucor's first quarter results and our work to grow our long-term profitability, we will take your questions.

First, and most importantly, I wanted to say thank you to all members of the Nucor team for your focus on safety, continual improvement and taking care of our customers. These are the most challenging steel market conditions we have ever seen. It is very unfortunate and extremely frustrating that our country's misguided economic and political policies over the past two decades have created the current financial crisis. But when times get tough, the 21,000 plus men and women of Nucor and our David J. Joseph and Harris Steel subsidiaries see opportunities to make our Company even better and stronger. As always, Nucor's most significant competitive advantage remains our people. The right people working together as a team, a team that takes ownership of driving Nucor's long-term success. This fact explains not only our record of strong profitable growth over more than four decades, but also why we know our best years are still ahead of us.

I want to again express my gratitude for the dedication of every member of the Nucor team at this time of global economic crisis. We realize that this is a time of hardship and difficulty for all of our teammates. As well as a time of significant loss value of our shareholders. But I want to assure you that our work during these adverse economic times will pay big dividends when the inevitable economic recovery arrives. We only have to look back as recently as 2001 to 2003 to see what we achieved during the last economic downturn. Quite simply, we positioned Nucor for the greatest period of growth in our history. As always, we're doing it together. Thank you. And keep up the good work.

The severity of this downturn is unprecedented. Steel production, capacity utilization numbers in the American iron and steel industry tell the story. First quarter 2009 steel production in the United States declined 53% from the year ago quarter. Industry capacity utilization for the just completed quarter was less than 43%, down from the first quarter of 2008 rate of more than 90%. Nucor is not immune to these conditions. An economic crisis unlike anything seen in our lifetime. Today, we reported the first losing quarter in our history. That breaks a record of continuous quarterly and annual profitability going back to Nucor's start in 1966. Warren Buffet said it best last month with his observation that the economy has fallen off a cliff. We have yet to see any evidence this abrupt and severe decline in economic activity has reached a bottom. In fact, conditions have continued to worsen with each successive month so far in 2009. There are few signs of improvement at this time.

I wish I was able to provide a more encouraging report on current and future second quarter conditions. But as always, our team will tell it exactly like it is and it is extremely ugly out there. I have noted one simple yet extremely important fact many times over the years in my conversations with investors. Nucor has a business model that even in the good times is based on how the Company might have to run things in the bad times. If you wait for an economic crisis to hit to get prepared for it, you probably won't survive. This has never been truer than in today's economic crisis.

A sustainable recovery in the economy all depends on when our government gets serious and realistic about fixing the deep structural imbalances in our huge twin trade and budget deficits that brought the US economy and the world's economy to this tragic condition. Quite simply, we need significantly more job creation, significantly less debt, significantly lower costs of doing business, not significantly higher costs. And a much stronger focus on the top five most important issues facing our country and the world's future. The economy, the economy, the economy, the economy, and the economy.

Extreme uncertainty present in our economy suggests that it may come down to survival of the fittest in the months and years ahead. We need less uncertainty going forward, not more. But all we seem to be getting is more, not less. While we are very concerned and clearly see that these are very grim times for the US and global economy, we are at the same time optimistic about the prospects for Nucor to do what Nucor has always done. Has always done during tough times. That is, to get even stronger and grow our long-term earnings power. Why is the Nucor team able to view times of economic distress as opportunities? Here are five big reasons.

First, Nucor's balance sheet is the strongest in North American steel industry. In fact, we, along with POSCO and [Ed Bunsfield] hold the highest credit ratings amongst global steel producers. Second, Nucor's long-term cost structure is highly variable and Nucor's one of the lowest cost producers in the global steel industry. There's absolutely no question that our cost structure in 2009 is carrying an extremely heavy burden from the overhang of high cost pig iron inventories. But that reflects the unprecedented abruptness of this downturn. A downturn driven by almost unimaginable crisis in the world's financial markets. From raw materials to energy to labor, our long-term cost structure remains both highly variable and significant in the range of variability. Here are some numbers that make our point.

Over the last five years, among North American steel producers, Nucor achieved the highest average annual return equity while using the least amount of debt leverage. That achievement speaks volumes about the competitiveness of our cost structure. Nucor -- item three. Nucor is North America's most diversified producer of steel and steel products. In addition to reducing the volatility of earnings, we are seeing both more and more one-stop shopping, growth opportunities developed as we work to build strong mutually beneficial partnerships with our customers. Fourth, Nucor's highly flexible production process utilizes electric arc furnaces and highly productive labor. We are able to almost instantaneously adjust our output to match market demand. And fifth, and most important of all, our people have an unrivaled can do attitude and passion for continual improvement in every aspect of our business. These long-term competitive advantages have been and will continue to be critical to Nucor's success and rewarding our shareholders with attractive returns on their valuable capital. So let me repeat them once more.

Our financial strength, our highly variable and low cost structure, our product diversification, our highly flexible production capabilities and our culture. No one welcomes economic conditions as challenging as those of today's environment. But this crisis in the United States and world economies provides strong validation of Nucor's long-standing conservative financial practices and extremely strong business model. And we believe the current downturn will present unusually attractive growth opportunities for Nucor. I can assure you that our team is focused on doing what Nucor does best, operating safely and efficiently, reducing costs, continually improving, growing stronger and expanding our long-term earnings power.

My last comments are with respect to steel imports into our US markets. During the first quarter of 2009, steel imports continued to enter the market and captured an increasing share of the dramatically declining US market. Virtually all of these imported products could have been produced in the United States. Nucor believes in trade that is legal and rules based. Nucor and our industry will continue to review the imports with US Government policy makers and do whatever is necessary to hold our trading partners fully accountable for abiding by rules they agreed to in order to enjoy access to our markets. Where illegal and exploitive trade practices exist, we will address those activities to ensure the jobs of our workers and the interest of our shareholders.

At this time I would like to ask Terry Lisenby, our Chief Financial Officer, to provide you some details on Nucor's first quarter results and financial position. Terry?

Thanks, Dan, and good afternoon to everyone. Nucor reported a first quarter 2009 net loss of $190 million or $0.60 per diluted share. These results are consistent with the guidance we gave last month for a first quarter loss in the range of $0.55 to $0.65 per diluted share. First quarter 2009 net sales of $2.654 billion decreased 47% from the year ago quarter. Compared to last year's first quarter, total sales tons of steel and steel products to outside customer declined 43% to 3.7 million tons.

Our results also carried a significant burden from consuming higher cost pig iron and scrap inventories, purchased prior to the collapse in iron units pricing in last year's fourth quarter. We have decided to consume these high cost raw materials as rapidly as our production rates will allow. While this move penalizes our income statement results in the short run, it immediately benefits our cash flow and it will provide greater operating flexibility as we move further into 2009. The current production rates, the overhang of higher cost scrap should be consumed by the end of the current quarter. And the overhang of pig iron should continue to impact our results through the third quarter.

Nucor's first quarter earnings included an expense of about $60 million for writing down inventory to the lower cost to market. We also had a credit of $105 million to value inventories using the last in, first out, method of accounting.

We know some of you when comparing steel company's financial performance make adjustments for lower cost for market charges and LIFO credits. It is our view that you should adjust for lower cost of market charges but should not adjust or remove LIFO credits when we are in a lower cost of market environment. Inventories valued using the LIFO method represented approximately 65% of Nucor's total inventories at December 31, 2008. As a result of the significantly higher scrap and other raw materials costs in recent years, our LIFO reserve increased from $387 million at the close of 2006, to a peak of slightly more than $1 billion at the close of 2008's third quarter. Without this significant LIFO reserve, we would have recorded a lower cost for market expense of approximately $360 million at December 31, 2008.

When adjusting Nucor's earnings for performance comparisons to peers, we suggest adding back our lower cost of market charges for the period, but not adjusting for LIFO credits. This is a correct approach because as we work through expensive inventory, the excess costs are being reduced by the LIFO credit since effectively these inflated inventory costs were being charged to prior periods via LIFO charges.

Nucor's liquidity position remains extremely strong. The close of the first quarter cash and cash equivalents totaled $1.9 billion. The decline from the year end 2008 level reflects a first quarter 2009 funding of a long-term debt retirement totaling $175 million, 2008 profit sharing and incentive compensation payments of nearly $400 million and a $200 million payment for 2008 federal income taxes. With these one-time outlays related to 2008 behind us, our cash balances will continue to benefit from reductions in inventories and receivables. That trend was strongly evident in the just completed quarter and should continue well into 2009.

Our liquidity position is also enhanced by the fact that we have no borrowings on our $1.3 billion unsecured revolving credit facility. That credit facility does not mature until November 2012. And we have no outstanding commercial paper. At the close of the first quarter debt totaled $3.098 billion and our debt-to-capital ratio was 28%. The weighted average coupon rate on our fixed rate debt is 5.7%. We estimate gross interest expense of approximately $154 million, for full year 2009. After retiring a $5.4 million industrial revenue bond later this year, our next debt maturity is not until 2012. $2.167 billion of our debt or 70% of the total matures in 2017 and beyond.

Nucor's earned the highest credit ratings of any North American metals and mining company awarded by Moody's and Standard & Poor's and our credit default spread is the lowest among North American steel producers and one of the very lowest among global steel producers. Nucor's balance sheet strength and industry leading credit ratings give us tremendous flexibility in managing and growing our business. For example, our debt-to-capital ratio of 28% provides us a significant cushion relative to the 60% debt-to-capital covenant limit in our credit facility. Capital expenditures for the first quarter were $120 million. For full year 2009, we continue to project capital expenditures of approximately $400 million. That represents a substantial decline from 2008 capital spending that exceeded $1 billion with the completion of a number of major projects. First quarter depreciation and amortization totaled $138 million. And we expect about $590 million for full year 2009.

As Dan discussed, the unprecedented turmoil in the global economy and financial markets has highlighted the value of Nucor's conservative financial policies. Our extremely strong balance sheet positions Nucor not only to weather today's economic storm, but also to capitalize on attractive investment opportunities that will develop. Consistent with our record established over many years, Nucor will continue to be both disciplined and opportunistic in pursuing profitable growth that rewards our shareholders with attractive long-term returns. Thank you for your interest in Nucor. Dan?

Thank you, Terry. I will now ask John Ferriola to report on our steelmaking operations. John?

Thanks, Dan. Good afternoon. Let me begin by thanking all members of our Nucor steel mills and David J. Joseph raw material teams for your incredible commitment to working safely and taking care of our customers in this challenging environment. I cannot emphasize enough the importance of everyone staying focused on safety. Nucor's best years are still ahead of us and we want all of our teammates to be around to enjoy them. Here are some quick statistics that highlight the severity of the current steel market conditions.

Nucor's first quarter steel shipments of 2.8 million tons declined 53% from the year ago quarter. Our steel mill utilization rate for this first quarter was 45%, less than half of last year's utilization rate of 92%. First quarter of 2009 capacity utilization by product ranged from 53% for plate, and 51% for bars on the high end, to 42% for sheet and 36% for beams on the low end. As tough as today's market is, I think about a saying we have that describes Nucor's mindset and actions in distressed steel industry conditions like these. We say simply, Nucor does bad really good. It is the point that Dan made in his remarks. Our Company is in a unique position of strength in today's steel industry to build our competitive advantages and our long-term earnings power and even better, our team is already moving ahead on a number of exciting growth projects. I will quickly review some of them for you.

A particularly promising opportunity is to leverage the fact that no competitor can match the broad product range offered by Nucor. Our One Nucor initiative is bringing together sales teams from across our product lines to better serve and increase Nucor's participation in key end use markets. For example, we have an automotive team providing value to our customers in this sector in the form of one stop shopping for their SBQ, sheet and fastener needs. Our heat team works with heavy equipment, agriculture and transportation customers to serve their plate, beam, fastener, and SBQ needs. And we recently formed a bridge and infrastructure team to serve growing infrastructure markets with Nucor's package of rebar, rebar fabrication, beam, plate, mesh, decking, and sheet products.

The early returns from our One Nucor work tell us that we have only begun to capitalize on Nucor's position as North America's most diversified steel and steel products supplier. Importantly, the One Nucor opportunities extend beyond the steel mill side of our business. Our teammates at David J. Joseph are proving to be an extremely valuable part of our One Nucor value package.

In the automotive market, we are now able to offer our customers one stop shopping for both buying steel and trading scrap. Teams at our steel mills are also taking advantage of reduced operating rates to work on developing new products. This work is difficult to do in stronger market conditions where we need every ton of available capacity to satisfy our customers' needs. As an example, in the first quarter of 2009, our Decatur, Alabama sheet metal successfully entered the armor plate market. Decatur shipped over 5,000 tons of their armor plate product in the first quarter for the use in the protective structure for the Humvee military vehicle. In addition to military applications, our Decatur team sees additional armor plate opportunities in transportation and energy markets.

Nucor Steel Berkeley continues to innovate and introduce new flat rolled products for automotive applications. As the first electric arc furnace, and slab sheet metal with a gassing capability, our Berkeley team is developing steels with unique properties that are not offered by other mills. Product advancements have been achieved in the areas of formability, advanced high strength steels that result in stronger, yet lighter vehicles. Berkeley's product development successes are both expanding our relationships with existing customers and attracting new customers that include European automakers.

Nucor's plate mills are also using current market conditions as an opportunity to do extensive product development work in both new grades and new sizes of plates to further enhance our product mix capabilities. Particular emphasis has been placed on products which will expand our opportunities in consuming sectors such as energy, bridge, large shipbuilding and heat-treated plate. These product development initiatives position Nucor and our customers to take advantage of any infrastructure stimulus spending.

As a result of these advancements, we have been able to secure business that was previously beyond our scope of production. I continue to be amazed by the work our plate mill teams have done since Nucor first began making plate in late 2000. And as outstanding as their results have been to this point, their best years are still to come.

Our new state-of-the-art special bar quality mill in Memphis is moving ahead with a successful start-up. Complimenting our SBQ mills in South Carolina and Nebraska, we believe Memphis will position Nucor with the most diverse, highest quality and lowest cost SBQ product offering in North America. In the first quarter, Memphis got its rolling mill fully operational and started shipping prime rolled bars to customers. The Nucor Steel Memphis team is rising to the challenge of starting up in tough economic conditions. It is worth noting that Nucor has a proven record when it comes to beginning production at steel mills in recessions. These mills include our Utah Bar Mill, our Nucor Yamato Beam Mill and our North Carolina Plate Mill. They have all gone on to become stellar performers for Nucor. These results are testimony to the power of the Nucor culture and its can do attitude.

As you can see, our focus remains on the future and Nucor's very attractive prospects for building attractive, long-term value for our shareholders. We greatly appreciate your interest in our Company. Dan?

Thanks, John. I'd like to ask Ham Lott to update us on Nucor's fabricated construction products businesses. Ham?

Thanks, Dan, and good afternoon. Demand was extremely weak for our fabricated construction products in the first quarter of 2009. Compared with last year's first quarter, steel joist production decreased 55%. Steel deck sales tons declined 35%. And metal building's volume fell 50% year-over-year. Our fabricated rebar tons did increase compared to the prior year period. However, the increase resulted from the volume contributed by the Ambassador Steel fabrication plants acquired by Harris in August of 2008.

Nucor's growth in fabricated construction products began more than four decades ago. We are well experienced in managing through economic and construction market down cycles. In fact, our Company has a long history of taking advantage of the downturns to grow stronger. We grow stronger while many of our competitors cut their capabilities for serving customers and that is exactly where our energy is focused in the current market turmoil. These efforts are ongoing at all of our fabricated construction products divisions. Here are two excellent examples of our work.

Our Verco and Vulcraft teams have introduced to the joist and deck market the EchoSpan composite floor system. Echo Span reduces the cost of elevated floor construction and it offers the advantages of green building materials that help projects qualify for lead certification. With the Magna Tracks acquisition in 2007 Nucor gained a much larger presence in the preengineered metal building business. Currently our building group team is enjoying strong success in expanding our distribution network and growing our market share. Our marketplace gains are being driven by Nucor's unmatched commitment of resources to providing our builders with cost effective solutions that meet their specific metal building project requirements. Nucor's growth opportunities in fabricated construction products have never been brighter than they are today. Most importantly, I want to say thank you to our team members at Harris Steel, Newcon Steel, Nucor Buildings Group, Verco and Vulcraft for your excellent work managing through these unprecedented market conditions. You are positioning Nucor for continued attractive growth and our long-term profitability. Dan?

Thank you, Ham. Earlier this decade, we laid the foundation for five excellent and four record years over the five year period ending in 2008. What we are doing during this downturn will lay the foundation for future record years to come. Indeed, Nucor's best years are still ahead of us. We appreciate your interest in Nucor and we'll now be happy to take your questions.

(Operator Instructions) And first we'll go to Kuni Chen with Banc of America.

Hi. Good day, everybody.

Good afternoon, Kuni.

I guess just to start off. On the pig iron issue, can you just talk about your mix of pig iron consumption going forward? Does that change? Are you increasing the mix as you sort of try to burn through that at a faster pace?

Yes, we -- during the first quarter we made a decision after we continued to see deterioration in the markets to increase the pig iron consumption dramatically. Up to that time in the quarter we were probably only using between 5 and 7% and we decided to up that to about 35%. That continued just throughout the latter half of the first quarter and will continue at that pace through the second quarter.

Okay. So even at that accelerated pace it still takes you into the third quarter?

Yes. Unfortunately, Kuni, when things fell off as dramatically as they did in September, second half of September, first part of October, when you see your order entry drop by 50% plus and you're forecasting a modest seasonal downturn, but not a fall off the end of the world. You have you to order pig iron out six to eight months in order to ensure a supply, not only -- in this case, through the fourth quarter, but into the first quarter. And when you've cut that in half, in terms of your operating rates, that normal pig iron inventory that would have been depleted by the middle of the first quarter now goes at least twice as long, if not longer and that's the situation that we're in right now.

Right. Understood. And then just one quick follow-up, if I may. Can you perhaps give us some sensitivities on what potential inventory write-downs could look like going forward? Let's say if we assume hot rolled prices go to let's say 350 or 400 a ton and scrap goes to a range of maybe 100 to 150.

Not off the top of my head I can't. You may be able to make some comparison of what we wrote down in the first quarter. But remember, that happens with respect to our FIFO operations. I don't know if you guys want to jump in here.

Some of both.

Yes, some of both. So at this time, I really can't give you a good forecast on that. As we mentioned earlier, midway between the two earnings releases we'll come out with an updated guidance but if you take a look at the impact that our pig iron situation had on the first quarter, which was only for half of the first quarter, it was somewhere around 80 million to $85 million a six, seven week period. So that will give you some idea. And we did report back in the earnings release and that will give you some idea of the kind of impact we'll have in the second quarter as a result of the pig iron.

Okay. Thanks. I'll turn it over.

Next we'll take a question from Luke Folta with Longbow Research.

Hi, good afternoon, guys.

Good afternoon.

My first question is your guys' guidance for the second quarter was a bit more pessimistic than what we've heard from some of the other companies reporting this week. Would you characterize that as your being more conservative? More realistic? Or do you think -- is it just this pig iron issue that's kind of dragging results down?

No, it's -- the pig iron issue is what it is. What we're talking about with respect to second quarter has to do with a very realistic view of the world ahead of us. I mean, we're already into the second quarter. I mean, here we are near the end of April and if you go back and look at our forecast in the first quarter conference call -- or the fourth quarter conference call and the year end conference call, you'll see we were probably the only one that gave a realistic view of what was in front of us. And so my comments to you would be our looking forward forecast is based upon realism, not based upon wishes or pipe dreams.

Okay. Just to follow-up on that, do you think the bigger risk is on the pricing side or do you think utilization kind of come in further?

Certainly, we see continued deterioration in pricing through the first quarter and into the second quarter. How that goes forward depends upon what happens in the competitive marketplace. Also, there's still the issue of whether or not volumes will pick up or continue to be negatively impacted in the marketplace. We still have to go through a whole automobile industry issue and the supplier issue and, it's going to be some time before we see any impact of any stimulus packages on that particular situation and so there's a big unknown out there with respect to that. I saw today where GM said they were going to take nine weeks, shut down their operations for nine weeks this summer.

So there's so much uncertainty out there in the overall economy, both here and globally, and there's so much lack of confidence on the part of consumers and business leaders. And what's going on in Washington and elsewhere that our view going forward is that all issues have to be taken into account, whether it be volumes or pricing and in terms of deciding exactly how things are going to look going forward. But right now it's not a pretty picture.

All right. Thanks a lot, Dan and good luck to you guys.

Thank you.

Next we'll hear from Michelle Applebaum.

Hi. I wanted to--.

Good afternoon, Michelle.

Hi. I wanted to ask you about you two weeks ago -- and I know this isn't your product so maybe I'm catching you unprepared. Two weeks ago there were seven companies on a joint filing for OTCG, trade case against China. And I just wanted to get your thoughts on the case?

Well, I think it's long overdue. It does impact us because we do supply materials to the folks that make those -- the tubular products both from our Memphis facility and others and it's way long overdue. And I commend those companies for going forward, they have our full support and it's time for our government to get realistic about the mercantilistic trading practices that go way beyond just steel or tubular products as practiced by our Chinese trading partners.

Can you tell me -- what I found curious about it and I really wasn't aware of this completely, was that the Canadians have had duties on the same exact products for well over a year and the Europeans actually announced duties on this product the day before the US companies filed the trade case. And in fact, they said in the document that that was one of the reasons that Europe had put duties on so the steel would come here. And I'm just wondering, because we all have similar trade rules and we're all WTL compliant, why are we so late to the party on this? Why were other people -- because I know the OTCG guys have been talking about this for a couple of years.

Well, while we all have similar laws on the books that are WTI compatible, each region of the world goes about being proactive at different rates. And the process by which you have to go forward can be different in the EU versus Canada versus the United States. So I think part of it has to do with the level of proof that needs to be put together and the circumstances that have to be incurred to deal with this type of issue. But I'm sure that the people, the companies involved did their homework and will be successful in their filing.

Can I ask another trade related? Right after that happened, and I didn't see this picked up in the press anywhere of so I was kind of surprised by that, there was an eight-way group thing that our trade association, Canadian, Latin American, European, eight different global trade associations got together, sent a letter to China, about their, their steel industry and I was just curious if you knew the back story to that and has that ever been done before where you got all these Western trade associations get together and sort of address another region's issues?

Well, as we've always said, Michelle, extremes beget extremes and the extremes in China's mercantilistic trading practices I think have put in place a very strong reaction by global trading partners. In fact, Japan was conspicuous by its absence in that filing because literally every other region of the world has joined in on that, whether it be South America or Mexico or Canada, the United States, the EU, you name it. And I think it's indicative of the illegal trading activities that have been conducted by the Chinese, particularly as it relates to manufactured products and further particularly as it relates to steel and people have just had enough. And it's about time our own government got with it and called an apple an apple and said that what we all know is that China's manipulating its currency. It's very disappointing to see the Obama administration continue down the same failed path of the Bush administration and the Clinton administration prior to that.

Okay. Well, thanks.

You're welcome.

Next we'll hear from Timna Tanners with UBS.

Good afternoon, Timna.

Good afternoon, guys. Just to follow-up real quick first on Luke's question when he asked how much of the loss in the guidance was from pig iron . Is that to say -- was your response to say that most of it is the pig iron as you continue into the second

I wouldn't say that most of it is but a good portion of it is, probably most of it, what we will experience in our sheet metal is.

Okay. So then I guess to clarify on the guidance, because Nucor's always been a Company that's been profitable even at low levels of utilization, can you help us understand what else might be going into the forecast for a loss? And what to expect in terms of like maybe your scrap out scrap outlook that might be incorporated there?

First off, we have never seen this low utilization in the history of our Company. I don't think the steel industry in this country has seen anything close to this since maybe the great depression or maybe the next time that we may have been involved in this kind of low operating rates might have been around in World War II. But this is unprecedented and we are certainly being impacted by the unprecedented nature of the lack of business and the complete disappearance of business with respect to steel orders. And so it is unprecedented. I mean, if you go back 2001 to 2003, our lowest operating rates were in the vicinity of 70 to 75 to 85% and again, this is -- that was the worst we had seen prior to this. So it's definitely -- our situation is definitely impacted by the low operating rates, compounded by drops off in significant, as you well know, dropoff in selling prices across all products and then add to that the issue with respect to lack of orders and a significant dropoff in orders that impacted inventories, lasting significantly longer than it otherwise would and the impact of the pig iron on the sheet metals and somewhat on our plate and beam mills, that is what has accounted for where we are today and I would say the inventory issue is probably the single biggest component. The first quarter and going certainly in the second quarter.

But there's still issues of continuing deterioration possibilities in pricing and we don't forecast pricing but there certainly is enough business falloff continuing that lower prices and many products are still a possibility. We still have way too many imports coming in. The market share of imports in this country, while the absolute number's gone down, the market share's gone up compared to what's being produced and domestically and sold by the domestic producers into the market. So there are a host of issues that are impacting this across the board, across all steel companies, and which give us reason to be very cautious with our guidance going forward in the second quarter and very realistic. So I don't know what else I could add to that.

Do you have anything on scrap?

As far as scrap itself goes, not talking about iron units, like pig iron or DRI, but scrap, scrap is going to go as market demand indicates and right now there's no -- there's very little demand in the domestic steel industry. While there are some exports going on with respect to Asia and Turkey in particular, some of that may be delegated to a seasonal impact like we saw last year and the year before. And right now bottom line is that the global steel industry is still seeing a downward trend, not an upward trend. So scrap prices will be determined by what happens there. If things don't get any better than they are today throughout the entire year you won't see scrap prices change a whole heck of a lot.

Okay. Great. Thanks for the update.

Next question comes from Wayne Cooperman with Cobalt Capital.

Hello, Wayne.

Hey, guys. I guess given your advantage cost structure, what's your thought about increasing volumes and taking business from guys who don't have the cost structure or you're kind of content to run your plants on a low utilization level and try to keep price -- some pricing integrity?

We're going to have to interrupt this conversation because I just vomited all over the speaker. There's no way we're intent with this level of operating rates. This is historically low. It's very uncomfortable. Our employees are making half of what they were making a year ago. There's nothing good about this. We are competitive in the marketplace. We'll continue to be competitive in the marketplace with pricing. We know that we're going to be here for many, many years to come but, you can -- you're only going to get so much business in an environment like this and, we'll continue to be competitive to get as much of it as we can.

I think you'll see that in some cases in comparison to some of our competitors, our rates while down significantly, may be slightly better than what you'll see coming from other folks. But at the end of the day, this crisis is so huge economically around the world and in the industry that everybody's being impacted and where pricing goes will depend upon whether things turn around or not but we will be competitive and we'll get every ton that we possibly can.

Just to follow, it seems -- I mean, couldn't you be getting more tons now if you wanted to or now there's not really the tons out there for you to get?

There is -- the demand down the line at our customers and our customers' customers is virtually non existent. All right? When the industry, the entire industry is running at 40%, okay, there is no demand.

Right.

And so everybody's out there, fighting for whatever they can get. All I can tell you is we'll definitely be around.

I'm not worried about that.

For our next question we'll go to Mark Parr with KeyBanc Capital Markets.

Good afternoon, Mark.

Hey, Dan, how are you?

Just lovely.

I can tell. It's a tough environment, that's for sure. I had a couple of questions. One, it's pretty specific and another one that's a little more global in nature. I'd like to get your comments on. First, in your plate operations, can you tell us the approximate mix of plate that was moving into the pipeline business over the last couple of quarters?

Looking around the table to get an answer to that. I'm not sure we can. John?

Yes. We -- obviously, most of our plate product goes through distribution and service centers and much of that at that point, Mark, we don't have visibility as to what end markets it goes to so it would be very difficult for us to speculate on a percentage there.

Okay. Is it fair to say that that's an important market for you, then, and if you can't give us a number? I mean, based on what you can--?

Certainly in today's environment, all markets are important right, but it is traditionally a very small percentage of our business. The larger percentages of our business would go into shipbuilding, construction, bridges, in today's environment wind towers are obviously a good market for us but historically and traditionally, in the pipeline business for plate is not a large percentage of our business.

Okay.

Mark, you have to be careful because there's a lot of crossover sheet product that we produce in our Tuscaloosa mill and our sheet mills that goes into pipe products and so depending upon the diameter you're talking about and the application, I mean, we're putting probably well over 1 million tons into that business out of our sheet mills and our Tuscaloosa 72 inch plus wide plate mill.

All right. Thanks. I don't know -- I missed the first few minutes of the call and I don't know if you addressed or have given an update on the iron ore project or the pig iron project that you're working on, but would like to get your thoughts on that? And then I've got one other global question.

We did not give any update on that. I would be happy to at this time. We are currently still waiting for the permit to be finally approved. It's going through some legal challenges as we speak. Last I heard, it would not be cleaned up and finalized until near the end of this year and beginning of next year. Certainly in this environment, there is heavy unknowns in respect to cap and trade issues and carbon tax issues. I should say cap and tax issues, not cap and trade issues. And eventual cost that could have on the project like that per ton, the economic climate that we're in, we're obviously not in any immediate hurry to move through on this project but as we talked to the governor and his people, there is nothing that we can do until we actually get the permit in hand. Now, we are in the process of buying the land, so that's one positive I can offer going forward, but right now everything's on hold for the permit.

Okay. All right. And then lastly, just wondering about your view of the global market. We've seen so much supply cutbacks around the world. Not just in the US, but to varying degrees in other parts of the world as well. And historically, there was -- there's always been a concern because the steel is somewhat more fragmented as each individual mill accounts for a relatively small part of the global total. There's a sense that maybe there's a potential for the upside in steel to be less than other commodities that may be more highly centralized. And I'm just curious as to your take on that and how you feel steel's ability to participate in the global upside over the next several years, assuming that we would come out of this in a reasonable time frame?

Well, first off, the forces that were at work prior to this surprise financial collapse, surprise from the standpoint that very few people anticipated or saw it because it was so well covered up by the unethical behavior that was taking place in a number of areas, but long-term, and I mean long-term, we will come out of this downturn. I don't know exactly when it's going to be but it's certainly not going to be any time soon. And we will again benefit by the global infrastructure build that is on hold but will be taking place. My biggest concern is that I have not seen a willingness on the part of our government to invest in America to the tune of the $2 trillion necessary just to get our own infrastructure back into shape again so that we can be globally competitive and have a dynamic economy going forward.

So there was really no infrastructure stimulus in that big stimulus bill out of Washington. And far less than what was necessary but at some point in time those things will come back into play globally and here and yes the steel industry will certainly participate and participate strongly. However, in this country here, right now, you know, we've gotten ourselves a major crisis that has impacted the entire world. This is not something entirely the US doing. Our global trading partners have had a role in what's developed here, particularly the huge trade deficits built up with China. But we will have an opportunity to participate in that growth when that occurs. The issue is when is it really going to occur? As you said, there have been tremendous cutbacks worldwide.

Now, you hear things in the press about well, things are starting, you see a little bit of strengthening here, a little more activity there, but by and large the news that says we're cutting capacity down far outweighs the positive. Capacity is still coming out everywhere in the world and starting to catch up here and places where it should be coming out, it's not or at least they're not reporting it. One suspects there may be some inventory builds going on in places like China in anticipation of their infrastructure stimulus packages and expansions of them but the reality is we have a major global oversupply situation today because of the economic crisis and the lack of demand. I fully anticipate that we will see capacity in this country disappear and not come back. Because going forward, there is going to be, we believe, less steel consumed in the United States unless we get serious about a major infrastructure build in this country because there will be less cars made, the consumers going forward will be more savings driven in their consumption, and less debt driven. A lot of the consumers over the past five years will be non existent because credit requirements will change and have changed dramatically. So even when we come out of this thing the steel industry in this country between now and then is going to see capacity disappear permanently.

Okay. Thanks for that color and good luck on the second quarter.

Thank you.

Next we'll go to Michael Willemse with CIBC World Markets.

Great. Thanks for taking my call. This might be a tough question, just given how bad the demand is out there, but do you have any sense on when your customers might be finished with inventory destocking? Are we talking months or are we talking not until next year?

For the last several months it's been like catching a falling knife, okay? Because inventories get worked down, shipments and demand drop, so apparent demand and real demand both keep going down and so what was -- people thought would be an okay inventory level in December, today is too high inventory level. I think if you took a look at Reliance's earnings release and their comments on the next quarter, Reliance is one of those companies that excels and has excelled historically and they know what's going on out there and they're very straight talkers and they see the same thing we do. We see -- we see a second quarter that's not going to be stronger than the first quarter. So -- and they are one of the largest service center customers out there and certainly our largest service center customer and, so that gives you an indication of where the customer base is. When that inventory destocking stops it will be because demand starts to pick up and we haven't seen that yet.

Okay. And then second question, on Nucor's inventory, you're at $1.9 billion at the end of the first quarter. I know you want to work through some pig iron inventory. I guess what kind of level of inventory would you be happy or, say, a few hundred million lower? Or I guess how much more reductions could we look for there?

We're talking in terms of dollars, not tons.

Dollars, yes.

And typically, from our operations, we need to have a certain level of -- what we focus on are the tons in inventory and certainly from a pig iron standpoint we have most of that value and most of the tonnage is in the pig iron which we will be working through. If order entry does pick up going forward we'll get through it faster but the biggest component of that is the pig. So depending on where the value scrap is and what have you, significantly lower than just a couple hundred million dollars below that number. And I don't really have a firm number to put in front of you in terms of the amount of inventory that we have on hand or want to have on hand and the value that that would be obviously depends upon the pricing of the raw materials. John, do you have anything you want to add to that.

I think it depends entirely on the pricing of the product.

On the tons basis, do you want to be a lot lower than where are you now?

With respect to pig iron, yes. With respect to scrap, we're pretty much where we need to be on scrap inventories until we work down the pig iron inventory and replace it with a scrap or DRI from our own plant in Trinidad. Again, that all depends on where the operating rates are, which depend upon where the demand in the marketplace and the order entry rates are. So that's a moving target.

Okay. Thank you very much.

We probably could go 500,000 to 700,000 tons lower combined.

500,000 to 700,000 tons lower?

500,000 to 700,000 tons lower than we are today.

With scrap and scrap substitutes combined.

With the majority of that being in pig iron. Vast majority of that.

How many tons of inventory would you say you have now?

We have in scrap and scrap substitutes about 2.6 million tons.

Okay. Okay. Thank you.

We'll go to a question from Sal Tharani with Goldman Sachs.

Good afternoon, Sal.

Hi, Dan. How are you? Continuing on this pig iron issue, are you -- what are you doing with your DRI out of Trinidad? Have you slowed that down or are you still taking the same amount?

We have slowed that operation down. John or Ladd, you want to comment on that.

We're actually using a little higher percentage of DRI at our plants than we normally would. Simply because our utilization rate has cut the tonnage down significantly, therefore we've had to slow our DRI plant in Trinidad down proportionately.

There was some comments in other conference calls between sort of long products and flat products in terms of pricing and demand. General view was that flat product pricing appears to be bottomed. Long products, plate, beam, perhaps still with room to go. Any comment, Dan, on that?

Well, my comment on that is that all products are still susceptible to lower prices, depending upon what happens in the marketplace with demand and competitive activity. And obviously the closer you get to a lower number, the pace slows down. But there is no -- let me put it to you this way. There's no pick-up in demand in any product that would say -- that would give anybody the ability to say that there is no further possibility for lower prices. And what happens in the marketplace with pricing will depend upon how each individual Company goes forward with their pricing strategies and whether or not we see any demand pickup. But there's no demand pickup and so to say that there's no chance sheet pricing would go down or that long products are more susceptible than sheet, that's poor conjecture.

Okay. Thanks. Also, on your guidance, just wanted to get a little more color on you -- are you planning -- first of all on your LIFO as I understand you take a yearly view and you sort of divide it by four and you flow it through your P&L and then you make adjustments as you go forward. So apparently you have the same view of $106 million LIFO credit for the second quarter in your guidance. But are you planning more write-downs because if you don't have any write-down then it means that conditions in the second quarter are worse than the first quarter?

As we said in our earnings release and during the script, every month since the collapse occurred in September, October, has showed worsening conditions, not improving conditions. Which includes the month of April which is the first month of the second quarter. Okay? So yes, it implies that we haven't hit a bottom yet, because we haven't. And as far as the LIFO issue goes, yes, we do take a look at where pricing is today, where inventories are today, the valuations of inventory. What we project out, consumption rates, we project out where we think the inventory is going to be at year end and then we make an assumption on whether there will be a LIFO charge, a credit based upon that and divide it equally. And it gets updated -- we divide it equally amongst all four quarters and then it gets updated every quarter. So the number could go up or down depending on how we see the picture going forward toward the end of the year. So the number could go up or down depending upon how we see the picture going forward to the end of the year. And obviously the closer to the end of the year you get the better the picture you have of where things are going to end up.

I will tell you this, that based upon where things are today, we are still very conservative in our application of LIFO credit. And, but that's the way you should be in the first quarter. You should be conservative. If we see things moving in the -- at the end of the second quarter into the third quarter differently, we would change the amount of the credit based upon that. And so all I can tell you is that right now our $105 million credit that we applied to the first quarter is on the conservative side from the standpoint of where we see things for the year right now. It's just too much uncertainty to be anything but conservative on the application of any credit.

Great. Thank you very much, Dan.

Our next question comes from Mark Liinamaa with Morgan Stanley.

Hello. A little more information on the imports. I'm curious, is this business that you're getting an opportunity to bid on and losing because it's below your price threshold? And also, presumably it's not just China that's a problem. Can you comment on where else things might be coming from and what sort of products? Thanks.

Well, the import data is very well published. You can take a look at it. It's pretty much across the board. The latest data showed that rebar imports out of Turkey in particular jumped up significantly which is interesting because they buy their scrap out of the United States, ship it to Turkey, turn it into rebar, ship it back over here and sell it and compete with us. I think there was like 60,000 tons that came in in the last reporting period of rebar and it increased from where it was the previous month.

So you're right, it's not just in China but the problem with China is it's state owned. It's heavily subsidized so virtually any ton sold over here is breaking internationally trading laws and it is sold illegally. As far as where other items are with respect to cost, those things are developing. You've already seen several trade cases and where it's appropriate, where we believe that people are selling below their whole market price, or below the cost of production other cases will be filed across the product mix.

Are you seeing opportunity to bid on some of this business or is it just remnants of maybe legacy long-term contracts that are still working through the system?

No, it's stuff that's going on currently.

Thank you.

We have no further questions at this time. I'd like to turn it back over to today's speakers for any closing comments.

Yes, Paul. Thank you. Again, I would like to thank everybody on this call, both here and those with the questions that were asked. Thank you all for participating, being interested in Nucor and to our teammates around the country and outside of the country, thank you again. Stay safe and keep up the good work. We appreciate your support and going forward we know that you will keep operating safely and work to keep our costs improving and our operations continually improving. Thank you all very much. Stay safe.

That does conclude today's conference. We thank you for your participation.