Nucor Corp (NUE) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Nucor Corporation third quarter of 2012 earnings 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 during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate and variations of such words and similar expressions are intended to identify those forward-looking statements which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy.

More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest 10-K and subsequently filed 10-Qs, which are available on the SEC's and Nucor's websites. The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligation to update them either as a result of new information, future events, or otherwise. For opening remarks and introductions, I would like to turn the call over to Mr. Dan DiMicco, Chairman and Chief Executive Officer of Nucor Corporation. Please go ahead, sir.

Thank you. Good afternoon. This is Dan DiMicco, Nucor's Chairman and Chief Executive Officer. Thank you for joining us for our conference call. As always, we appreciate your interest in Nucor. With me for today's call are the other members of Nucor's senior management team; our President and Chief Operating Officer, John Ferriola; Chief Financial Officer, Jim Frias; and our other Executive Vice Presidents; Jim Darsey, over Long Products and Bar Products; Keith Grass, over at David J. Joseph and Scrap Operations; Ladd Hall, over our Flat-Rolled Businesses; Ham Lott, over our Downstream Fabrication Businesses; and Joe Stratman, who is responsible for our Beam and Plate Businesses as well as our Business Development Group.

First, and most importantly, as always we want to thank everyone on our Nucor, Harris Steel, David J Joseph, Duferdofin, NuMit Steel Technologies, and Skyline Steel teams for your hard work in today's extremely challenging economic and steel market conditions. We are extremely proud of your unrivaled commitment to taking care of our customers. Every day, you are building a stronger and more profitable Nucor, and as always, you are doing it by working safely, and by working together. You are Nucor's greatest asset and our real competitive advantage. The right people. Thank you all very much. I will now ask our CFO, Jim Frias, to discuss our third quarter results and financial position. Following Jim, John Ferriola will report on Nucor's operations and growth strategy. Then, I will wrap up with some thoughts. Jim?

Thanks, Dan, and good afternoon. Third-quarter 2012 earnings of $0.35 per diluted share were at the high end of our guidance range of $0.30 to $0.35 per diluted share. Third-quarter results were negatively impacted by two non-cash charges totaling $0.10 per diluted share. $0.06 per diluted share resulted from inventory related purchase accounting adjustments associated with our acquisition of Skyline Steel, which we acquired at the end of the second quarter. We expect those charges to be much lower in the fourth quarter. We also recorded a non-cash charge of $0.04 per share resulting from a loss on the sale of assets of Nucor Wire Products, Pennsylvania.

A quick comment about our tax rate, since it can be confusing due to the impact of profits from non controlling interests. After adjusting out profits belonging to our business partners, the third quarter of 2012 effective tax rate was 35.9%. Overall market conditions softened further in the third quarter. In addition to slowing economic growth, both domestically and globally, steel imports into the US have increased significantly in both 2011 and again in 2012. The sheet market has been further pressured by new domestic capacity that began ramping up in 2011. For Nucor, these market conditions were evidenced by a 5% decline in production and a 3% decline in shipments at our steel mills from the second quarter.

Operating rates at our steel mills fell to 71% in the third quarter, from second quarter's rate of 76%. However, challenging steel markets highlight the value of Nucor's business model, particularly our highly variable cost structure and our diversified product portfolio. Our profitability in the just-completed quarter was supported by relatively more stable results from our bar and beam mills when compared to the profit declines at our sheet and plate mills. Additionally, our downstream steel products business reported its second consecutive profitable quarter, after being unprofitable for the preceding 13 quarters.

Another key strength of our business model is Nucor's ability to generate healthy cash flow through cyclical downturns. In contrast to a 43% decline year-over-year in the first nine months of 2012's net income, cash generated from operations increased more than 60% over the same period to $1.1 billion. Nucor benefits from a counter cyclical cushion provided to our cash flow as lower scrap and steel prices reduce our working capital investment during downturns. Nucor's consistent cash flow performance is also helped by our highly variable cost structure.

Balance sheet strength remains another important attribute of Nucor's business model. Standard and Poor's in its October 2 quarterly report entitled North American Metals and Mining Companies, Strongest to Weakest again ranked Nucor Number 1 for credit ranking and credit outlook among a universe of 62 companies. Nucor was the only steel company in the group that S&P awarded a strong business risk profile due to our competitive position and profit performance relative to our peers. We are the only steel producer in North America to enjoy the extremely important competitive advantage of investment grade credit rating. The benefits of our credit rating include a lower cost of capital, financial flexibility, and our position as the lowest risk counterparty for both our customers and suppliers. Our natural gas working interest investment to support Nucor's raw material strategy is an excellent example of how financial strength pays off for Nucor.

Cash, short-term investments, and restricted cash totaled $2.5 billion at the end of the third quarter of 2012. That was an increase of $365 million from the second quarter of 2012. This improved liquidity was driven by our strong operating cash performance during the third quarter. Further to Nucor's strong liquidity, our $1.5 billion unsecured revolving credit facility is undrawn and it does not mature until December 2016. We have no commercial paper outstanding. At the end of the third quarter, long-term debt totaled $4.3 billion. In the fourth quarter our leverage is declining. On October 1, we paid off maturing debt of $350 million, and in December we will be paying off an additional $300 million in debt.

As a result of our strong cash flow performance, we expect year end 2012 cash, short-term investments, and restricted cash to exceed $1.5 billion. We will maintain this strong liquidity position in a year when we invest almost $750 million in acquisitions. Invest an estimated $1 billion in capital expenditures and pay off $650 million in debt maturities. That is a total of $2.4 billion in cash outflows in 2012, with most of it targeted on increasing our earnings power. It is a long tradition of Nucor to grow stronger during downturns. We are able to do this because of our financial strength and the long-term approach we take to managing our business.

Through the first nine months of 2012, capital spending totaled $692 million. The majority of the capital is going to a number of growth investments. The largest project is our Louisiana direct reduced iron raw materials facility currently under construction. There are many other projects being implemented throughout our upstream, steel-making, and downstream businesses to develop new products, increase quality, and reduce costs.

Skyline Steel, acquired in June for a cash purchase price of approximately $675 million, is off to an excellent start as a member of the Nucor family. This acquisition brings together Skyline, the North American market leader in the distribution of steel piling products, and Nucor-Yamato, North America's leading producer of steel piling products. The combination of these organizations expands Nucor's opportunity for profitable growth in the steel piling business. Skyline has been immediately accretive to Nucor's cash flow, and is expected to be accretive to our earnings in the fourth quarter.

For the fourth quarter of 2012, we expect to see a reduction in earnings exclusive of one-time charges from the third quarter level as a result of the ongoing trend, the economic softness in the global economy. Nucor will again follow our practice of providing quantitative guidance in the final month of the quarter. Dan?

Thank you, Jim. I will now ask John Ferriola to report on Nucor's operations and the implementation of our growth strategy. John?

Thanks, Dan, and good afternoon. Let me begin by thanking all of our raw materials, steel-making, and steel product teammates for your outstanding commitment to working safely and to taking care of Nucor's customers. Thank you, and please keep it going. We are extremely excited about the impressive work being done by our raw materials, steel-making and downstream product teams during these bad times to prepare Nucor for the good times ahead.

Here are some third quarter highlights from a few of the projects currently under way to grow Nucor's long-term earnings power. Our Hertford County, North Carolina, plate mill team successfully brought their new vacuum tank degasser on line during the third quarter. New grades, requiring degassing, are now being trialed and made available to our plate customers on a regular basis. Coming next at Hertford County will be a new normalizing line that is scheduled for start-up by the middle of next year. These value-added investments build on the outstanding success of the mill's heat treat line that began operations last year. In the third quarter, the heat treat line again delivered record shipments and our heat treated plate products have largely avoided the severe pricing pressure of commodity grade imports.

Nucor's sheet mills also continue to move up the value-added chain. Our Hickman, Arkansas, team will start up a new vacuum tank degasser within the next three weeks. The degasser will allow Hickman to participate in the higher value-added OCTG products market, along with opening new opportunities in Mexico. Our Decatur, Alabama, team continues to run very successful trials in the automotive market, using their world class galvanizing line to produce parts for several of the new domestic auto producers. Our Berkeley County, South Carolina, team is moving ahead with their new wide and light project. It will allow Berkeley to produce up to 72-inch wide material and light gauge down to 0.042 inches. Equipment orders have been placed and construction is under way. We expect this project will be up and running in late 2013.

In the third quarter our David J. Joseph team began operating 2 new nonferrous metal sortation facilities, 1 in Florida and the other is located in Kentucky. These investments allow DJJ to maximize the profitability it realizes from its recycling of obsolete scrap. Another noteworthy, DJJ third-quarter achievement was the recognition of our Salt Lake City, Utah, recycling facility by OSHA's SHARP program. The Safety and Health Achievement Recognition Program, or SHARP program for short, represents the gold standard for safety excellence and recognizes companies that voluntarily go to the extra mile to meet rigorous safety standards.

Our team at Nucor Steel Louisiana made excellent progress during the third quarter on the construction of our new DRI plant in St. James Parish. Their can-do attitude and high-energy level allowed them to overcome significant challenges arising from this summer's record low level of the Mississippi River. Two major milestones reached this quarter were the placement of the DRI vessel on the structural module that supports it and the erection of the iron ore storage domes. Most importantly, we are on schedule for a mid-2013 start up of DRI Production. Our Louisiana DRI project is a huge step forward implementing Nucor's raw material strategy. Combining Louisiana's annual capacity of 2.5 million tons with our Trinidad plant's 2 million tons of annual capacity, brings us to about two-thirds of our goal to control from 6 to 7 million tons of annual capacity in high quality scrap substitutes.

Successful execution of our raw materials strategy, our DRI production capability, pad with our long-term and low cost supply of natural gas is a game-changer for the cost structure of Nucor's steel-making operations. It does more than just support our growth in the higher value-added and higher margin sheet and SBQ markets. Our investments in DRI production capacity and in natural gas assets will provide Nucor significant competitive cost advantages for raw materials and energy. The raw material strategy is also a game-changer, by shortening our supply chain for high quality iron units.

The Nucor team is in a position of strength, to build on our Company's proven ability to be effective stewards of our shareholders' valuable capital. As always, our success will be driven by the adaptability and sustainability of Nucor's business model. In everything we do, our focus remains on long-term, sustainable growth, and Nucor's profitability. We are continuing Nucor's historical and highly successful strategy of preparing for the good times during the bad times. Working together, our team is building an exciting and very rewarding future for all members of the Nucor family, our shareholders, our customers, and our teammates. Thank you. Dan?

Thank you, John. The biggest near term challenge facing Nucor and the entire US steel industry is the current flood of steel imports into our country. Based on US Census Bureau data, steel imports are on a pace to reach 27.7 million short tons for full year 2012. This represents an increase of more than 20% from 2011 imports of 22.8 million tons, and more than 40% from 2010 imports of 19.3 million tons. Such increases are totally inconsistent with a domestic economy that is barely growing as well as a US steel industry capacity utilization rate mired in a range of 70%.

Not only are we concerned about dumped and subsidized steel and steel products, we are taking action to protect our interests by asking our government to enforce rules-based free trade. A number of sunset reviews are pending or about to be initiated be the US International Trade Commission. These include cases on galvanized steel sheet, rebar, and hot rolled sheet from a variety of countries. Maintaining these orders is critical to maintaining free and fair trade in the US market. And it's highly likely that new trade cases will soon be filed. The Nucor culture will always be proactive and aggressive in addressing all risks to our business.

For that same reason our team continues to take a leadership role in advocating real solutions to our nation's economic challenges. Our view of this situation is unchanged. The time is right and long overdue to reinvigorate the American economy by seizing new and exciting opportunities. They include capitalizing on our nation's vast energy resources, growing a globally competitive US manufacturing sector ready to prosper on a truly level playing field, and rebuilding our decaying infrastructure. Long-term, we are bullish on the profitable growth opportunities for the American economy and Nucor.

That is why we are working hard to build a stronger Nucor. A stronger Nucor is one positioned to deliver higher highs and higher lows in earnings power through successive economic cycles. Our disciplined execution of our multi-pronged growth strategy has invested nearly $7 billion of our shareholders valuable capital since the last cyclical peak in 2008. Those investments have dramatically increased our Company's long-term earnings power. That is why our confidence has never been greater that Nucor's best years are ahead of us. Thank you for your interest in Nucor. And we'd now be happy to take your questions.

Thank you.

(Operator Instructions)

Our first question comes from Michelle Applebaum with Steel Market Intelligence.

Hi. Congratulations on a great quarter in the environment we're in.

Good afternoon, Michelle. Thank you.

I wanted to also applaud you for taking the time in your release and in your script to talk about the issue of imports, to put that front, center, because you've got over $1 billion of projects that we could spend 90 minutes on, but this is an industry problem that is just plaguing everywhere you look. There's no place to hide. I wanted to address how that can be fixed. Because in my 30 years, I've only seen one time where action really made a huge difference and that was the Reagan era of VRAs back in the '80s. Is there a solution like that? Is there a real trade solution here?

Trade solutions that we have available to us are numerous facets. And I mentioned several of them in my script. In addition to that, we are exploring some very new and unique ways to deal with these trade issues that I will not go into on this call. But rest assured that our creative juices have been hard at work to come up with new ways to deal with the abuse of our markets by trading companies and by foreign steel companies and countries, particularly state-owned enterprises. And we will continue to be very active on these issues, along with the entire industry, and many in our domestic manufacturing customer base. So just stay tuned and over the next six to nine months, there will be a number of things that will be obvious to people about the directions we're taking to deal with these issues.

I would also suggest that the VRAs were probably not the only time we had a strong action on the part of our government to deal with a massive flood that occurred during these 2000-2003 time period. And there are opportunities for us to deal with this today, with tools that are in the toolbox and tools that will be added to the toolbox. In addition to that, we are working with our government to find more proactive ways to stop this before it becomes damaging. That's enough said on that subject.

Can I ask another question?

Certainly.

Okay. There's been kind of overwhelming number of price increases for sheet this week and there hasn't been anything since July. And I was just wondering if you could give us some color on what's prompting that?

Well, as you know, we don't really get into discussing the pricing situation particularly on a short-term basis. And I'll leave John the opportunity to make some comments. John?

In general terms, Michelle, when you look at sheet, first of all the market was over-sold. Pricing had reached unsustainably low levels. Also, when you look at the inventory throughout the supply chain, the inventory is low throughout the entire supply chain on sheet. Imports are down a little bit. And we're reaching the point where customers are beginning to place their first quarter business. So we've seen an improvement in our backlog, in our order entry rate. Right now, our lead times are out just about to December. So all of those factors played into our making an announcement on sheet increases.

Okay. That's some great color. Okay. I'll go back in the queue to see if I can get another one in later. Thank you.

Thank you.

Our next question comes from Shneur Gershuni with USB.

Hi. Good afternoon, everyone.

Good afternoon.

My first question I guess sort of following on the import theme just slightly. Your prepared remarks, as well as in the press release earlier, you sort of called out imports and new domestic supply as kind of a headwind. But generally speaking we've seen imports starting to trail off a little bit. We've had a big bankruptcy in the space as well too. Do you believe that that's enough to sort of readjust the supply/demand balance? Or do you need to see a little bit more capacity come out as well too? Just trying to understand sort of where you're thinking things are going from that perspective.

First thing we need is a recognition in Washington that the best way to get out of this mess that we're in, whether it be jobs or deficit spending, is to get increased revenues coming in from a stronger economy. And that will drive increased demand in the steel sector. Having said that, imports are not falling off significantly enough to have a major impact. We've got, as I mentioned in the prepared remarks, it's coming in at annualized rate of almost 28 million tons. That's ridiculous considering how much tonnage is actually being produced by domestic producers that are operating in the low 70 utilization rates. So there's much more that needs to be dealt with there. And they will be dealt with.

And many cases the penalties will be retroactive. And so as far as the domestic production and the shuttering at the present time of the RG assets, that's obviously a positive thing for the supply/demand balance. And it helps cushion the negative impact of the poor economy and the flood of imports that have come in. And as far as the new start ups go, they're in a desperate situation. They're bankrupt. They're selling their assets. And they're behaving that way in the marketplace. Sooner they're sold, the better.

A follow-up question, if I may. While iron ore prices have bounced in the last couple weeks, they're certainly off from where they were. Given your focus on DRI and so forth, has there been any thought or consideration to kind of some vertical integration as it's maybe picking up some assets in that respect, sort of vertically integrate your operation at all?

We are thinking about a whole host of things all the time, all different opportunities, and if we make a move in that space it will be because the opportunity says it's the right price and the right time to do it. But we are constantly exploring opportunities throughout the downstream, through the upstream space. Literally on a daily basis.

Great. One last question. There's a competitor of yours out there talking bouts SBQ weakness and so forth. Is this something that you're seeing as well too? Is it unique to them? I was wondering if you had some color on that market.

There certainly has been some slowing in some of the markets of SBQ. In other areas, there's still significant strength. Automotive would be one example of that. Heavy trucks are off a little bit from the peak where they were a few months ago. Still fairly strong. So some SBQ markets have weakened for sure, but then there's others that we're very active in that have remained strong.

In general, the larger sections in the SBQ marketplace have been hit the hardest and certainly some competitors are more impacted by that than others.

So this won't necessarily impact the expansion of the Memphis mill.

No, no. What we're doing with our SBQ expansions in Memphis and at 2 of our other mills that focus on SBQ is based upon how we see the future. If it was based upon how we saw today, we would probably stop them all. But we are very confident that we're going to see an influx of manufacturing coming back to this country for a host of reasons, in sectors that are strong consumers of SBQ type products and in the energy area as well. John?

The other thing I would add, Dan, is that when you look at the investments we are making in SBQ, they're investments that get us into new products, new geographical territories, new applications, with new customers. So we've even if the market remains a little stagnant, we have opportunities to grow in those areas.

Great. Thank you very much, guys.

You're welcome.

Next we have Sal Tharani from Goldman Sachs.

Good afternoon, Sal.

Afternoon, Dan. Good afternoon, guys. How are you? Dan, you are going to start the DRI mid-2013, so that means that you're going to start looking for buying iron ore a few months before that. Was wondering if anything you've thought about, was it because there's some new capacity coming in the Minnesota region in the US? Also the pallets, would that be a good alternative? Or do you think that Brazil is the best source for you to bring pellets into the plant.

Currently, we buy pellets from three different pellet producers. Two are in Brazil, one is in Canada. The start up and the continued operation of the Louisiana first DRI plant will be supplied by those same suppliers and probably similar percentage as to what they do today for us. And we have been and are currently exploring other supply sources. And we will be successful in bringing on some additional supply sources from other parts of the world.

And continuing on that, you had mentioned that there's an opportunity to actually get to the resource and buy the resource, or acquire the resource of iron ore, that would also be an option. But with the iron ore prices are weakening, do you think that option is still on the table?

I think that the options become less expensive that are on the table. And that may exist for some period of time. And so, again, we will be opportunistic. If we can get something that looks like it will be a good, long-term add to our raw material strategy, we will take serious look at it and you'll hear about it when it happens, if it happens.

Thank you.

The opportunity's -- we believe there will be more opportunities for that going forward than there have been.

Great, Dan. Thanks.

We have next Luke Folta with Jefferies & Company.

Good afternoon.

Good afternoon, Luke.

First question, I think I read recently that Moody' s had put Nucor on review for potential downgrade on the credit rating. And Jim talked a lot about how important that is to you guys. I kind of wanted to hear your thoughts about what you thought about that number one? And then also if that factors into your view on how you look at spending opportunities over the next near term here.

I'll let Mr. Frias take a shot at that one. Jim?

We are several levels above investment grade. The bottom investment grade is a BBB-. We're right now a middle A so we're like 5 brackets above the bottom. And we may end up with a split rating if Moody' s does in fact downgrade us to a low single A rating. We will still have an A rating that's split. We don't like the idea that it could happen, but it's a real possibility. We've always been committed to maintaining a strong credit rating and we will remain committed to maintaining a strong credit rating. And there's a lot of different ways to achieve growth investments that don't always require issuing significant amounts of debt. So as opportunities come, we'll evaluate them from a number of different perspectives.

In addition, I would add to the comments that Jim made in his presentation, his prepared remarks, that the counter cyclical cash generation that we benefit from is actually adding to our stronger cash position at the end of the year than people might be forecasting. So that only serves to help us in regard to issues like we're talking about.

Got you. Okay. And then I guess just secondly, I think you guys probably have as much insight into nonresidential construction as any other company in the US. I just wanted to understand your thoughts on -- typically we see the rule of thumb is basically that once housing starts to recover you get a lag, 12 to 18 months or whatever it is, recovery in commercial construction. And I just wanted to get a sense of how you -- is there anything different that you see this cycle that would result in that not happening?

Well, first off, people all like to focus on the positive when possible and when you see a nice uptick in the housing side of things, that tends to be portrayed as good news, which it is. But relatively speaking, we're still at abysmal levels overall. And so I think that it's something that is going to take longer to have a positive impact on the commercial construction than would have been normally the case coming out of recessions where housing had suffered. I have no idea exactly the time line on that, but it's the way things are going in Washington, with the lack of action on the economy, the dismal performance of the economy and job creation, the threats to the business community and the private sector, you know, things are going to happen slower as long as that's the case. And hopefully that won't be the case for a whole lot longer.

With whoever wins the presidency, hopefully they will do the right thing to stimulate this economy and create job creation. And so we still see the nonresidential, of which commercial would be a component, struggling. While our downstream businesses have been profitable now for two quarters in a row, as Jim mentioned, it's still a very weak environment out there. And we've got under the current set of circumstances, we've got a couple of years yet to deal with before we start to see a strong nonresidential construction market. Hopefully, we will be able to change that. I know we can change if we do the right things. It remains to be seen whether we will or not as a country.

Okay. Could I ask one more quick one?

Sure.

Just on Skyline, are the shipments that are going through Skyline showing up in your reported sales tons, in your supplemental data? When the segment data's reported is that going to be in the downstream segment?

It will be in the steel segment. It is included in the tons right now.

Can you tell me which category?

It will be in the structural.

Got you. Okay. Thanks a lot, guys.

You're welcome.

Our next question is from Dave Martin with Deutsche Bank.

Yes. Thank you. Jim and Dan, as you pointed out you had a very good cash flow and cash quarter in the last couple months and some of this was due to asset investment sales. But I'm just kind of curious as to whether any of this may reverse in the fourth quarter? If there's anything unusual?

David, I would say very little of it had to do with asset sales. The proceeds from the sale of Wire Products were in the tens of millions of dollars, in fact, less than 20 I think, as I recall. So that really wasn't a factor. In fact, if the pricing trends that we've kind of seen in the pipe for steel was weaker in the second half of the third quarter than it was in the first half so we're starting out with a lower pricing position. I would say the more likelihood is that we'll get another benefit in the fourth quarter from working capital. And so no, this isn't a one-time thing that's going to reverse direction. It's likely to get another little bit of pop cash for us in fourth quarter as well. Maybe not as big as third quarter but still something there.

Okay. And then secondly, just had a quick question on structural pricing which was up in the quarter versus a second which looks a little odd. But was that just a function of Skyline?

Yes.

Okay. Thank you.

You're welcome.

Our next question is from Timna Tanners with Bank of America-Merrill Lynch.

Yes. Hi, good afternoon.

How are you, Timna?

Good, thanks. John was going through in detail with the projects and I kind of caught the part about auto and wanted to probe it a little bit more, given the additional investments you've been making there and the time frame for starting up late 2013. So I mean it's been a parable at least in the steel industry that the mini mills could never make auto quality exposed sheet. Can you tell us if you're attempting to break down that expectation and what your plans are there?

Before John gives you details on your question, I will just repeat one phrase that I've always thought of as being very important. Never say never. If people haven't learned that after the last 30 plus years of mini mills in the steel business, then they have not been awake or alive until very recently. Never say never. John?

Timna, I will tell you with a great deal of confidence, we will be able to achieve that at some point. I go back to the history of mini mill steel-making and I remember when people told us we couldn't make garbage can quality steel. Look at the things that we're doing today in every aspect of our business. So the investments that we're making, the world class galvanizing line, other investments, the wide and light project that we're working on, the degassers that we are adding virtually at every one of our mini mills. Our focus on moving up the value chain on SBQ business. Clearly, we are focused on automotive and we have a great deal of confidence that we will be able to make all of the steels that are used in automotive at some point.

Excuse me, Timna. I think on one previous call John talked about a product that we made for Nissan, was it? And satisfied the most demanding hood quality requirements for exposed. So it's --

Yes. I will say this, Timna. We have done trials with many different new domestic and domestic auto producers on a wide range of automotive steel, okay, and what Dan is referring to is a particular application which is without a doubt the most difficult application in terms of surface quality. And we did extremely well in that trial.

So at some point in the next couple years when we list whose suppliers to the main auto companies, we'll expect to see Nucor up there on the top.

I would be disappointed if it was measured in years.

Oh, months? Okay. Got it. All right. So then my other question is for Jim. I think I'm understanding the LIFO but just with the extent of the swing this last couple quarters, can you help us understand the assumptions behind the change to a credit from earlier this year?

Yes. If you think about what's happened during the year. In the first quarter we were experiencing a somewhat inflationary look forward and so we were recording LIFO expenses, expecting the cost of scrap to be higher by the end of the year. That moderated in the second quarter so we reversed our accrual and went to a neutral position. And now in the third quarter it's clear that scrap prices are going to be lower than they started the year at, and overall raw material costs, because scrap is not the only thing that goes in the LIFO calculation, it just tends to be the biggest driver. Having said that, we're recording 75% of what we expect to book for the year at the end of September. And so you'll see a smaller charge or credit in the fourth quarter if things stay the way we foresee them. So we booked I think $84 million this quarter. We'll book one-third of that in the fourth quarter if things stay the way we seem them right now.

Got it. Okay. Thank you, so much.

You're welcome.

Our next question comes from Arun Viswanathan from Longbow Research.

Good afternoon, Arun.

Good afternoon. Just had a couple quick questions. So I guess, can you just tell me what you guys are seeing in scrap right now? There's been I guess speculation that things appear to be bottoming. What you're seeing on both domestic and export side for scrap?

Before I turn it over to Mr. Ferriola, the only comment I would make about the term bottoming is, seems like we have several bottoms through out a 12 month period in the course of the year. And as we seem to hear talk about another quote-unquote bottom, at the end of the day if the demand in the marketplace will establish where scrap goes and right now demand is still pretty weak. But John, you have some comments?

The only thing I would add to that, Dan, I think you said it very well. Predicting where scrap is going is somewhat of a challenge. But there has always been a correlation to iron ore pricing and when you look at iron ore pricing it's at lows over the last couple of years. It had a small period where it spiked up. I say spiked by a few dollars and it's on its way back down. So I don't want to say that it's at a bottom either. I think it's the best way to say it is that the end of the day the market will determine what the price of scrap is. And it will be a function of volumes, production levels, utilization levels and what's happening in other raw materials such as iron ore.

It's also impacted by what the rest of the world is doing. And there has been a general slowing but that can change. And so it's probably more difficult to forecast today and over the last couple of years than it ever has been. So we'll just leave it at that.

That's why we're asking you guys because you guys are right there in the thick of it, right?

We're the experts, all right. (laughter)

All right. Another question I guess on DRI. You expect start up in mid- '13 of the first plant. Are you still planning for further capacity increases? And then, I think you've discussed the economics previously on a previous call. Can you just help me try to think about how much you will save by these 2 projects?

The answer to your first question is yes. We are still on track to move the second DRI facility shortly after starting up the first, if I understood your question properly.

Is there a time line for that?

When we start up? The one that we are projecting for mid-year and we see that some of the different technologies, not necessarily new technologies, but different ones than we're used to working, prove to be as effective as we've been told, then we will begin immediately.

The second part of your question, you talked about the economics of making the DRI. We have an investor presentation that's available on our website where there's a slide that gives a side-by-side comparison of our DRI making costs at $100 iron ore costs compared to Best-in-Class in the world. With every recovery possibility that exists and you can see that side-by-side and that shows the benefit of what I view at the bottom of a market. So it's very cost competitive with an advantage to the bottom of the market. And at peak market, we'll be a cost based producer of iron. And iron ore may go up to, say, $180 like it did in the last economic peak, where as pig iron went to $1,000 a ton and that's where we'll have our real savings.

Thanks.

Next question comes from Richard Garchitorena from Credit Suisse.

Good afternoon.

Good afternoon. First question is in the press release you mentioned excess domestic sheet supply as an issue impacting the market. You know, obviously RG steel's offline. Utilization rates are at 70%. Where do you think utilizations need to be? Or is this more a function of where demand is right now?

Well, it's a function of overall where demand is, but when you have 27, 28 million tons of imports coming in, that undermines even the supply/demand situation from the economic standpoint. So it's a combination of those, plus we have as I publicly stated before, plants built that never should have been built as witnessed by the fact that now they're being basically sold off and should never have been rejuvenated for the umpteenth time. They're being sold off again without any strategic players stepping forward. So whether it be new stuff that was brought in, much to the chagrin of the major steel player in the world, has not worked out well. It has impacted the entire industry and so that's the kind of situation we're in. Even in a good market, quote-unquote, good market if the imports were at these kind of levels there would be a supply/demand imbalance. But certainly some of the things that are taking place at RG and elsewhere will have a moderating effect but right now the demand is and the import flows don't allow for it to show up in higher utilization rates with need to be north of 80%.

My other question, noticed a bit of an uptick in conversion costs this quarter. Can you give us some color into what drives that? And is Skyline Steel part of that? And how should we think about that going forward?

The main issue that drives it is you take a look at the utilization rates and production numbers this quarter prior to the previous quarter, you'll see that it's throughput related and tons related. John, anything else?

It's volume. Volume's the driver.

Okay. Thank you.

Our next question comes from Evan Kurtz with Morgan Stanley.

Hi. Good afternoon, guys.

Good afternoon.

I thought I'd ask you a question on OCTG since you're a pretty big supplier of feed stock there. We've been hearing a lot about an inventory overhang as some people may have over bought, assuming the rig count would just continuously go up through the course of the year, and it flattened out. Just want to get your thoughts on where you see that market headed? What are we in for as far as destocking? When do you think that could stabilize?

Well, I appreciate the fact that you highlighted that some people over bought. I think the bigger problem with the OCTG supply side has been the amount of tons have shoved into this market from overseas again. When the market wasn't there for it. There wasn't a question of people having greater expectations as much as it was stuff being dumped into our market which will be addressed shortly. John, you want to add to that?

There's certainly a concern about the over-inventories and it is a result of the imports and over-buying of those imports.

And the docks that are under siege these days and sagging from the weight of imports sitting on top of them that have not been sold.

Got you. I guess at the risk of kind of beating a dead horse, on some of these trade cases seems like the real issue here is not that, it's pretty obvious that there's dumping going on, but we have to prove damages as well. And how do you think about it? Seems like OCTG might be a right product as far as a case goes. We've been hearing more and more about that in the news flow. But what do we need to see on the damages front before some of these things can actually start going forward?

The damages are current. It's a matter of a timing issue. And if there's time that needs to have pass by where those damages are and a case is put together. And those are well along the way as an industry in a number of those fronts right now.

Great. That's helpful, guys. Thanks a lot.

Our next question comes from David Galison with CIBC World Markets.

Thank you, guys, for taking my question.

Thank you.

Just wanted to touch on the automotive again. We've talked in the past about efforts to increase automotive market share. We've seen some good success in this area. Just wondering, do you have a target level that you're looking for, that you're working for the automotive market?

Do we have a target level for the automotive market? Well, 100% would be nice.

As a percentage of Nucor's business.

As a percentage of Nucor's business?

Yes.

Somewhere in the neighborhood of 15% to 20% would be a good number for us.

And then just if I could touch on your operating rates in the quarter. It looked like there was a possibility to get a bit of an uptick in Q3 with some of the down time expected, but operating rates actually sort of trailed the industry. Just wondering if you could provide some color there?

Well, actually if you look at our operating rate as it was reported, it's 71%. And you look at the industry numbers, the most recent AISI number was just over 71%, 71.2%, something in that neighborhood. And what you have to look at there, David, is there's a little bit of a trailing effect on the industry reported numbers. So because of the way that they're calculated. We feel confident when you look at the history, year-to-date numbers for example, we're right in the ballpark with the AISI numbers as we were last year. Last year, the full year, the AISI number was about 74.4%. We were about 74% even. We feel comfortable that we're right there with them.

The problem with comparing any individual company's latest information with the number reported by AISI is it's complicated even for us to figure out. But it has to do with what John said and that is the reporting is not from the current time period in some of the numbers that are reported as current. May sound strange to you but that's the way it is because there's a reporting lag and what have you. It's the best estimate the industry can give at the time, but it won't be as current as what individual company can give you.

That's why the best way to take a look at it is to look at it over a period, so you're not looking at any one particular week of numbers. It doesn't give you an accurate picture.

Okay. Thank you, very much.

Feel free to call AISI up and ask them the methodology.

Our next question comes from Michael Gambardella with JPMorgan.

Hello, Mike.

Good afternoon. Hi, Dan, how are you?

Hanging in there. How are you?

Good, good. Hey, over the last 30 years or so we've seen many foreign steel companies coming in and buying assets or building assets in North America. With just tremendous failures, you know, this Thyssen one being the most recent. And even as we speak there's an article out on The Financial Times saying Mittal looking to sell part of their iron ore up in Canada now. Do you think this is just the tip of the iceberg? Do you think you're going to see more opportunities, more distressed opportunities in some of these assets? I think back in 2003 you picked up I think it was Tuscaloosa pretty cheap.

Yes.

Do you think there's more coming?

That's a tough call. Certainly if things don't improve from where they're at, there will be more opportunities, i.e. failures in the marketplace. And as you well know, sometimes these things take a couple of reiterations of failure to go away. But specifically, I couldn't give you a really good feel for what the odds are of that happening. You'd have to tell me where the economy's going to be in six to nine months. Principally to the flat rolled side, that's probably the most impacted by the things that you're talking about in the marketplace with new mills being built and new players coming in from overseas. Even though they've come in and hadn't gone out of business yet, they're not making a whole lot of money out of the new plants they've built.

You're mentioned as a bidder at Thyssen down in Alabama. What exactly do you see in that property?

I think, at this point in time, all the people that have been mentioned, if they are indeed looking, including us, are doing it because it's non binding, whatever their interest.

It's a free look.

At this point in time, and at the very least people want to know, okay what am I going to be up against in the future because this is a new asset. Didn't need to be built. Despite all the rhetoric. It's not going to go away. It will end up in somebody's hands so if you can get a free look-see at what's in there, people are taking a free look-see. It will get sold, don't get me wrong. It's not worth anywhere near what they spent on it. And, but at the end of the day the market will determine what it gets sold for and who ends up with it. But the main attraction to it is it's new, it's there, and it's not going to be cut up by anybody.

For you, would the most interesting parts be just the cold rolled and galvanized?

Our interest would encompass the entire thing. I don't mean the Brazilian assets. I am talking strictly about the US assets.

So you'd have to work a traditional caster into that if you were to do it.

I don't want to get into exactly what our plans would be if we actually ended up bidding in binding rounds and what have you. There are a couple of alternatives for how you deal with the fact there's no melt shop there, including building one at some point in time.

Right. So basically you're saying it's just a free look right now?

I think everybody's safe that has taken a look at it in that respect. Everybody that's looking at it's taking a look at it to see what they can make out of it. When it gets to the point where bids are binding, that's when the rubber meets the road on people's interest.

Okay. Thanks a lot, Dan.

You're welcome, Michael.

Our next question comes from Aldo Mazzaferro with Macquarie.

Good afternoon, Aldo.

Good. I'm fine, how are you?

You sure?

I just had a couple housekeeping questions and then one other one. If you could update us on how many people you pick up when you bought Skyline? And what the total employees are now? And secondly, if you had any start-up costs in the quarter and what they may have been?

Skyline teammates that came on-board are lean, mean, 350 in total.

350.

It's a little higher than that.

It's a little higher than that. It's about 490. And pre operating start-up costs, the trend, Aldo, --

People are looking at me cross-eyed here. Somewhere between 350 and 490. We'll get it together.

In the second quarter, our pre operating start-up costs were $19 million. They actually slipped a little in the third quarter to $16 million. And we're expecting next quarter to be around $19 million again.

All right. Great. And then, Dan, this is not an import related question. It's a question a little bit on politics. If you were to go forward with the requests for import protection and cases like that, which political party do you think gives you better support in that? It's a little confusing to me.

First off, we're not going forward on import protection. We're going forward on enforcement of the laws that these trading, so-called trading partners agreed to have access to global markets including the markets here in the US, both WTO related and US trade law related and favored nation trading status related so on and so on. We're not looking for protection. We're looking for enforcement of the laws to stop cheaters from cheating. That's number one.

Number two, as far as the political parties go, I'm not going to get into commenting about that. I certainly like the strong, tough language that Romney is putting out on China and stopping the cheaters. As you well know our position on China is well-known, well documented. No running from that. No desire to run from that. We've had good success with support on trade cases in Washington and the Democratic regime too. Although we've been disappointed there hasn't been stronger action on China, which is the number one trade issue facing this country, not just the steel industry. So at the end of the day, who walks the talk as opposed to who just says the words.

Okay. Thanks, Dan. Good luck.

You're welcome.

Our next question comes from Mark Parr from KeyBanc.

Hello, Mark.

Thank you, very much. Hey, Dan. Appreciate you letting me chime in here a bit. Most of my questions have been answered.

You got on. What am I going to do? That's a joke, Mark. That's a joke. (laughter)

I'm smiling over here. It's okay. You're all right. Don't worry. The one area that I was curious, if you could maybe give some color on would be every month you have to make a determination on scrap buy and Joseph would potentially be in a position to see how other mills would buy. We've seen such a drown draft in scrap, particularly in October. Just wondering if you characterize the buying activity as about in line with what you would normally do, or maybe it's a little heavier than usual. Any color that you got would be appreciated?

Our buying opportunity or the industry's buying?

Whatever, either way would be great. If you think the industry bought heavy in October because the price came down so much, that would be interesting.

I know it would be but I wouldn't comment on either one. No offense, but that's not something we should comment on. I think you just take a look at the pricing, it tells you what's going on. If prices are dropping $40 to $50 a ton one month, going up $40 to $50 a ton another month. That pretty much gives you an idea of how the industry is behaving. Particularly if you understand what's going on with the Turks and others in terms of exporting scrap out of our markets. I don't really want to comment about exactly what we saw taking place or not taking place. But understand your question. It's a good question.

Good luck on the fourth quarter.

Thank you.

Our next question from Phil Gibbs with KeyBanc Capital Markets.

Good afternoon, Phil.

Hey, I just had a question for Jim. How are you?

Good.

CapEx this year of about $1 billion, what are we looking at for next year preliminarily?

We haven't put our budget together yet. We'll have those budget meetings November to set that. We expect it to be lower with the windup of the DRI facility.

Any help you can give us on start up costs? I know you don't like to break those out necessarily anymore.

I think the next quarter, I just talked about next quarter, that's about as far out as we have a good view at. We think it might be in the neighborhood of $19 million next quarter, $16 million this quarter.

All right. Thanks a lot, guys.

We'll start ramping up obviously next year as the DRI facility gets to full employment prior to them actually being up and running. It will start picking up probably in the second quarter will be the heaviest quarter I would think.

Second quarter will be the heaviest on start up costs.

And we'll probably start disclosing it in our earnings release itself when it becomes a material number. Not probably, we will.

So we should expect basically a ramp from this rate of startup into startup peaking in the second quarter of next year.

Yes, sir, and it will probably be at a similar level in third quarter and then it will fall off.

Okay. Thanks a lot.

You're welcome.

And our final question comes from Michelle Applebaum with Steel Market Intelligence.

Hi, just a follow-up question. Hopefully just a housekeeping question. When you say that you expect earnings to be down exclusive of one-time items, that's down from $0.45 is what you're assuming is the clean number?

Michelle, we specifically don't give quantitative guidance. We're giving qualitative guidance. You do a good job with math. We've talked about what LIFO was. It was $84 million, $0.16, it will be about a third of that next quarter. So you can make that adjustment. You know the one time and startup costs are going to be not recurring. There may be other ones but we don't know what those might be right now. And then finally, we are saying that steel mill profits will be lower. So you can do the math from there. We're not saying a specific number.

We're not saying a specific number but there's a --

Well, --

I'm asking about the LIFO, the $0.11.

I answered the question on LIFO for an earlier caller, $0.16 year-to-date, it was booked all in the third quarter and we're expecting it to be in the neighborhood of $0.05 in the fourth quarter. It could change depending what happens to scrap prices this quarter but that's our current expectation.

Okay. Thanks.

You're welcome.

That does conclude our Question-and-Answer session. At this time, I would like to turn the call back over to our speakers for any closing comments.

Thank you. And once again we would like to thank all our teammates, our shareholders, and our customers for your support, our suppliers, and also thank everybody listening for their interest in Nucor. Thank you all, very much. Have a good day.

That does conclude our call for today. We appreciate your participation.