Nucor Corp (NUE) 2013 Q2 法說會逐字稿

Good day and welcome to the Nucor Corporation second-quarter of 2013 earnings 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 during this conference 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 these 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 website. 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 now like to turn the call over to Mr. John Ferriola, Chief Executive Officer and President of Nucor Corporation. Please go ahead.

Thank you, Dana. Good afternoon. This is John Ferriola, Nucor's Chief Executive Officer and President. Thank you for joining us for our conference call. As always, we appreciate your interest in Nucor. With me for today's call are other members of Nucor senior leadership team -- Dan DiMicco, our Executive Chairman; Jim Frias, our Chief Financial Officer; and Executive Vice Presidents Jim Darsey, Ladd Hall, Ray Napolitan, and Joe Stratman. Executive Vice President, Keith Grass, is traveling today.

First, and most importantly, we want to thank everyone on our teams at Nucor -- Harris Steel, David J. Joseph, Duferdofin, NuMit Steel Technologies, and skyline steel, for your hard work, taking care of all of our customers in what is now the fifth consecutive year of extremely challenging steel market and economic conditions. You have built and continue to build a stronger Nucor, by working safely, working smart, and working together. The more than 22,000 men and women of the Nucor team are our Company's greatest asset and our greatest competitive advantage. You are the right people doing the right things every day. Thank you all.

While steel markets remain challenging, we have a number of exciting updates to share with you today on our success in growing Nucor's long-term earnings power. Nucor is in a position of strength in our industry, and we are growing stronger. We are primed and ready for the inevitable steel industry cyclical upturn.

I will now ask for our CFO, Jim Frias, to discuss our second-quarter results and financial position. Following Jim, I will discuss the execution on many of our initiatives, focused on profitable growth. Jim?

Thanks, John, and good afternoon. Second-quarter of 2013 earnings of $0.27 per diluted share were within our guidance range of between $0.25 to $0.30 per diluted share. Consistent with our guidance, there was no LIFO impact on results for the just-completed quarter. By comparison, first-quarter 2013 results included an after-tax LIFO charge of $0.03 per diluted share.

On a sequential quarter basis, our steel mills' profitability declined. Our fabricated products business returned to profitability in the second quarter, following a modest loss in the seasonally slow first quarter. Fabricated products, which included joist and decking, rebar fabrication, and pre-engineered metal buildings, have now reported profits for four of the past five quarters. This improved performance has been achieved during very depressed levels of non-residential construction. A quick comment about our tax rate, since it can be confusing due to the impact of profits from non-controlling interest. After adjusting out profits belonging to our business partners, the second quarter of 2013 effective tax rate was 35.1%, or slightly higher than normal.

Balance sheet strength remains an important attribute of Nucor's business model. Our total debt-to-capital ratio is 31%. Cash, short-term investments, and restricted cash totaled $749 million at the end of the second quarter of 2013. 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.

Nucor is the only steel producer in North America to enjoy the extremely important competitive advantage of an investment-grade credit rating. Standard & Poor's highlighted our unrivalled position of financial strength in the steel industry in the second quarter of 2013 review of US metals and mining companies, strongest to weakest. Nucor was again ranked number one for credit rating and business risk profile, among the universe of 66 companies. Nucor's second-quarter cash position decreased by $330 million from the immediately-preceding quarter. The decline was largely due to the retirement of $250 million of long term debt maturing in June, as well as the ongoing funding of our 2013 capital projects. In an uncertain economy, we are well-positioned to benefit from the financial flexibility provided by our strong balance sheet and healthy cash flow generation through the cycle.

Our balance sheet liquidity and cash flow have enabled us to continue Nucor's long tradition of growing stronger during downturns. 2013 capital expenditures are expected to exceed $1.1 billion. Of this total, we estimate that more than 80% is for what we consider to be strategic investments. The balance is for more recurring or maintenance capital spending. Our strategic investments are viewed as relatively low risk and high return projects, focused on key objectives such as lowering our raw material cost, and shifting our product mix to include more value-added offerings.

Lowering our raw materials cost improves our competitive position, and profitability throughout the economic cycle. The shift in our portfolio to more value-added higher margin products does the same, as well as reducing the competitive pressure we face from imports. The most significant of these investments, which are being completed over the balance of 2013 and into 2014 include adding a normalizing line in our North Carolina plate mill; constructing our Louisiana direct reduced iron facility and the related natural gas drilling investments; expanding our South Carolina flat-rolled mills product portfolio to include wider and lighter gauge sheet steel; expanding our Nucor Yamato structural mills portfolio of sheet piling products to build upon our highly successful 2012 acquisition of Skyline Steel, the market leader in steel piling distribution; and expanding our value-added SBQ production capabilities at our bar mills in South Carolina, Nebraska, and Tennessee.

As the majority of our strategic projects will be completed by early to mid-2014, we expect lower capital expenditures next year. Total spending at our steel making, raw materials, and downstream businesses should decline closer to more maintenance-type levels. At the same time, our natural gas drilling expenditures will be at contractual levels, which we have previously disclosed, totaling over $700 million for the two year period of 2014 and 2015.

Nucor's natural gas investments will secure a long term low-cost supply of natural gas, sufficient to cover our expected future steel making and DRI production needs, for more than 20 years. The performance of wells completed over the past two years has exceeded the projections we used to justify this capital allocation decision. That of course translates into lower gas cost, and higher returns from our drilling investments. We also expect our natural gas investments to be cash flow positive by 2016, meaning the cash generated from sales will exceed the cost of drilling new wells. Our team is excited by the opportunities we are executing to continue rewarding Nucor shareholders with very attractive long-term returns on their valuable capital. The objective of our growth strategy is higher highs and peak earnings power, and shareholder value through successive business cycles.

For the third quarter of 2013, Nucor's earnings are expected to improve modestly from the second-quarter level. This outlook reflects several factors. Flat-rolled pricing has improved in recent weeks, due to market supply disruptions resulting from production and labor issues at several competitors. Our downstream businesses expect further improvement in earnings in this seasonally-strong third quarter. We also expect our David J. Joseph scrap processing operations to benefit from the recent increase in scrap pricing. On the negative side, we expect pre operating start up costs in our Louisiana dry facility to increase in the third quarter.

Overall, the outlook continues to be challenged by anemic economic growth and excess global steel capacity. Nucor will again follow our practice of providing quantitative guidance in the final month of the quarter.

John?

Thanks, Jim. As I mentioned earlier, we are now five years into what remains a stagnant global economic environment, and in turn, extremely difficult steel market conditions. Two facts tell the story of this harsh environment. First, in this so-called US economic recovery that began in June of 2009, a realistic measure of the unemployment rate has seen very little progress over four years, and currently stands at 17.5%. That rate includes the unemployed, underemployed, and those people who have simply given up hope for finding a job, and have dropped out of the labor force.

Second, imports continue to devastate the margins and output of the steel industry in the United States. Through May of this year, steel imports are running at an annualized rate of nearly 26 million tons. This makes no sense at all, given the fact that American producers are among the lowest-cost producers of steel in the world. The reason it is happening is the failure of US trade policy to address imported steel sold at dumped and subsidized prices in a timely and effective manner. The recent pipe and tool trade case filed against Korea and eight other countries is yet another example of our country's too-little too-late approach to enforcing trade laws.

Our view remains unchanged. These very serious challenges facing the US economy all have solutions. The time is right and long overdue to reinvigorate the American economy by seizing very real and significant opportunities available to our nation in energy, infrastructure rebuilding, and growing a globally competitive US manufacturing sector, that can only prosper in an environment of rules-based free-trade. Why is it so important that we have effective and timely enforcement of rules based free-trade? If not for dumped steel and subsidized imports we would have more production and more jobs in the United States. Put simply, the key ingredients required for healthy and sustainable US economic growth are jobs, jobs, and more jobs.

For the steel industry, it is absolutely critical that policy makers address the issue of China's estimated excess steel production capacity, of at least 200 million tons. Most, if not virtually all of this capacity is government owned and subsidized. The bottom line is simple. The Chinese government must reduce government-owned capacity, not build more of it. The Chinese government must also stop providing financing and other subsidies to steel producers that are not cost-effective and do not earn adequate returns to be sustained.

You can expect Nucor to continue to be proactive and stake out the sound economic policies. It is vital to fulfilling our most important responsibility, to be good stewards of our shareholders' valuable capital. The Nucor team has always managed our business with a long term perspective. With that longer term view, we are bullish on the profitable growth opportunities for both the American economy and for Nucor. We are optimistic regarding the desire and ability of the American people to do the right things over the long run, to reinvigorate our economy. Quite frankly, the time is right for a US economic renaissance, fueled by our country's abundant energy resources, and a workforce unrivalled in its productivity and ability to innovate.

For those reasons, we are busy building a stronger Nucor. To that end, we have invested approximately $8 billion of our shareholders capital from the last cyclical peak in the economy in 2008 through the end of 2013. As Jim discussed, our most recent period of investment to grow long term earnings will peak this year. These investments have dramatically expanded Nucor's long-term earnings power.

I would also like to reiterate Jim's point that our investments during this downturn are what we consider low risk and high return. Rather than just adding capacity to an oversupplied market, Nucor's reducing its raw materials cost and shifting our mix toward more value-added, higher margin profits. Over the next several years, our unrelenting focus will remain on executing our strategic plan, and converting our $8 billion of investments into higher highs and profitability, once the next cyclical upturn inevitably arrives. At the same time, we will continue to plan for tomorrow, while executing today.

I will now update you on the excellent progress achieved by our team this quarter in executing our strategic growth. Construction is nearing completion on our 2.5 million metric ton annual capacity, near our facility in Louisiana. We expect to begin hot conditioning in August and to start production by the end of September. Our team in Louisiana is doing an excellent job, bringing online a plan with enormous scope. For example, the material handling equipment includes 4.5 miles of conveyors. The port facility has one mile of Mississippi River frontage and is capable of receiving vessels as large as 950 feet in length, with cargoes of about 115,000 metric tons.

Given the scope of this project, start up hiccups are to be expected, however our confidence is extremely high in the process technology. We expect completion of our Louisiana plant, paired with our long term and low cost natural gas supply will be a game changer for Nucor's cost structure for high quality iron units. Nucor's preparing to take a unique step forward in the implementation of our raw materials strategy. Combining Louisiana's capacity with the 2 million tons of annual capacity of our existing Trinidad mill plant will bring us to two-thirds of our long term goal to control 6 million to 7 million tons of annual capacity and high quality scrap substitutes.

In June, our Herbert County, North Carolina plate mill successfully started production on its new normalizing line. The initial output has been well received by our customers, who have noted superior flatness and surface quality of our normalized plate. Our 120,000 tons per year capacity normalizing line will serve attractive end-use markets, such as energy, transportation, ship building and on the plate. Complementing our recent investments in a heat treat facility and a vacuum tank gasser, Herbert County's value-added plate products annual capacity has now doubled to 240,000 tons.

Our bar mill group is on track with the implementation of several projects to expand our SBQ production capabilities at our mills in South Carolina, Nebraska and Tennessee. In the current quarter, the South Carolina mill will start production on its new bar blocker. This equipment will allow us to expand our participation in an attractive and underserved market in the southeastern United States. In the second half of this year, our Tennessee mill will commission new state-of-the-art SBQ bar inspection equipment, that will provide growth opportunities in supplying precision engineered bars for the most demanding applications. In late 2013, our Nebraska mill will bring online significant upgrades that include a device shear, straightener and cold sheer.

Other Nucor SBQ projects are scheduled for completion in 2014. It is important to understand that all of our SBQ investments have one objective, and that is to expand the breadth and depth of Nucor's value-added SBQ product offerings. We see many attractive opportunities to better serve existing and new customers, with our growing SBQ product portfolio. Our team at Berkeley County, South Carolina sheet mill remains on time and on budget, for the first quarter of 2014 completion of its wide range project. This investment involves an upgrade in modernization of equipment from the top of the caster through the reversing mills. It will provide Berkeley with the capability to produce wider and lighter gauge sheet steel. These expanded capabilities will provide profitable opportunities to move up the value chain and have the cultural, [hyphen to] industrial equipment, heavy truck and automotive high strength and ultra high strength applications.

Our Nucor Yamato sheet piling product expansion is on schedule for production start-up in the second half of 2014. This project will add several new sheet piling sections to their value-added offerings. This initiative is an excellent example of Nucor's time-proven, highest-return strategy for profitable growth investments that optimize our existing operations. In this case, we are expanding the opportunities for profitable growth, both in the production of sheet piling, and Nucor Yamato, and in distribution by recently acquired Skyline Steel.

While market conditions remain frustratingly challenging, these are nevertheless exciting times for the Nucor family as we grow stronger and stronger. A stronger Nucor is one that continually improves its capability to take care of our customers. As always, we define our customers as the people that buy and use our products, our teammates, and our shareholders.

In closing, I want to again thank everyone on the Nucor team while working safely, working hard, and working together to build a stronger Nucor. Thank you, and please keep it going. We would now be happy to take your questions.

(Operator Instructions)

We'll go first to Michelle Applebaum with Steel Market Intelligence.

Okay, I didn't think I'd be first, so let me find my notes here. Because I had a very specific question not so much about the quarter. So there was a great article in American Metal Market last week, you gave some interviews, and there was some new things in the articles. There was one thing in particular that really surprised me.

You said that, and I apologize this isn't a great first question, but you were talking about how you would be running the Company going forward, and you said one thing you'll see more emphasis is commercial side. And then you said without a doubt we're known for our operational prowess. People say Nucor is one hell of an operating Company and we are. They might not say we are one hell of a commercial Company and we're going to change that. I thought that's kind of unusual for even a new CEO to come out and say something like that, so I was going to ask you to elaborate on what you meant by that, and where you thought the opportunities might be.

Okay, well thank you, Michelle. It's a good question. I don't remember using those words in the article but I'm sure I did. Let me start by making a few comments.

Yes, we are focused on commercial excellence. That's an area of improvement that we believe is important to Nucor. I also want to make sure that I stress the fact that we've got a great commercial team, we've been doing a great job already. And at Nucor, you know continuous improvement is our middle name, so we're focused on getting even better in commercial excellence, and I'll talk about some of the areas that we will focus on.

But I also have to make sure that I stress the fact that we are operationally excellent and there will be no focus taken off of remaining excellence in our operations. So looking to expand our commercial excellence going forward, this isn't really any change of direction for the Company. It's more of an expansion of expectations for all of our teammates. Commercial excellence isn't something that's just done by our commercial team. It's something that's the responsibility of every member of the Nucor family.

And as we focus on commercial excellence, we talk about five areas of focus. We call them the five pillars of commercial excellence, and just going through them briefly, it's being more market-driven, it's being more aware, more better at anticipating the needs of our customers and finding ways to create value for them.

It's being easier to do business with. It's building strong durable loyal relationships that bring value to our customers and to us. And it's about creating sustainable results, making decisions that are long term decisions to bring extra value to us and to our customers. And finally, it's about leveraging the overwhelming advantage, our 22,000 teammates working together bringing to our customers, and are of course expecting to get paid for that value.

Okay, well one of the things I wanted to say that really impressed me about you saying that whether those were exactly the words, I know you don't say swear words so probably not.

It might have been a slip of the moment.

Is that you have been the Chief Commercial Officer, that's been your mission at the Company so I just want to say I'm not going to opine what I think of your commercial effort but for you to say something about that's one of your main pillars the last 10 years is quite impressive in and of itself. So I want to say kudos to you to look for that in the public domain.

My second question was an easier question. Why does your capacity utilization drop from 77% in the first half of last year to 72.5% in the first half of this year?

Well there were a couple reasons, Michelle. One that I'll start with is that we had taken fairly large shut downs in the first half of this year, in preparation for many of the projects that we mentioned just a while ago. Our Darlington facility was off line for I think three weeks, in preparing for the projects that we're doing there. NYS was offline for 17 days, preparing for the piling project work that we're doing there. We had a Memphis outage, preparing for the second vacuum tank of gas, so we had a lot of things going on.

And in addition to that, we typically take an awful lot of our maintenance shut downs in the second quarter, a lot of our facilities are located in areas where you have extreme heat in the Summer and extremely cold weather in the winter. So we try to moderate the shut down temperatures by working in the second quarter, so we've got a lot of maintenance shut downs also in the second quarter.

I guess one final point that I would mention is when I look back at 2012, if memory serves me correctly, the first half of 2012 we were very strong flat-rolled products. Our sheet business was very strong in the first half of 2012, and it's down in the first half of 2013.

Okay, that's great.

And part of that obviously is driven by the topic that I had earlier in the opening comments, and that being imports. The whole industry operating capacity utilization is down as a result of the tremendous number of imports that are flooding into the United States in the first half of this year.

Okay, great thanks. I'll go back in the queue.

We'll go next to Martin Englert with Jefferies.

Looking to the release you noted this time around the construction market remained challenged. Last quarter you highlighted cautious optimism and slow improvements. Has your view changed at all?

Well cautious optimism is the only thing that keeps us going in this market so we'll say it again. There are certain things that we see that give us some slight indication that things might be getting a little bit better. We always look at residential construction as a 9 to 12 month leading indicator of non-residential construction and we have noticed an improvement in residential construction. If past performance holds true, that might lead to an improvement in non-residential construction in 9 or 12 months.

We also take a look at our downstream businesses and they tend to be leading indicators for non-residential construction. We look at our backlogs, our order entry rates and although they haven't been spiking, to the level we would like to see them we do see an improvement in those areas.

When you start to look into the backlogs and different type of work that's comprised of, is there anything that you're starting to see the cycle, as far as the different types of non-residential construction projects? If there's a greater focus whether it be in manufacturing or energy versus infrastructure, is there anything happening there this cycle relative to last that you see is different?

Well I'll just make a couple of general comments. We see industrial non-construction being challenged. It's frankly down a little bit. On the other hand we see some of the commercial construction picking up.

Thank you, that's helpful.

We'll go next to Nate Carruthers with Steel Market Intelligence.

You were just talking about downstream a little bit, but I noticed that your rebar fab shipments are actually down 11% year-over-year in the first half. I was just wondering what was driving that, and if you expect any kind of catch up in the second half.

I'll make some general comments and I'll ask Ray Napolitan to jump in if he has anything he would like to add. As a general comment the rebar fabrication and rebar markets in the United States have been challenged. Our business in Canada continues to be very strong and we continue to see that growing.

But rebar imports have been a challenge from the country, rebar fabrication along with non-residential construction is typically lower. Anything you want to add, Ray?

This is Ray Napolitan. One thing I would add is weather has influenced us in the last -- first part of the year here and shipments have been behind. But we're gradually seeing projects break loose and return to schedule so weather is the biggest impact from our rebar fabrication.

So do you expect that to pick up a bit in the second half?

I think in Jim's notes, he mentioned we expect to see our downstream businesses perform a little bit better in the third quarter.

Okay, thank you very much.

We'll go next to Curt Woodworth with Nomura.

John, you talked a little bit about going into lower more maintenance CapEx levels in the future, and harvesting all of the investments that you made over the past couple years. And it seems like you saw the ability from a liquidity perspective to pursue additional investments, and I know that the additional DRI facilities on the table but can you talk a little bit about the M&A strategy. And if we're in an environment where the steel consumption growth rates continue to be low, would you look at using more capital to grow the M&A?

Let me start by making a comment on the maintenance CapEx. We did not say we will lower our maintenance CapEx. We will keep the maintenance CapEx at the levels that we always had it at. We will not in any way sacrifice the condition of our equipment going forward, so we will continue to invest in the maintenance that we need to keep our mills in top-notch condition to produce high quality product and be able to deliver to our customers on time. So that's number one.

Secondly I did comment on my statement that we will continue to plan for the future while we execute today, and what I meant by that is that we will continue to be opportunistic in our M&A opportunities. If we see a great opportunity coming down the pike, we're going to jump at it. A great example of that would be Skyline just last year, and we weren't anticipating that coming along, we didn't really plan for it, to be honest with you, but when the opportunity presented itself we went after it. And successfully, and its been a great addition to the Nucor family.

We are really happy and proud to have them as part of the Nucor family. So we'll continue to look at opportunities, we'll and be opportunistic as we approach them.

The point that I do want to stress is we are focusing on execution. We've invested $8 billion growing our Company. That's a lot of money. Shareholders, rightfully, so have the expectation that we will convert that investment on their part into higher highs during the inevitable up cycle that we know is coming.

So we are going to continue to look at M&A. There's no difference in our strategy except we will be a little more opportunistic as we look at those things that come across and become available. But we are going to focus our attention heavily on executing on the investments that we've already made.

Okay, thank you.

We'll go next to Timna Tanners with Bank of America Merrill Lynch.

I really appreciated some of the detail that you gave on a lot of the different projects. Maybe this isn't the venue, but it would be helpful to get a little more color on not just the timing but volumes or potential margin contribution. I don't know if that's something you could offer at a later point, or if you have color you could provide on some of the projects now?

Well we've given some detail on the volumes so we aren't giving anything out on the margin improvements. That's information I'm sure some of our competitors who are probably listening to this call would love to hear. We're not going to accommodate them.

But we've talked about the SBQ, value-added volumes, in terms of 1 million tons of additional, and we want to stress this, it's very important to stress, this isn't just additional capacity in the SBQ business. There's plenty of capacity out there, and there's plenty more capacity coming online. Our focus is two-fold. Focusing on adding to our value-added portfolio and on improving the effectiveness and efficiencies of our existing bar mills by shifting by-product shift, by changing our mix at those facilities.

Understood. And then when you talk about maintenance CapEx, or returning to a more maintenance CapEx like level with the addition of your natural gas investments, how does that factor in future DRI investments? Or are you still waiting to decide on a second and further DRI investment?

When I talk about maintenance CapEx I'm speaking of specifically of maintenance work. In terms of future growth of the Company, we will continue to look very seriously at a second DRI facility at the appropriate time.

Right now our focus is on getting Number 1, up and running in Louisiana. I have to clarify that, because first number 2 DRI facility counting the one in Trinidad, but all of our focus is on getting through the cold commissioning, hot commissioning and the start up of new facility in Louisiana and when we get that up and running, we'll take a look at a second DRI facility.

That makes sense. All right, thanks a lot.

We'll go next to Evan Kurtz with Morgan Stanley.

I read an article that John you're in DC on Tuesday, meeting with some Congressional folks and some folks in Commerce. Just wanted to see if you could share some of I guess who you met with and what was discussed, and if you think anything will come of that going forward on the trade front?

Well, we met with a few senators. We were given the opportunity to spend some time with Senator Sessions, and, but we also spent time with Ambassador Froman and Undersecretary Sanchez. And also later in the afternoon we had the opportunity to meet with Senator Brown. And I'm not going to go into specific details of the conversation, we presented our case very clearly, and I will make the following comment, we got a great reception by all of the parties involved, and I'll take this opportunity to publicly thank them for their time and listening to our arguments.

Certainly none could make any firm commitments, but I will tell you that having made several trips to Washington now, my sense is that we are getting -- the message is being better understood and better received each time we go and we speak to the appropriate people. The message is getting across about the impact that imports are having on our industry.

We stress each time we go that we are not asking for protection, we are not asking for subsidies, we are not asking for the government to invest in our companies, we're asking nothing more than a level playing field on which our teams can compete, because we absolutely that believe that given a level playing field, our team at Nucor will complete successfully against anyone anywhere in the world. So that's assist a little bit of a color of what we talked about that day.

I hope, and we will continue to work hard to make sure that we continue to gain ground in this arena. It's extremely important to us.

The current trade laws simply are not getting the job done. They are reactive, they are not proactive and we need a more proactive approach to trade laws. The concept of waiting until serious injury occurs to the industry just simply doesn't make sense, and we need to become more proactive. We certainly have the data to do it, we have information we gather on the import licensing.

So we know when the tsunami is heading our way, we nowhere it's coming from, we know when it's going to hit, and it's ridiculous that we don't use that information to take a more proactive approach to dealing with the tsunami that we know is coming. It's important to our industry, and it's important to our teammates here at Nucor, and frankly it's important to the American worker.

Going back to existing system I guess, we saw an OCTG case brought forward earlier this month. Are there any other products in particular that are in the works right now, where we might see something similar?

Well this is what I would say, all of the above. We are looking carefully at every product that's being imported. We believe that there are many that fall into the same category that they are being brought in illegally. They are being dumped, they are being subsidized and we're gathering data now, and we'll take action in a variety of products at the appropriate time.

Great and maybe one modeling question on DRI. You mentioned there could be some costs associated with the start up in the next quarter. How should we think about that as we go out the next 12 months to 18 months as for the ramp in DRI as far, as getting a breakeven and moving to profitability, and so forth?

This is Jim Frias. First of all pre-operating and start up costs, the total was roughly $6 million in the second quarter and most of that was related to DRI. And the final weeks and months of starting up the facility has the most significant amount of start up costs to predict. They could roughly double, might be a little higher and might be a little lower, but that's the range, it could roughly double.

In terms of reaching a breakeven start up it probably depends -- it totally depends on how quickly it ramps up. The first DRI facility we started up in Trinidad was profitable I think in the second or third month of operations. So it should be pretty quickly reaching a breakeven profit point in our view, if the start up doesn't have glitches.

But as John noted in his comments, a lot can happen in a start up. You can have an equipment problem that you didn't know existed until you start up your equipment.

We can certainly expect to see hiccups as we get started but we are very confident in our ability to deal with those hiccups. This isn't our first rodeo when it comes to start ups, and we started up very complex facilities in the past. We've experienced hiccups that come along with it, and in every case we've overcome them, and we've had a successful operation. The facility in Louisiana will be no different.

Okay, thanks for all of the color.

We'll go next to David Galison with CIBC World Markets.

So just, was I correct in understanding that Q3 start up costs will be around $12 million? Is that what you're thinking?

That's a crude estimate but yes.

So then would it be fair to assume that the Q3 guidance that was provided for improvements in flat-rolled, downstream and scrap pricing would be more than modest, I guess and then offset by start up costs?

We did not get that specific in our guidance, in our thinking. We think that the operational side will go through. My guess is, if I had to guess, the pre operating costs won't completely offset the improvement.

Okay, and we're still looking for reaching full production in three to four months?

Well what we've said in the past is that we expect to be at full production by the end of the year, and we still feel confident that can be achieved.

And then as I guess maybe to help us understand, as you're ramping the facility up, will it have an impact on your steel production, as you're using this material? You have to -- there's some dial up you have to do, in order to incorporate this material? How should we think about that?

We've been using DRI at a number of our steel mills for several years now, so there's really no effect in the steel operations to speak of. It's really going to be all about how quickly we can make the DRI and get it transported and delivered to our facilities.

Thank you very much.

We'll go next to Phil Gibbs with KeyBanc.

Can you give us some sense of the timing of the Encana venture ramp, and when you may expect to be fully hedged in your natural gas needs for both DRI and steel?

Well that's a great question and we haven't really disclosed that at this point, and I would just say that it really depends on a number of factors. One, if we continue having the success in volumes coming from each well we drill is one factor, because as we've noted in our comments, we've been performing better than what we modeled when we first made the investment. Another factor is the timing of when we build our next DRI facility, and we haven't made a commitment to when we're going to do that yet. So I would just say that we could be balanced within probably three to four years is the range to think of, and that would cover steel making and DRI.

Just the first phase of your DRI when you say you're balanced within a three year to four year time frame?

Yes.

But I do want to stress, Jim as we look out forward and without giving the details of the volumes involved. And we've said in the past that we will reach the point where we'll have enough gas to supply not only all of our steel mill operations but also two DRI facilities, all alternatively, we would have enough gas to supply three DRI facilities.

Okay, I just had one follow-up, if I could, for you, John. Can you just talk a little bit about the evolution of your automotive business, and where you feel like you've either gained some traction, maybe relative to last year? Thank you, appreciate it.

Certainly. We continue to grow in automotive, not only in flat-rolled business. During my comments, I spoke of the ultra high strength steels that we are now supplying, and are going primarily into the automotive market. But we've also had a tremendous amount of success with our SBQ product in automotive. And again, you'll hear us talk often about the benefits of One Nucor and our ability to offer our customers a breadth of products under one umbrella, and automotive is a great example of that.

We've piggybacked both sheet and SBQ off each other many times, to gain entry into a new customer, and allowed us to grow quicker than we anticipated in automotive. We have obviously automotive is calling strongly in the Southeast, we have strong presence in the Southeast, automotive is growing rapidly in Mexico. We have a strong presence through our steel tack operations in Mexico to be able to serve that market. So we feel good about where we are and automotive and we're happy about that because right now automotive is one of the few bright spots in the marketplace.

We'll go next to Aldo Mazzaferro with Macquarie.

I've got a couple of questions, first one on the CapEx forecast, I thought I heard you say that maintenance CapEx was about 20% of the $1.1 billion that you're projecting this year. Does that imply your CapEx next year is going to fall as low as below depreciation, or anything like that?

The CapEx at the steel mills could be -- or excuse me, at the operations could be below the CapEx or below depreciation. That could be the case, yes. But keep in mind that depreciation tends to be a bit front weighted in the steel industry, we've been making a lot of investments recently so our depreciation numbers ramped up pretty high.

So in terms of your debt on your balance sheet, that's very low-cost debt. You wouldn't have an intention to repay that, I would think, right?

We don't talk about our intentions relative to capital structure. That's publicly traded instruments as well.

Okay, and then John, one question I know you might not want to discuss it too much, but could you outline a little bit about the pros and cons you see in the Tisan plant possibly from Nucor's point of view whether you'd consider owning that plant or whether it's just out of the question?

Well I have to say you're very astute. It's something I don't want to discuss and I'm not planning on discussing. We said it's a process that's ongoing and it's just not appropriate for me to comment at this time.

Okay, John thanks. Take care.

We'll go next to Brian Yu with Citigroup.

I've got a follow-up question on the natural gas. Jimmy said it performed better and in the past I believe that all-in cost number is somewhere around $4 per MMBTU, and given what you've seen so far, can you help us with the order of magnitude, and how does that change that $4 number so far?

Well Brian, we've never said a number so I'm not sure where that came from. You may have backed into it -- triangulated from things we've shared. We've never said a number. But I think the important thing to think about is the fact that we do have flexibility to the contract, and John do you want to speak to that?

Well either way I'll make some comments, and we do have a great deal of flexibility in the contract so we have some flexibility in the volume and in our drilling. We do have a threshold level, which if the price of gas drops under that threshold point price, we are not obligated to continue to drill. And that's a level, it's a level in which we feel very comfortable in being able to get a return, even at that threshold level.

So over the course of the drilling program, we feel very good about the returns that we're going to be getting in this investment, and the variability and flexibility we have in drilling. Anything else you want to add?

Just that we do have also flexibility to drill more wells that we're not committed to, if in fact gas prices are higher so we get an upside benefit too. On the downside we can stop drilling if prices fall low, and on the upside, we can drill more at our option in certain areas.

Okay, that's helpful. Second one is with the DRI facility, there's more domestic iron ore miners, who are talking about making DR grade pellets. I was wondering if you guys have experimented with any of the production that's come out thus far and then is it more cost advantageous to try to source it domestically than maybe from the international suppliers?

You mean the iron ore specific?

Yes, the DR grade iron ore pellets.

Well, we have had pretty long term suppliers. We've added one recently and also in international supplier. We haven't really done much with domestic suppliers at all.

We've got three very good suppliers that have been with us for a long time. We have a great deal of confidence that the fourth supplier will also be a high-quality supplier. We've done some testing in our facility in Trinidad, so we have no need to look further at this point.

Okay, thank you.

We'll take our final question from Luke Folta with Jefferies.

Yes, just a couple quick ones, if I could. I think we've tallied up there being about 10 potential OCTG new projects coming into North America, some of them will have steel capacity and most won't. I was curious to know if Nucor has done anything and speaking with these new potential customers, as far as Nucor's potential to substrate, whether it be flat-rolled or bar products to those mills?

It's a great question. Thank you for asking it.

I can tell you that we have contacted every single one of them and we are in discussions with every single one of them. We're even in some discussions with new suppliers or new production facilities that currently have plans to provide their own substrate. We're in discussions with them working actively to convince them that advantageous to do business with us and the capital expenditure of building their own melting facilities.

So at this point you'd say the prospects are pretty good that Nucor has meaningful participation in those mills?

We've got a great commercial team. We're confident they are going to be successful.

Great. And then second one just relates to the DRI strategy. So when I understand the DRI plant will in part probably display some pig iron that you're currently bringing in from overseas or elsewhere, and then perhaps some of it will displace some prime scrap you're purchasing domestically. And those accomplish different things and I wanted to see if I can get a sense of initially at least when you bring the second plan up is that mostly going to be a pig iron offset?

It's really a question going back to an earlier question. It's a question of flexibility, and what this is giving us is the ability to make those decisions and optimize the feedstock that goes into our furnaces. We'll take a look at the current pricing situation, along all of the iron units that are out there and available, prime scrap, HPI, pig iron, DRI, and make the best decision to optimize the mix to reduce our cost going into the furnace.

So we don't have a definitive plan on replacing pig iron or how much DRI we'll use in place of pig iron or prime scrap. We'll take a look, frankly on a very regular basis, at what the best lowest cost mix of iron units is available, and that's what we'll use.

Okay, great. Thanks.

And there are no further questions in the queue.

Okay, Dana I'd like to make some closing comments. So I'll go ahead and do it. I guess we're still online.

Go ahead, sir.

Okay, thank you, Dana. Now, at Nucor, we recognize the challenges of a weak economy and the tsunami of imports resulting from ineffective trade policies, and we will continue to fight to eliminate those challenges. But I want to stress that in the meantime that we will continue to do what Nucor does best.

We will focus on the issues that are within our control. We will continue to grow profitably. We will continue to execute better than anyone else in the industry, and we will insure that Nucor's best years are still ahead of us.

Thank you all for joining our call today. Let's keep it going by working together. Thank you.

Again, that does conclude today's presentation. We thank you for your participation.