Nucor Corporation (NYSE:NUE) Q3 2023 Earnings Call Transcript

Nucor Corporation (NYSE:NUE) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good morning and welcome to the Nucor’s Third Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jack Sullivan, General Manager, Investor Relations. Please go ahead.

Jack Sullivan: Thank you, and good morning, everyone. Welcome to Nucor’s third quarter 2023 earnings review and business update. Leading our call today is Leon Topalian, Chair, President and CEO, along with Steve Laxton, Executive Vice President and CFO. We also have other members of Nucor’s executive team with us, including Dave Sumoski, Chief Operating Officer; Al Behr, responsible for Plate and Structural Products; Brad Ford, Over Fabricated Constructions Products; Noah Hanners raw materials John Hollatz, Bar Products and Fabrication; Doug Jellison, Corporate Strategy; Greg Murphy, Business Services, Sustainability and General Counsel; Dan Needham, Commercial Strategy; Rex Query, Sheet and Tubular Products; and Chad Utermark, New Markets and Innovation.

We posted our third quarter earnings release and investor presentation to Nucor’s IR website. We encourage you to access these materials, as we’ll cover portions of them during the call. Today’s discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different and involve risks outlined in our Safe Harbor statement and disclosed in Nucor’s SEC filings. The appendix of today’s presentation includes supplemental information and disclosures, along with a reconciliation of non-GAAP financial measures. So with that, let’s turn the call over to Leon.

Leon Topalian: Thanks, Jack, and welcome, everyone. I would like to begin today’s call by highlighting the tremendous performance of our 32,000 Nucor team members through the first 9 months of the year. The investments we’re making to grow our core and expand into new markets are generating strong returns for our shareholders, and our team continues to operate efficiently and safely. In fact, we’re on pace to deliver our fifth consecutive year of record safety performance, further proof of the world class performance by our Nucor team members who live our culture each and every day. Looking at our financial performance in the second quarter, Nucor generated approximately $1.8 billion of EBITDA and $1.1 billion net earnings, or $4.57 per diluted share.

This brings our year-to-date net earnings to $3.7 billion, or $14.83 per diluted share. Even though we still have one more quarter to go, our year-to-date earnings through September already represents our third best full year in Nucor’s history. In keeping with our investor focused capital allocation strategy, we’ve returned $627 million to shareholders in Q3, representing 55% of our net earnings for the quarter. On the operation front, total shipments to outside customers was approximately 6.2 million down 5% compared to the prior quarter, and down 3% compared to Q3 of 2022. Total steel mill shipments for the quarter were nearly 5.8 million tons and downstream steel product shipments to outside customers was roughly 1.1 million tons. Earlier this month, we launched a National Sustainability Campaign branded Made for Good, which highlights our commitment to producing the world’s most sustainable steel and our efforts to lead others in our industry to adopt practices that reduce emissions.

Our circular recycling based process gives us a competitive advantage, as more customers look to reduce emissions in their supply chain. But we’re taking steps to differentiate ourselves even further. We’re not just talking about sustainability, we’re making investments in forming partnerships to accelerate a cleaner future for Nucor, the broader steel industry in all industrial manufacturers. And in almost every month of the past year, we’ve done something to move the needle in that regard. We’ve entered into another renewable energy PPA invested in technologies to develop advanced forms of nuclear power generation and zero carbon iron making, formed a partnership to capture, transport and sequester CO2 emissions from our Louisiana DRI facility, introduced Elcyon, our new sustainable heavy gauge steel plate for the offshore wind energy industry, and help lead the Global Steel Climate Council, a coalition of global steel companies and industry partners to develop a clear and unbiased global standard to measure and report carbon emissions.

Consistent reinvestment in our businesses has played a critical role in our company’s growth. We make investments after we identify strategies that have compelling risk adjusted return opportunities for Nucor’s shareholders. I’d like to highlight three important milestones we’ve hit recently across sheet, plate and bar with a reminder of the strategic rationale behind each investment. Starting with sheet, last week, we were joined by hundreds of leaders in West Virginia in Mason County for a groundbreaking event to celebrate the start of a construction of our newest sheet mill. This investment in West Virginia along with additional galvanizing paint in tube lines, we are adding at other sheet mills will enable Nucor to produce higher margin value added products for a broader set of customers, especially those who value high-quality steel with a lower carbon footprint.

By 2026, we will have more than doubled our capacity to produce higher value sheet products compared to our capabilities in 2020. Turning to plate. Earlier this month, we celebrated the official grand opening of our state-of-the-art mill in Brandenburg, Kentucky. This investment positions Nucor as the most capable plate supplier in the largest plate consuming region of North America, able to produce specialty plate products that support our nation’s economy and security in critical areas such as wind, long span bridges, military applications, power transmission, amongst many others. And in August we held a groundbreaking ceremony for our rebar micro mill in Lexington, North Carolina. This mill will help us to capitalize on growing demand for rebar in the growing Mid Atlantic in Southeast regions over the coming decades.

The modernized equipment and processes at this new mill will enable us to achieve both improved margins and lower emissions intensity from our rebar operations. The team in Lexington is making great progress on the construction, and we look forward to starting the mill up in early 2025. As we have said many times, the goal of our growth strategy is to expand our capabilities to better serve our customers and grow our earnings for our shareholders. The new capabilities we’re adding in our steel mill and steel product segments are diversifying our customer base and creating more opportunities to cross-sell various products. A lot has already been said about the magnitude of the three steel intensive megatrends, each fueled by supportive federal legislation.

We like to think of these three as the rebuilding, repowering and reshoring of the U.S economy. And with Nucor’s unrivalled scale and diversity, we are favorably positioned to capitalize on these growth drivers. Investors have been asking where we are in the cycle of these megatrends and what steel products Nucor is best positioned to supply. I’d like to share a few thoughts on that. And since it’s baseball playoff season, I’ll use a few baseball metaphors to help make my point. Based on current production in order books, it feels like we’re still in the early innings across all three. To be clear, innings played is not intended to reflect unshipped and some innings may last longer than others. It’s meant to indicate where we believe we are along the continuum from federal and state level appropriations, project engineering and development, the permitting and bidding process and ultimately taking orders in manufacturing steel products.

Well, all three are still early in the process with still plenty of upside to come, we feel like the IIJA has progressed the least with respect to steel related orders. The CHIPS Act has probably had the biggest impact on our order book thus far and the IRA falls somewhere in between. As it relates to the rebuilding effort with funding through IIJA, we have shipped tons related to the first wave of bridge projects involving Nucor plate, beam and piling products. But we believe a lot more has yet to make it out of state level permitting and the bidding processes, especially with respect to highway construction, and power transmission, which will require a great deal of rebar, plate and heavy sheet. Back to my baseball analogy, the game has started and we’ve probably neared the bottom of the first, but some fans are still tailgating while others are just entering the stadium.

On the repowering front, the financial stimulus under the IRA occurs through tax credits as opposed to the longer allocation process under the IIJA. This probably gives the IRA a slight edge on timing, but renewable and energy storage projects still take a while to secure financing and all the necessary permits. So while we are starting to see more orders relating to ground mounted solar and onshore wind, there’s still a lot of upside remaining in the years yet to come. And finally, the reshoring efforts supported by the chips and Science Act has promulgated announcements for at least 37 projects worth an estimated $370 billion. Nucor is already delivering steel products to a few of these. But these projects can take several years to complete and will shift from one steel product to another as construction progresses.

When it comes to an advanced manufacturing facility, including semiconductor, battery and EV plants, Nucor can produce an estimated 90% of the required steel. Some of the higher steel intensity products represent homeruns for Nucor, but there are plenty of companion tons representing base hits. And in many cases, the profit margins of base hits orders can be quite compelling. Needless to say, we’re excited for what these megatrends can mean for the U.S economy and Nucor plans to be the leading supplier of the steel with which it’s built. With that, I’d like to turn it over now to Steve Laxton, who will provide additional details about our Q3 performance and outlook for Q4. Steve?

Steve Laxton: Thank you, Leon, and thank you all for joining our call this morning. With third quarter consolidated net earnings of more than $1.1 billion, we exceeded the midpoint of our guidance by about 10%. The main driver of this exceedance was better performance in September than we expected from many of our businesses, the most notably in our bar mills and several downstream steel products divisions. The strength of Nucor’s business model and growing the earnings power were on display yet again. The third quarter was our 10th consecutive quarter were both net earnings exceeded $1 billion and return on equity exceeded 25% on a trailing 12-month basis. With respect to our operating segment results, our steel mills group generated $883 million of pre-tax earnings in the third quarter, a decrease of 37% from the second quarter.

While volumes declined roughly 4% from the prior quarter, lower realized pricing accounted for most of the earnings decline. As an example, our realized sheet pricing for the third quarter fell by roughly $80 a ton compared to the prior quarter outpacing more modest declines in our cost of scrap and ore base metallics. Our utilization rate for the quarter was 77% down from 84% in the prior quarter. This lower utilization rate was a key factor affecting higher price per ton conversion cost at our steel mills. We continue to see excellent results from our steel product segment. Pre-tax earnings for steel products were approximately $807 million for the third quarter. As you know our steel products business produces the most diverse set of solutions in our industry and were benefiting from this broad range of capabilities.

During the quarter, we saw stronger contributions from areas like rebar fabrication, pre-engineered metal buildings and insulated metal panels. These partially offset some declines in joist and deck and tubular products. While Joist and deck profitability continues to moderate from historically high levels, it remains well above pre-pandemic averages. Although there is a lingering lack of clarity with the overall economy, we’re still seeing areas of growth within non-residential construction. Here again Nucor’s diverse product range is allowing us to see gains with advanced manufacturing facilities and data centers on the buildings front and transportation and energy on the infrastructure front. Our raw material segment produced pre-tax earnings of $71 million for the quarter compared with the prior quarter we shipped lower volumes and saw lower realized pricing in both our DRI and recycling businesses.

Nucor generated nearly $2.5 billion of cash from operations during third quarter, and $5.6 billion through the first 9 months of the year. This strong cash flow enabled our balanced approach to capital allocation. Our framework for capital remains the same. We expect to maintain a strong investment grade balance sheet, make meaningful direct returns to shareholders and create long-term value by redeploying capital and advancing our strategy. Nucor’s balance sheet remains strong with a total debt to capital of just around 24% and more than $6.7 billion of cash on hand at the end of last quarter. This level of liquidity provides support as we move into a period of accelerated capital spending over the next year with large capital projects such as our West Virginia Sheet Mill, while also enabling potential M&A activity.

Nucor has a long track record of returning capital to shareholders. Since 2020, Nucor’s returned approximately $9.3 billion back to shareholders through dividends and share repurchases. Year-to-date, Nucor’s returned nearly $1.8 billion or 47% of net earnings to shareholders. Turning to capital spending. As you may recall, initial progress on several of our growth projects was slower-than-anticipated. But in particular, our largest project in West Virginia was delayed. Because of the slower spending and timing delays, we’re reducing our 2023 capital spending estimates from $3 billion to approximately $2.4 billion, with the difference between those figures being pushed into 2024. For our fourth quarter outlook, we expect consolidated earnings to be lower than the third quarter with declines across all three segments.

At the steel mills, we expect earnings to decrease compared to the third quarter results on lower realized prices and slightly lower volumes. Given that most of our sheet business is sold on contracts, recent improvements in pricing are not expected to improve average realized selling price until later in the quarter. In our steel product segment, we expect slower volumes and lower realized pricing as well. For the raw material segment, we expect lower earnings in the fourth quarter due to margin compression and planned outages at our DRI operations. Looking ahead into 2024, we have attractively priced backlogs into the second quarter for some of our steel products, with continued strong order activity expected in manufacturing, data centers and energy.

So while we remain constructive over the long-term due to expected secular demand drivers, near-term market conditions have softened. We attribute this to uncertainty arising from the United Auto Workers strike, higher interest rates, credit tightening, elevated geopolitical risk and concern about another potential U.S government shutdown. As of today, we expect the sequential declines in our fourth quarter earnings may exceed that of our third quarter decline. With that, we’d like to hear from you and answer any questions you may have. Operator, please open the lines for Q&A.

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Q&A Session

Operator: [Operator Instructions] The first question is from Tristan Gresser of BNP Paribas. Please go ahead.

Tristan Gresser: Yes. Hi, thank you for taking my questions. The first one is on capital allocation. Could you remind us what is the place of inorganic growth and the strategy? I think you touched on potential M&A. I think in the past you viewed M&A as more on the downstream side, but how do you view the upstream and how do you view the current federal market at the moment? That’s my first question. Thank you.

Leon Topalian: Yes, Tristan, I will kick it off and maybe ask Steve to comment on maybe the second half of your question. But if we think about our mission statement that we started when I took over CEO in 2020, it’s to grow the core expand beyond and liberal culture. So as we think about growth, it’s really against those two backdrops growing our core projects like our sheet mill in West Virginia, which again, we couldn’t be more excited about at an incredible groundbreaking last week on Friday of last week with our team and senators and local politicians, and again, couldn’t be more thrilled for the location of that, the proximity of that, generating the highest grades and cleanliness of steels in that facility, projects like Lexington, North Carolina are expansions and galvanizing and sheet and painted and galvanized.

So that’s the core. The other piece is the expanding beyond things like our investment in CHI in the overhead door business, so racking our warehouse systems, the towers and structures, pieces of Nucor that are going to continue to generate more consistent earnings profiles, a higher high and again a higher low. Because again, many of those businesses as we think about the adjacencies, Tristan, our — that operate outside the traditional cyclicality of the normal steel curve that we’ve been a part for so long, so we are balancing that overall portfolio, again, balancing that return profile for our shareholders. And so those are our priorities. As we think about — we’ve not broken out dollars to dollars on where we’re going to spend x amount of percent in which bucket, what we’re doing is looking through, where do we bring value?

Where do we create economic value add and how do we maximize each capital dollar into those projects that are going to come closer near double our cost of capital. Ultimately, with the umbrella or the cultural fits renew core? Do they make sense because ultimately, what drives Nucor and every KPI that you see is the 32,000 men and women who make up this family, it is our culture that drives every result in our shareholders benefit from.

Steve Laxton: And Tristan, the other thing I might add to what Leon said was, you started the question with capital allocation. And just as a reminder, Nucor has been and Leon used the word balance. Balance is really the key summary there. We have a disciplined and consistent approach with returning capital back to shareholders, which we enforced for a number of years, reinvesting in our business. And your question was about how do we look at organic versus inorganic, and as Leon walked through some examples, you can see that we take advantage of opportunity where we can create value. So we don’t expressly have an inorganic more M&A strategy. We have a strategy and M&A is a tool by which we use to implement that strategy.

Tristan Gresser: All right. That’s clear and helpful. Maybe a quick follow-up on that. But when you look at M&A, are there particular red lines, I mean, [indiscernible] the upstream side, is there potentially interest to go on certain upstream asset to get certain types of grades and quality? I think one of you peer earlier mentioned that the flat rural market was pretty fragmented. Is that also something a view of share?

Leon Topalian: Yes. Tristan, the short answer is yes. If you think about all of that, and another 100 variables of upstream product differentiation other materials, Nucor is — and our team and M&A team review that consistently. And we’ve looked and again, one of the great things about having a comprehensive strategy, it informs you as much about what you’re not going to do is what you are. So the things that we’ve made and the investments that I’ve just highlighted are really reflective of the opportunities that we’re going to continue to look for in the pipelines and those megatrends that are existing in archive. They’re going to provide a differentiated value proposition for our customers. So the megatrends like towers and structures, the opportunities and sustainability and iconic steel that we’re making with zero net carbon footprints, how are we thinking about the manufacturing build out of EVs, battery plants, data centers that, again Nucor is really well-positioned.

And so, what I would tell you is, all the things you mentioned come into the filtering of how we’re thinking about M&A. But ultimately, what Steve and I just mentioned, are the drivers of can we create EVA for every dollar invested that it’s going to return well above our cost of capital to our shareholders, and also giving us a opportunity to, again, improve the overall volatility of our earnings profile through cycle performance is much more consistent over the long-term.

Tristan Gresser: All right. That’s it. That’s very clear. Thank you. And if I might just have a follow-up on the rebar market. You just announced you looking for some investment there. Yes, basically, what are you seeing in terms of supply and demand medium term. I know there’s been a lot of project be announced. But I’m not sure if they’re going through with the interest rate being where they are. So how comfortable are you with the medium term supply and demand balance you’re seeing on the rebar market to make this type of investments? Thank you.

Leon Topalian: Yes, Tristan, I’ll start it off and maybe ask John Hollatz, our EVP over bar products to comment as well. But, look, we announced an exploration that we’re going to look into the Pacific Northwest, as we think about what we’ve done in the bar group itself in the — our footprint in rebar is significant. And so, in the micromill strategies and what we’ve seen in the bar group itself in the — our footprint in rebar is significant. And so in the micro mill strategies and what we’ve seen in Sedalia and Frostproof and now what we’re getting to see come online in ’25 in Lexington, North Carolina, it gives us an awful lot of excitement and optimism, but so do all our other facilities that are running rebar. So the market is growing, we know that.

We know it’s going to grow similar to that 2 million ton range. And to your point, there’s a lot of announced capacity, not sure all of that will see light of day. But again, we know the Pacific Northwest we have our Seattle operations play. It’s been running a long time and consistently one of our great financial performer and return to the team there does an amazing job. And so we know the customers there, we know the growth that’s going to be there. And again, we think it holds a great deal of promise as we evaluate this in the coming months. John?