Nucor Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 16 speakers on the call.

Operator

Good morning, and welcome to Nucor's Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise and today's call is being recorded. After the speakers' prepared remarks, I will provide instructions for callers wishing to ask questions. I would now like to turn or introduce Jack Sullivan, General Manager of Nucor Investor Relations. You may begin your call.

Speaker 1

Thank you, and good morning, everyone. Welcome to Nucor's 2nd quarter earnings review and business update. Leading our call today is Leon Tapalian, Chair, President and CEO along with Steve Laxton, Executive Vice President and CFO. Other members of Nucor's executive team are also here to participate during the Q and A portion of today's call. We've posted our Q2 earnings release and investor presentation to the Nucor Investor Relations website, and we encourage you to access these materials as we'll cover portions of them during the call.

Speaker 1

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 than forward looking statements 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, I'll turn the

Speaker 2

call over to Leon. Thanks, Jack, and welcome, everyone. I'd like

Speaker 3

to begin by highlighting 2 recent changes to our executive team. In June, Doug Jellison retired after 33 years with Nucor. Doug worked across many of our businesses and made tremendous contributions to Nucor over the 3 decades he was part of our team, most recently as EVP for Strategy. We wish Doug, Luana and his entire family the very best in retirement. And in May, Randy Spicer was promoted to Executive Vice President to run our bar and engineered bar businesses.

Speaker 3

Randy is a talented leader who has most recently served as President of Nucor Tubular Products. He's been with Nucor now for more than 20 years and we are excited to have him part of our executive team. Turning to our Q2 performance, I'd like to congratulate our entire team on achieving the safest first half of any year in Nucor's history with 52 of our 109 divisions accomplishing our ultimate goal of 0 recordable injuries. These are fantastic results, and I'd like to thank our 32,000 team members for your steady progress toward making Nucor the world's safest steel company. In terms of financial results, we generated earnings of $2.68 per diluted share in the 2nd quarter, bringing our year to date earnings to 6 point $4 per diluted share.

Speaker 3

2nd quarter earnings decreased compared to the Q1, primarily due to lower average selling prices in both our Steel Mills and Steel Products segments. Returning capital to shareholders and maintaining a strong balance sheet are key components of our overall capital allocation philosophy and we made progress in both fronts during the quarter. Nucor repurchased approximately 2,900,000 shares for $500,000,000 and Moody changed its outlook on Nucor's senior unsecured credit rating from stable to positive. One thing I'm especially proud of is the progress our team continues to make in advancing our long term value creating strategy. During the quarter, we continue to make progress in growing our core steelmaking operations, while expanding into new downstream businesses.

Speaker 3

I'd like to just take a minute and highlight a few of these initiatives. At our Lexington, North Carolina greenfield bar mill, we hit key milestones during the quarter and remain on track to commission the mill in the Q1 of 2025. At our West Virginia sheet mill, we've made considerable progress since our groundbreaking last fall and expect construction to wrap up by the end of 2026. As for recently completed projects, we continue to build momentum in production and shipments out of our Gallatin and Brandenburg Mills. Gallatin shipped almost 500,000 tons for the quarter, establishing new daily and ship production records.

Speaker 3

And in late June, we celebrated the grand opening of its new tube mill. At Brandenburg, we shipped nearly 60,000 tons in Q2, but we no longer expect to ship 500,000 tons for the year due to softer market conditions, elevated plate imports and our focus on capabilities rather than volume. However, we will continue to focus on achieving full run rate capabilities and becoming EBITDA positive by year's end. We also took additional steps to expand the set of solutions we offer customers, recently announcing 2 acquisitions as part of our Expand Beyond strategy. As a reminder, this strategy involves targeting steel adjacent businesses with attractive growth profiles, high margins and compelling synergy potential.

Speaker 3

In June, we announced the planned acquisition of RITEC, a leading manufacturer of high performance overhead doors. In conjunction with this acquisition, we're forming Nucor Door Technologies, our overhead door growth platform, which will include CHI overhead doors as well as RYTECH. RITEC has 2 manufacturing facilities in Wisconsin that produce high performance doors for warehouse, auto dealerships, advanced manufacturing facilities and cold storage. The company has a strong reputation for quality products and superior customer service. The combination of Rytec and CHI to form Nucor Door Technologies allows us to offer customers a diverse portfolio of residential and commercial doors.

Speaker 3

The acquisition is expected to close by the end of July and we're excited to welcome RITAAC's 300 team members to the Nucor family. Earlier in the Q2, we closed on the acquisition of Southwest Data Products, a manufacturer and installer of data center infrastructure. This acquisition gives us expanded capabilities to serve a rapidly growing market, driven by the rise of artificial intelligence and cloud computing. By combining the capabilities of Southwest Data Products, Nucor Warehouse Systems and Nucor Buildings Group, we can now provide customers with nearly all steel products that go into a data center from the building to the interior infrastructure. We believe the cross selling opportunities that RYTECH and Southwest Data Products create with existing Nucor business units will create meaningful value for our customers and our shareholders.

Speaker 3

Now I'd like to take a minute to revisit our long term growth plan and how the investments we're making today can create value for our customers and shareholders for years to come. In raw materials, we're investing in new technologies to enhance our scrap segregation and recovery rates, while reducing our carbon footprint. In our Steel Mills segment, each investment is aligned with our broader strategy to increase Nucor's product mix towards higher margin, value added products to address specific customer needs in key markets. For steel products, we're investing in automation to drive efficiencies and create a safer work environment. And we're innovating new products and production methods that our customers value.

Speaker 3

And finally, we're investing in new downstream platforms, Nucor embarked on this long Nucor embarked on this long term growth strategy in 2020 when I became CEO. Over the past several years, we've accomplished a lot, but we've still got plenty left to do. The next 2 years will likely be our most capital intensive with several active construction projects occurring simultaneously. We plan to fund this with operating cash flow and cash on hand, which was approximately $5,400,000,000 at the end of Q2. Our largest current project is the West Virginia Sheet Mill, which will begin supplying customers in the Midwest and Northeast with a more sustainable sheet product once construction is completed in late 2026.

Speaker 3

Between now and then, we're excited about the start ups of several other projects. In the Q1 of 2025, we'll begin ramping up our new rebar micro mill in Lexington, North Carolina to supply construction markets in the Southeast and Mid Atlantic regions. In the spring and fall of 2025, we'll complete construction of 2 highly automated utility tower manufacturing plants to serve the high growth power transmission and telecommunications markets. After that, we'll be bringing on new finishing capabilities, including a new Galvan and coating complex at Crawfordsville in late 2025 and a second Galvin at Nucor Berkeley in mid-twenty 26. Each of these projects along with several others throughout the company serve important roles.

Speaker 3

It's not about adding capacity, it's about a differentiated capability set for our customers, while doubling the through cycle earnings potential for Nucor. We have crossed the midpoint of our multiyear CapEx plan, but several recently completed projects have yet to reach their full earnings potential. We know what it takes to accomplish the goals we've laid out for you at our Investor Day nearly 2 years ago, and our leadership team is laser focused on the execution required to get us there. Finally, I'd like to address concerns the domestic steel industry has regarding unfair trade practices. Over the last 18 months, we've seen a material uptick in steel imported from Mexico and Canada to levels far above historic levels, contrary to the Section 232 agreements with both countries.

Speaker 3

It's also clear that China and other countries have been evading the Section 232 tariffs and other duties by trans shipping steel through our neighbors to the North and South. Fortunately, a few weeks ago, trade representatives from the U. S. And Mexico announced an agreement designed to stop the flow of illegally imported steel from China and elsewhere. Under this new agreement, the U.

Speaker 3

S. Will impose a 25% tariff on Mexican steel that is melted and poured outside of North America. And Mexico agreed to raise its tariff rates on imports from countries it does not have free trade agreements with. In our view, this was an important first step to stop the surge of steel imports from Mexico and address the problem of circumvention. However, more stringent efforts are needed and any exceptions to this new requirement, including through the exclusion process will largely negate the benefits of the agreement.

Speaker 3

And we still have concerns about trade practices involving rebar, electrical conduit and the rise in fabricated seal products coming in from Mexico. We urge the U. S. Government to continue working with Mexican leaders to address each of these issues. We also urge Congress to pass the Level of the Playing Field Act 2.0.

Speaker 3

This legislation includes critical updates to the U. S. Trade remedy laws that would enhance domestic industry's ability to defend against unfairly traded imports with new tools to address Chinese cross border subsidies and expedite investigations of repeat offenders that simply move production from one country to another. We appreciate the bipartisan support that exists for strong trade enforcement. With that, I'll turn it over to Steve, who will share additional details on our Q2 financial results.

Speaker 3

Steve?

Speaker 4

Thank you, Leon, and thank you to everyone for joining us on the call this morning. Leon just highlighted how the Nucor team is continuing to advance the ball on its long term and value creating strategy. And during the first half of twenty twenty four, the team also executed on delivering results, posting strong earnings of just under $1,500,000,000 at around $2,000,000,000 of cash from operations. During the Q2, Nucor generated net earnings of $645,000,000 or $2.68 per share, approximately 23% lower than earnings from the Q1 of the year. The majority of our overall change in earnings between the prior quarter is attributable to our Steel Mill segment.

Speaker 4

This generated pretax earnings of $645,000,000 a decline of roughly 40% from the prior quarter. Lower realized pricing, especially among our sheet mills, was the biggest single factor contributing to the segment reduced profitability. The Steel Products segment delivered pretax earnings of 4 $41,000,000 for the 2nd quarter, roughly 14% lower than the Q1. Although segment shipments increased in the second quarter, lower realized pricing and decreased margins more than offset volume gains. Our Steel Products segment is composed of a diverse set of products and market solutions, and I'd like to highlight 2 of our groups that had more pronounced impact on the segment results during the quarter.

Speaker 4

First, our Tubular Products Group saw earnings decline by more than 50% during the quarter as those divisions work through higher priced substrate in a declining price environment. Our Tubular Products Group accounts for more than 1 out of every 5 tons sold from the Steel Products segment. Another group to highlight in this segment is our joist and deck operations. These divisions continue to perform well even as realized pricing for these products moderated from the record levels of prior years. Earnings from Joyst and Deck declined roughly 5% from the prior quarter, but still accounted for more than half of the segment earnings for the 2nd quarter.

Speaker 4

Our raw materials segment produced pretax earnings of approximately $39,000,000 for the quarter. Overall, volumes and pricing were softer than the prior quarter, but lower operating expenses more than offset these headwinds. During the Q2, the power of Nucor's business model allowed us to generate $1,500,000,000 in cash from operations. This strong cash generation is a key factor enabling Nucor to continue its balanced, consistent and long term approach to allocating capital and creating value. Our capital allocation framework includes maintaining a strong investment grade balance sheet, providing direct shareholder returns and enabling growth in value through investments.

Speaker 4

That balanced and disciplined approach to capital allocation was on display again in the Q2. Newhall's balance sheet has long been a foundational source of advantage and an enabler of our long term strategy. At the end of the Q2, our total leverage stood at less than 1.2x trailing 12 month EBITDA and our cash on hand was a healthy $5,400,000,000 And as Leon mentioned earlier, we're pleased to see Moody's revise our senior unsecured credit outlook in May from stable to positive. The Q2 saw Nucor return just over $630,000,000 back to shareholders through dividends and share repurchases. These returns, when combined with the Q1, yield direct shareholder returns of more than $1,700,000,000 year to date.

Speaker 4

While we target returning 40% or more of net earnings to shareholders, we've nearly tripled that rate on a year to date basis. And this demonstrates an important aspect of how Nucor thinks about managing shareholders' valuable capital. We either invest it to grow and create value or we return it to shareholders. In addition to strong shareholder returns, during the quarter, we deployed more than $800,000,000 of capital spending and more than $100,000,000 in acquisitions. These investments and those to come will help fuel the future earnings capacity of this company.

Speaker 4

Turning to our Q3 outlook, we expect consolidated earnings to be lower than the 2nd quarter, primarily because of lower anticipated earnings from our Steel Mill segment. Earnings in the Steel Mill segment are expected to decline meaningfully as realized pricing has recently continued to decline across most of our major product the magnitude of the the magnitude of the sequential decline in consolidated EBITDA for the Q3 could resemble that of our Q2. Taking a step back to reflect on the broader macro picture, while the U. S. Economy appears to continue to avert a more pronounced downturn, it's becoming more evident that activity has softened as the year has progressed.

Speaker 4

We've also seen an increase in imports year over year and a higher for longer interest rate environment may have tempered or delayed some marginal demand. The confluence of these factors is driving margin pressure on several of our products in the near term. It's worth noting that there are several end markets that remain quite healthy, including construction activity related to semiconductors and other advanced manufacturing facilities, data centers, healthcare facilities and energy and infrastructure projects. As the largest and most diversified steel producer in North America, Nucor is well positioned to service each of these markets. With that, we'd like to hear from you and answer any questions you might have.

Speaker 4

Operator, please open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Bill Peterson from JPMorgan. Your line is now open. Please ask your question.

Speaker 5

Hi, Liam and Steve. This is Bennett on for Bill. Given it's been about 3.5 months since you first introduced your weekly CSP back in April, I was wondering if you could share any key takeaways you've received from customer feedback thus far. Furthermore, how has the strategy unfolded relative to your initial expectations?

Speaker 3

Yes. Thanks, Bennett. I'll kick us off. And Noah, if you have any comments you'd like to add regarding the CSP and Sheen. Look, first, I would tell you we're excited about what we're seeing in the market.

Speaker 3

I think in a down market like we're seeing or a little softer market like we're seeing today, I think this is exactly where the long term impact of CSG can be most meaningful to take out the speculation, the speculative buying in the spot market and create a relevant transparent published price. And so, again, I think it's going to take a little bit of time to work through a full cycle in the steel segment or the steel sheet steel CSP side of things. But again, we like what we're seeing. We're hearing a lot of positive feedback

Operator

from

Speaker 3

our customers and we believe it's helping us to solidify relationships with those customers whose demand is driven more by end use market conditions and less by speculation. And so those are the customer relationships we value the most. And again, early days still, but again, we're liking what we're seeing.

Speaker 6

Yes. Bennett, this is Noah. I'd just add that as it's core to our culture, we've done what we've said we were going to do with CSP. We believe we've provided relevant timely pricing. And I think the market conditions over the last few months have afforded us the opportunity just to prove our transparency in pricing.

Speaker 6

I'll say that the feedback we get from customers is our customers want to deploy their capital in a way that creates value for their customers and not in managing working capital or buying opportunistically. So we're going to continue to do what we've said we're going to do with CSP, remain relevant and timely with our pricing. And to your point about how do we measure success in the future, we'll gauge success. We'll be able to see success when we see order entry better matching underlying demand. So I think it's a longer term engagement, but we're committed and we're happy with our progress on CSP so far.

Speaker 5

Great, thanks. And if I could do one more, I think the color was clear on earnings for each segment and the comment relative to 2Q is helpful, but how should we think directionally about shipments for each segment looking into the Q3?

Speaker 3

I'm sorry, shipments related to what, Bennett?

Speaker 5

For the Steel Mills segment and the Steel Products segment directionally expectations into the Q3?

Speaker 3

Yes. Look, I think there's a lot of talk in the market that's softer and are we heading for a cliff. And I wouldn't tell you we don't feel that way at all. Certainly, we've seen pricing move off historic highs of 21, 2 and even parts of 3, but it's moderated. We think we found some stability and this market has stabilized in most of our product groups from a demand picture.

Speaker 3

The back half of the year, we expect it to be relatively flat. Again, if you look at the overall market for the year, the ADC is expected to drop about 1%. So again, from a demand picture, things are really not too bad. And again, many of our products remain incredibly resilient. So specifically on the steel products sector, again, it's a very large sector for Nucor.

Speaker 3

It's not just buildings and joist and deck in our ball craft facilities. We've got the fabricated rebar, we've got skyline steel, we've got our overhead door businesses in both CHI and RITEC now and our data systems are racking. And so it's an incredibly diverse group that's consuming about 22% of our overall steel products into it. So it's an incredibly large business segment for us. But specifically in Buildings and Products, we're seeing some stable order entry rates incoming over the last few quarters.

Speaker 3

We've seen that very much stabilize. And so we think the back half of the year, while we're working through some higher priced inventory, will continue to tick up and again from a demand picture remain pretty resilient.

Speaker 5

All right. Thanks so much and best of luck.

Speaker 3

Thank you. Appreciate it, Bennett.

Operator

Your next question comes from the line of Martin Englert from Seaport Research Partners. Your line is now open.

Speaker 2

Hello. Good morning, everyone. Can you provide an update on Newports raw material strategy, specifically upgraded low copper shred products and low emission iron making? To the extent that it's applicable, maybe this is longer term, but if you could touch on electrolysis process for iron ore and your investment in electric?

Speaker 3

Yes, Martin, we'd love to address that. I'm going to ask Al Baer, who's taking over our raw materials group here in a second to provide you a more detailed update. But I would tell you broadly for the last 25 years, Nucor has taken a very, very deliberate focus on controlling our raw material inputs across the spectrum. Over the last decade, decades and a half, we've been really focused on how do we control more of that? How do we give ourselves the flexibility and optionality to be able to do that for the long term?

Speaker 3

But Al, if you would maybe share some of the things that we're working on, some of the projects that are already completed and where we're headed.

Speaker 6

Sure, Leon. And thank you, Martin, for the question. You asked just about our raw material strategy. I'd summarize it this way and say that what we're aiming to do is create competitive advantage by supplying our mills with the most cost effective stream of inputs and to do that while minimizing the embodied carbon our finished products. And so that's our guiding light.

Speaker 6

And under that then we execute that by building flexibility and adaptability into our raw material stream. And we've talked about that for a number of years and have had the opportunity to demonstrate that through changes in the market that we see. So one of those that gives us flexibility is low copper shred, and I know you asked about that. And I'll share a few thoughts just on how we're attacking that area and how we think of it. And the first thing I'd share with you, Martin, is that low copper shred isn't new for us, that we've been making that product for about 12 years at 2 different locations.

Speaker 6

And so we've mastered the discipline of how to make it. We've mastered the discipline of how to use it in the mix. But you have seen recently a renewed investment investment and some newer investments in low copper shred as we see the demand for high quality metallics going up and we're responding to that by making additional investments in low copper shred to add to the flexibility that's so key to our strategy. And so in terms of where we sit today, I'd share with you, we can process today about 1 point 4,000,000 tons of low copper shreds and we're bringing on another 750,000 tons as we speak. So that'll give us in the very near future about 2,100,000 tons of capacity.

Speaker 6

And then as we look out another couple of years, I'd expect us to add another 3 point 5 5000000 to 4000000 tons of additional capacity, landing us somewhere in the 5,500,000 to 6000000 ton range for low copper shred. But Martin, I'll share with you, if you think about the 4,000,000 tons of DRI that we also make and you add to that 6,000,000 tons of low copper shred, it puts us at about 10,000,000 tons of metallics that we control, which is about 2 thirds of our needs. And so that's a sweet spot for us because it gives us incredible control, while at the same time allowing us the ability to be very flexible and very opportunistic in the market and how we serve the rest of our needs. I know you asked about Elektra, too, and I just want to talk just for a minute about that. I think what I'd say is we remain really excited about that project.

Speaker 6

It's got a long ways to go, but it's a very interesting technology. We remain an investor and are considering additional investments in that space. And Noah and I work on that together and are following that closely. That's got really interesting advantages for us, particularly in the lower carbon range. I wouldn't consider that a cost benefit, but that's primarily a green and sustainability benefit and really exciting technology.

Speaker 2

Thank you for all the detail. That's helpful. If I could one last one there. Sequentially, implied steel conversion costs seem like they stepped higher quarter on quarter. You've guided to flat conversion costs in 3Q.

Speaker 2

Can you touch on what led to the sequential step up in unit conversion costs in 2Q?

Speaker 7

Yes. Hey, Martin, this is Steve. Thanks for the question. The conversion costs really are a function of a few different things, a few different moving parts. And in the quarter, what you see is utilization rates were down a bit.

Speaker 7

That always affects our cost. But probably more pronounced, there is a flow of materials through our production processes that creates a little bit of timing differences. And that causes the conversion costs to look higher on a quarter over quarter comparison. I think the most important thing probably for you to take note of is that input costs right now are moderating consistent with, what you see with CPI other indicators.

Speaker 2

Okay, excellent. Thanks for the additional color there.

Speaker 7

Thanks, Mark.

Operator

Your next question comes from the line of Piston Besser from BNP Paribas. Your line is now open.

Speaker 8

Hi, good morning and thank you for taking my questions. The first one is on the policy front. When you look at the upcoming elections, what risks do you see? I mean, for instance, solar and wind have been source of growth and potential upside for your business. So how concerned are you of any potential new administration removing some of the funding for those areas?

Speaker 3

Yes, Tristan, it's really hard to speculate today on what might come in a change of control in the administration. From a macro standpoint, I would tell you Nucor has had incredible success with both Democratic as well as Republican candidates in office. As we think about that, again, not trying to completely evade your question or be so ambiguous, Would there be some pressure on IRA and would there be some potential for that? Yes, we've heard the same rumors as well. What is the overall impact to Nucor?

Speaker 3

Well, it's really hard to predict. What I would tell you is our strategy is to invest in the long term. We're not over weighted to any single side of the market. So we serve an incredibly diverse range of customers, have an incredible range of capabilities for those customers. So we're not so over weighted to offshore wind or certain elements of that, that if it changed, it would be impacting the new quarter.

Speaker 3

But on the other side of that, if those change, do you see different benefits and some tailwinds from tax relief, less regulation for investment moving forward. And so again, it's really a very difficult question to speculate on what might happen tomorrow with a different precedent. And so we'll just have to wait and see. But again, I love how we're positioned. I love the strength and strength of our portfolio and where we're headed that I think is going to continue to serve this marketplace incredibly well.

Speaker 8

All right. No, I understand and I appreciate the color. And as a quick follow-up to that, when it comes to trade, a little bit again, what do you believe should be the new administration number one priority when it comes to steel? I mean, you've been vocal about Vietnam being an issue. Is there a specific trade case against the country?

Speaker 8

And Mexico, the new deal, to your understanding, does Brazil have an exemption? Where do you see where what would you be pushing for?

Speaker 3

Yes. Look, you touched on some of that. And what I would tell you is we've always advocated for is not free trade, it's fair trade to make sure that our trading partners are actually following the TRQs that are put in place, things like the USMCA. So while we're we think it's the right first step that the administration put into place a few weeks ago with Mexico, it's not enough. We still have concerns with rebar, with electrical conduit, with some other products that we see are surging that have to get brought back into control.

Speaker 3

We've looked at the fabricated steel products sector over the last several years has more than doubled its import levels from about 1,000,000, 1,200,000 tonnes. We believe that's closer to 2,400,000 tonnes today. That has got to get curved, that has got to get brought into control. And then again, the other piece of all of that is if we begin to pick apart the most recent announcements with exclusions, it was all for naught. It won't have had any teeth put into it.

Speaker 3

So again, you're going to see Nucor continue to advocate, vocally and in Washington with regardless of the administration to create a level playing field that protects this industry from illegally dumping subsidized steels from making into the shores of the United States.

Speaker 8

All right. That's very clear. And maybe the last one, if I can squeeze that in on plate. You made a big pricing adjustment last month. What are you seeing from a demand perspective?

Speaker 8

Do you think you've hit the bottom in terms of prices? You're starting to see a bit more stable demand environment? Or is there further adjustment to come? And if you can touch on the little the various end user end markets that would be appreciated.

Speaker 3

Certainly, Tristan. I'll ask Brad Ford to speak to our current outlook in the playgroup and go from there. Brad?

Speaker 7

Yes.

Speaker 9

Thanks Leon. Thanks for the question Tristan. I think it's important to start with some context. We're coming off of some pretty strong years for play, really 2021, 2022 and 2023 were pretty robust. So as we think about this market being a little bit softer, there's a couple of things to address.

Speaker 9

1, we are seeing some softness in the more rate sensitive portions of the market, namely kind of vertical construction, some of the heavy equipment and agriculture side. And 2, the most significantly, back to the import conversation, we were challenged in the first half of this year by meaningfully higher levels of imports, which gained some market share and put pressure on pricing. This pressure on pricing has led our distribution customers to take a pretty cautious approach to purchasing as they try to right size their inventories. All that said, we do see some bright spots and as we think about the second half of the year, Back to imports, we've seen certain countries use up almost 2 thirds of their quota really through the 1st 5 months of this year. So we expect a slightly lower import picture in the second half.

Speaker 9

Bridge and power transmission markets remain strong. And what we're hearing from our customers and developers is on shore wind is really going to pick up kind of late in the second half. And then there's the impact from IJA funding and project awards really as we think about those picking up here in late 2024 and early 2025, which supports not just plate, but our structural businesses and a lot of our steel products.

Speaker 8

Okay. That's very clear. Thank you very much.

Speaker 3

Thanks, Tristan.

Operator

Your next question comes from the line of Chris Lefebvre from Jefferies. Your line is now open.

Speaker 10

Hey, thanks operator. Hey guys, it's Chris Lomina from Jefferies. Lian, you mentioned automation in the Steel Products segment and you've alluded to it a bit in the past. But I was wondering if you could just kind of elaborate on how automation could impact your margins. I mean, what sort of cost benefits might you see?

Speaker 10

Is this sort of the stuff that you just need to remain competitive? Or do you think that you can become an even lower cost producer relative to the rest of the industry by some of the automation initiatives that you're putting in place?

Speaker 3

Yes, Chris. Well, appreciate the question. I would tell you, I like our position where we sit today. I think we are cost competitive with anyone in the world. And again, we have always advocated, we will compete against anyone in the world as long as it's done fairly.

Speaker 3

Again, back to the import question. But regarding automation, regarding AI, it's something that I would tell you Nucor is embraced and embracing and the changes are coming at an incredible rate of speed. And so we're seeing the potential applications of AI and automation in a whole raft of different areas of our businesses, technologies that we're using to deploy to create safer outcomes from our team members, to create cost advantages, to create efficiencies. And so I'd like, Chad, you to Mark, who's over our innovation group and maybe John Hollich to just touch on maybe a few of those specifics. Chad and John, if you would to give Chris a little more detail and background of what we're doing, how we're

Speaker 11

embracing that? Yes. Thanks, Leon. Yes, Chris, not only is it flexibility opportunity, especially in our businesses at basic and also a safety opportunity for our teammates. When you think about expand beyond, yes, we're going to continue to invest and look for businesses so that we can bring technology that will allow us to be more efficient and take care of our customers.

Speaker 11

Some specific examples in our new core racking group, we've invested and we have robotic well sales that are operating at several of our facilities right now. And we're excited about what we're seeing there. We've mentioned this before, but our 2 new tower and structure greenfield plants, they have highly automated material handling equipment as well as robotic plasma and well cells. And we look forward into the spring and fall of next year as we bring those plants online and see the automation take place. As a reminder, many of our downstream businesses in Nucor face these demand fluctuations through the cycle.

Speaker 11

And what we are seeing is that automation in key manufacturing areas can really help us navigate that demand fluctuation so that we can really take care of our customers. John?

Speaker 12

Yes. Thank you, Chad. And thank you, Chris for the question. I'll share a couple of other examples from a few of our operations. One is our SBQ Mill in Memphis, Tennessee, where here our team has embraced AI to optimize the production scheduling of a very complex steelmaking process.

Speaker 12

We've been able to reduce the man hours committed to this process by about 80% through the use of AI. In addition to that, we also benefit from yield savings, reducing working capital and operational efficiencies. Switching gears to another project. For the last 6 years, we have been developing a robotic joist line at Folcraft in South Carolina. Joist production traditionally has been a very labor intensive process.

Speaker 12

This new robotic line, which we have been operating now for about 1 year, utilizes patented robotics and vision technology to perform the assembly and welding of choice. This is really a game changer for our team and we're looking to grow this across the rest of our choice operations in the future.

Speaker 7

Hey, Chris, this is Steven. I'll just add on one other thing to address your question about advantage or not. Nucor has always been about creating production efficiencies. That's how we win. And so if you think about the scale and reach of what we do, any technology advantage is leveraged across a bigger system for more gains.

Speaker 7

So I'll call that a scale efficiency if you want to. But Nucor is unparalleled in our industry and the ability to review that.

Speaker 10

Thank you. That's very helpful. I appreciate that.

Operator

Your next question comes from the line of Philip Gibbs from KeyBanc Capital Markets. Your line is now open.

Speaker 13

Hey, good morning.

Speaker 3

Good morning, Phil.

Speaker 13

So you called out in the press release $137,000,000 of startup costs. Is the vast majority of that related to Brandenburg at this point?

Speaker 7

Yes. Hey, Phil, this is Steve. It's really 2 projects Brandenburg, which is slightly a little bit bigger in the quarter impact in West Virginia. As we're accelerating the spending of West Virginia, you're seeing more a little bit more impact there.

Speaker 13

Okay. Are you also including non cash costs in that number?

Speaker 7

No, no, generally not. It's generally contractor work and site specific work.

Speaker 13

Okay. It leads me into my next question. So West Virginia, I think plan is to get it started at least in terms of some level of commissioning in 2025, but it sounds like it's probably more so in the back half of the year based on your slide deck and then also ramping throughout 2026 and 2027 as you build product capabilities. Is that the way to think about it?

Speaker 3

It's a year later. So back half of end of twenty twenty six, Phil, is when we'll ramp up Brandenburg into 20 27. West Virginia. I'm sorry, West Virginia, not Brandenburg. Yes, West Virginia.

Speaker 13

Okay. And you all said in your deck that conversion costs expect to be flat quarter on quarter. Did you have anything from a maintenance perspective to call out in particular in 2Q? And do you have any maintenance outages in the Q3, anything beyond normal?

Speaker 7

No, Phil, the only in terms of overall in the company, you won't notice it necessarily, but in some of the segment numbers, some of those maintenance costs at our DRI plants as we have outages do swing the cost impacts a little bit in that segment.

Speaker 13

I was asking for steel.

Speaker 7

Yes, for steel now, there's you shouldn't see any pronounced impact headed into the Q3.

Speaker 13

Okay. And then lastly for me, any update in terms of what to think about CapEx for this year or next to the extent that you didn't mention it? Thank you.

Speaker 7

Yes. Phil, the guidance we've given on the year is about $3,500,000,000 for CapEx spend. We'll keep an eye on that. We'll update as we have in the past years as we get closer to the end of the year if we see any meaningful adjustment to that. And then Leon mentioned it in his prepared remarks at the outset of the call that for the next couple of years, you'll see an elevated level of capital spending as we move through some of these projects.

Speaker 7

It's about $6,500,000,000 of really larger projects that you'll see us move forward on in the next couple of years.

Speaker 13

Thank you. Thanks, Phil.

Operator

Your next question comes from the line of Alex Hacking from Citi. Your line is now open.

Speaker 14

Yes, good morning. I wonder if you could maybe comment on how much incremental steel demand, if any, you're really seeing from the IIJA at this point? Or is that still something that's on the horizon? Thanks.

Speaker 3

Yes. What I would tell you, Alex, is a couple of things. If we think about those three pieces of legislation, I would tell you that the CHIPS Act is by far the most out front. We're seeing that steel getting processed and put through and again that moving at a much higher rate. We're I think follow that by some of the IRA, particularly in your torque tubes and some of the applications within the wind and solar.

Speaker 3

And then lastly, and again, still early innings on the infrastructure bill itself. And so one of the things to keep in mind is that through cycle kind of start to finish by the time the state requests the funds till it's seeing or hit the order books could be 2 years. So again, we have a long maturation process that's in there from the federal package passed to the state actually getting the money for the bridge road work or the infrastructure that they want to rebuild in that state. So that we believe will continue to increase in the years to come as more and more states continue to move further up that process map of actually getting those funds into the states, but it's still early days.

Speaker 14

Okay, thanks. And then just a follow-up on Brandenburg, if I could. Right now, it's operating around 20% utilization rate. If the plate market was booming, is there anything stopping Brandenburg from a technical perspective to ramping to 100% utilization rate over the next 6 to 12 months? Or are you still in that startup phase proving out the capabilities phase and your mill is really not ready to run at that rate yet?

Speaker 14

Thanks.

Speaker 3

Yes. Look, really, really good question, Alex. And here's what I would tell you. The short answer is no. We anticipate and the team at Brandenburg continues to do an amazing job of bringing that mill online.

Speaker 3

So we expect that even despite market conditions, that mill will be able to achieve its full run rate capabilities in 2024. Now we'll decide how long we need that and how long they run at those capabilities. But from a technical perspective, they're still working out some bugs, but there's nothing materially that's going to keep us from achieving that full rate capacity situation by year's end. And again, we'll be mindful as we think about how we introduce those touch to the market. Obviously, we know our plate market, we know the customers.

Speaker 3

And again, we've been selling in the plate market for over 20 years now. So and we'll be mindful about how we think about that. At the same time, balancing that team's got to be able to achieve that so that when it's required, they know they can hit that last year and produce all the tons that are required for our market.

Speaker 10

Thank you.

Speaker 3

Okay. Thank you, Alex.

Operator

Your next question comes from the line of Tina Tanners from Wolfe Research. Your line is now open.

Speaker 15

Hey, thank you and good morning everyone. I have a near term question and a big picture question. So in the near term, I wanted to ask about the magnitude of EBITDA decline commentary and if it was more about pricing than volume again as you said last quarter? And then same concept, but just wanted to follow-up on the downstream segment. If indeed the squeeze in tubular was about the higher cost substrate and that should be normalizing, so it's index should be normalizing.

Speaker 15

Should we not see like a smaller magnitude of decline in the downstream?

Speaker 3

Yes. Look, Tim, that's a fair assumption and assessment. What I would tell you as we think about products, the reason we forecasted a decline in Q3 is a few reasons. While they're still working through some of that higher price backlog that's going to we know is going to flow through in the coming weeks and next couple of months. However, again, one of the bright spots as we think about where inflation is, unemployment is a little bit more elevated, seeing the Fed's appetite or at least intimation for some rate cuts, that certainly could have some considerable impact, particularly to the product segment that you would see more likely the back half of the year Q4 and into Q1.

Speaker 3

But again, there's we know what our backlogs are. Those backlogs are strong and hit from a demand picture in the Bowcraft and joist and deck, we're out for the rest of the year in terms of that backlog strength. But we also know what that pricing is and again we're going to see some squeeze on that as we get into Q3.

Speaker 7

Yes. Timna, I'd just add to what Leon said, the first part of your question about the near term. It's much more about pricing and margin pressure than it is volume pressure. So you were correct in that assumption.

Speaker 15

Okay. Thanks. And then taking a step back on the big picture, there is an incredible amount of appetite for grain oriented electrical steel and also for further options on automotive exposed. And I know we've talked about this in the past, but I've been hearing Gallatin can make thicker grades. I know West Virginia is targeting auto.

Speaker 15

Can you just remind us, a, when could you make some of these other auto grades and compete more broadly in the auto sector? Is that still the design? And is grain oriented even on your radar still? I just wanted an update there. Thanks.

Speaker 3

Yes, Tim. I'll kick it off and certainly open it up to anyone that wants to add some thoughts. But look, as we think about the auto sector over the last couple of years, we're supplying that 1 to 1,500,000 to 1,600,000 tons annually. So it's a customer base we know. We've got a great relationship with many of the big OEMs.

Speaker 3

Their appetite for our iconic steels has been incredible. We've achieved the Supplier of the Year award with General Motors for going on 5 years and hopefully that will continue. And so our expectation is to double that volume in the next several years. And so as you see West Virginia come online, that is going to be a key focus for us. How we think about how far upstream we go into that, like the exposed automotive is we'll wait and see.

Speaker 3

Again, we know we can produce those steels and we're going to be deliberate about how we think about doing that because again we want to make the most money that we can possibly make for ourselves, customers and our shareholders. So we're going to be really deliberate and mindful, not to get too over weighted to auto, but to be very deliberate about how we continue to move up in that value chain and the higher value products there. Electrical steels, look, I would tell you stay tuned. It's something that we've looked at. We again know that market.

Speaker 3

We know who's in it. We know the imports that are coming in, where it's being supplied and the end uses that could be potentially attractive as we move forward. So again, as Nucor continues to evaluate that we make no mistake, we've got some great partners. We've got some great relationships with those that are currently making it around the world that we'll Okay. Will do.

Speaker 3

Thanks, Liam and team. Thank you.

Speaker 15

Okay. Will do. Thanks, Liana and team.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Martin Englert from Seaport Research Partners. Your line is now open.

Speaker 2

Hi. Thanks for the follow-up. I wanted to see if you could touch on how you source electricity for your steel mills and the typical duration for agreements and how you might be thinking about protecting that cost if rates and capability of what you have to pay to get that start to rise in the future?

Speaker 3

Yes, Martin. Look, I'm going to kick it off and I'm really glad you asked that. Over the last 3 or 4 years and really since I took over as CEO, it's been something that we've talked about and not just talked, we've actually take meaningful steps. So you saw a few years ago, our partnership with an investment in NuScale, the small module reactor and the advanced nuclear reactors that are getting built. Obviously, Bill Gates and TerraPower are doing their own SMRs and as well as 2 other manufacturers.

Speaker 3

So from a Nucor perspective, we have a large power consumption that we look at. We're in 40 different states. We've got 30 EAFs around the country that we need to build relationships with. But you got to understand as well, we've been doing this since 1968. We have incredible relationships with the utilities that we're in because we're the largest power consumer in many of those states.

Speaker 3

But the macro picture to what you're asking, as you think about the green and digital economies, you think about the data center infrastructure build out in the cloud computing that's got to be handled, That volume is insatiable. And so we as a nation have really got to think about how are we going to solve that energy need because almost everywhere they're looking, these data centers now are growing from 100 megawatts to 6, 7, 8, 900 megawatts in demand. It's a huge, huge appetite. So you're going to see Nucor continue to look for opportunities to promote, invest in or otherwise position ourselves for the long term so that not only do we get surety of supply at the right cost. And again, many of our contracts are long term pricing.

Speaker 3

So they're not we're not going to the market daily or monthly. We don't have we will have firm power rates versus variable, but we have a consistent pricing model that we're able to look out years years into the future that will continue that. So again, it's a really important question for our nation. So we think about manufacturing as well as the U. S.

Speaker 3

Citizens and how they're going to be able to afford energy in the years to come as we think about the current environment in decommissioning of our existing coal plants, about 70% of them will be idled by 2,030. So we've got to find and I think we have to re embrace as a nation nuclear energy as the cleanest, most reliable form of energy that's out there. But Steve, anything you'd want to add on kind of current climate and pricing in utilities? Yes.

Speaker 7

Mark, I think just to build on what Leon said, a couple of points of emphasis. We're multi site locations, so it's not specific to a particular delivery point. It's also the vast majority of our power is purchased under a tariff rate agreement. And so, those fluctuations tend to change slowly over time. But Leon highlighted really the more fundamental long term importance of the company or as a country.

Speaker 7

And we've, of course, you're familiar that we've put in place some purchase power agreements and we've taken some proactive steps to partner with, ironically I shouldn't say ironically with the folks out of our sector, some technology companies on procurement and worked with utilities closely on the development of their plans. So I'd say that we're very front footed on this issue. Energy is about it's a little less than $40 a ton cost last quarter, roughly give or take about 80% of that is electricity based. So it is a meaningful part of our overall cost.

Speaker 2

I understand there's a lot of facilities, but is there an average duration or goalposts, whether that's 5 years or 10 years under contract for the AAF note?

Speaker 9

Mel?

Speaker 3

Martin, I would tell you that that does vary. I'm not sure I've got a great average answer for you across the spectrum. What I would tell you is in most of those cases, they're multi year contracts that we're signing with the utilities. So they're now 1 to 2 years or 5, 8, 10 year type contracts. So all of those could be at different positions of where we sit in 2024, obviously, because of the timing and when those plans came online.

Speaker 3

So again, from the macro, it is a long term contract is the way you could think about that.

Speaker 2

You touched on this or alluded to this to some degree in your answer,

Speaker 9

but do you have concerns

Speaker 2

that higher electricity rates might concerns that higher electricity rates might stymie some of the reshoring activity and potentially disadvantage some of the U. S. Manufacturing base given U. S. Has been more so an ideal market, at least from a cost of energy or electricity perspective historically versus some others globally?

Speaker 3

Short answer, Martin, yes, I do. I think if you look today, the U. S. Is building no nuclear power. Right now in China, they're building 27 facilities.

Speaker 3

And so absolutely, because again, we're talking we're end use customers, we're talking to some of the biggest companies in the country and the partnerships that we have with them. And they are looking out 5, 8, 10 years and they know they can't get the power today. And so there are absolutely cases where we know projects are moving forward because they can't meet the power requirements. So yes, is the short answer to that question of it's an issue that has got to be dealt with because it's sitting right at our front door. And again, we have an opportunity to embrace that and to think about how we again, as a superpower in the world, how we continue to proliferate manufacturing, support manufacturing and again, the overall economy through our energy independence.

Speaker 2

Okay. I appreciate all the color and commentary. Thank you.

Speaker 3

Thank you, Martin.

Operator

I would now like to turn the call to Liam Tepalian, Chair, President and CEO.

Speaker 3

Thank you. And once again, I'd like to thank our Nootcore team for an outstanding first half performance and safety. Thank you for your efforts, your dedication to one another in helping us to achieve our goal of becoming the world's safest steel company. I'd also like to thank our customers for giving us the opportunity to serve you each and every day. And finally, thank you to our investors for trusting us with your valuable shareholder capital.

Speaker 3

Thank you for your interest in Nucor, and have a great day.

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Earnings Conference Call
Nucor Q2 2024
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