Nucor Corporation (NUE) Q2 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Nucor Corporation second quarter of 2014 earnings call. (Operator Instructions) Certain statements made during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate, and variations of other such words and similar expressions are intended to identify those forward-looking statements, which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy. More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest 10-K and subsequently filed 10-Qs, which are available on the SEC's and Nucor's website. The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligations to update them, either as a result of new information, future events or otherwise. For opening remarks and introductions, I'd like to turn the call over to Mr. John Ferriola, Chairman, Chief Executive Officer and President of Nucor Corporation. Please go ahead, sir.

Good afternoon. This is John Ferriola, Nucor's Chairman, 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 the other members of Nucor's senior management team: Chief Financial Officer, Jim Frias; and our other Executive Vice Presidents, Jim Darsey, Keith Grass, Ladd Hall, Ray Napolitan, Joe Stratman and Chad Utermark. In May, we announced the promotion of Chad to Executive Vice President of Beam and Plate Products. Joe Stratman, who has served in that role since 2007, will focus on our business development activities, for which he assumed responsibility in 2010. These moves result from ongoing implementation of Nucor's thoughtful and orderly succession planning. Chad Utermark is a 22-year veteran of our company, and will be a strong addition to our executive management team. He is a proven Nucor leader with experience in our sheet, bar and structural steel mill operations. Since 2011, he has served as General Manager of Nucor-Yamato Steel. Chad and his team are well-prepared to continue Nucor's highly successful record of profitable growth in Beam and Plate Products. On behalf of the entire executive management team, I want to thank everyone on our Nucor, Harris Steel, David J. Joseph, Duferdofin, NuMit Steel Technologies and Skyline Steel teams for a job extremely well done in the second quarter. You worked hard and work together to deliver better than expected earnings. Nucor's second quarter earnings increased over both this year's first quarter and the year-ago quarter. This growth was achieved, despite a very serious challenge of surging imports in many of our products produced by our steel mills. It should also be noted that while non-residential construction is improving, it is improving from a very low base. The key driver to Nucor's performance in this quarter's still very challenging environment is easy to identify. Our more than 22,000 teammates are doing an outstanding job on the execution of Nucor's strategy for profitable growth. During the current downturn, we have invested significant capital in a large number of projects to improve our cost structure and expand our product portfolios to include more value-added higher margins offerings. We are now just beginning to see some of the benefit from these strategic investments. We expect the returns will grow dramatically in the years ahead, as steel markets and non-residential construction inevitably improve. I want to again thank all of our Nucor teammates for their unrivaled commitment to excellence and taking care of all of our customers each and every day. Nucor's employees, the right people, are our company's greatest asset and our greatest competitive advantage. Keep up the great work that you're doing. Most importantly please stay focused on our number priority, working safely. I will now ask our CFO, Jim Frias, to review Nucor's second quarter performance and financial position. Following Jim's comments, I will update you on strategic issues and our progress implementing our plan for long-term profitable growth. Jim?

Thanks, John. Good afternoon to everyone. Second quarter 2014 earnings of $0.46 per diluted share exceeded our guidance range of $0.35 to $0.40 per diluted share. For the month of June, results from our steel mills and steel product segment were much better than forecast. As expected, the performance of our raw material segment included an operating loss of approximately $0.06 per diluted share at our new direct reduced iron, or DRI, facility in Louisiana. Second quarter of 2014 earnings improved over first quarter of 2014 earnings of $0.35 per diluted share, even after adjusting for period specific items. The first quarter of 2014, included $0.06 per share for diluted share of unusual expenses and a charge of $0.03 per diluted share for LIFO inventory valuation. The second quarter of 2014, included no LIFO inventory valuation charge and carried approximately $0.04 per diluted share of higher stock-based compensation expense related to the timing of annual grants. These grants are typically authorized in June of each year. The second quarter of 2013 carried a comparable amount of stock-based compensation expense. Nucor's year-over-year improvement in earnings was very robust compared to second quarter of 2013 earnings of $0.27 per diluted share. Last year's second quarter included no LIFO inventory activity and no unusual items. As John mentioned, our teams working throughout Nucor are working hard to increase earnings, despite continued headwinds from surging imports and a non-residential construction market that remains less than 60% of the peak from 2007. Our teammates' success is demonstrated by a 52% gain in the first half of 2014 in earnings over the year-ago period. Noteworthy contributors to the improved year-to-date earnings include our sheet mills, plate mills and fabricated construction products. Our sheet mills capitalized on both improved demand and opportunities provided by supply disruption at our competitors. Our plate mill group is benefiting from the investments made during the downturn at our North Carolina plate mill to add a heat treat facility, a vacuum tank degasser and a normalizing line. Our fabricated construction products group has taken advantage of small, but noticeable improvements in non-residential construction activity, by both growing our market share and increasing our margins in rebar fabrication, joist and decking, and pre-engineered metal buildings. A comment about our tax rates, as it can be confusing, due to the impact of profits from non-controlling interest. After adjusting out profits belonging to our business partners, the effective tax rate was 33.8% for the second quarter of 2014. That is consistent with our expectations for full year effective tax rate of approximately 34%. After adjusting out profits belonging to our business partners and the first quarter charge related primarily to New York State, tax law changes. At the end of the second quarter, Nucor's financial position remained strong. Our gross debt-to-capital ratio was 35.8%. Our cash and short-term investments totaled $1.2 billion. Further to Nucor's strong liquidity, our $1.5 billion unsecured revolving credit facility is undrawn, and does not mature until August of 2018. We have no commercial paper outstanding. Our next significant debt maturity is not until 2017. Nucor is the only steel producer in North America to enjoy the important competitive advantage of an investment-grade credit rating. Our financial strength is a significant competitive advantage. It allows us to invest aggressively during downturns to grow our long-term earnings power, which is a long tradition of Nucor. During the current downturn, Nucor has invested in a broad range of strategic investments throughout our steel making, raw materials and downstream businesses. Our investments all build upon Nucor's competitive advantages that include our low cost and highly flexible production capabilities, our diversified product mix and our market leadership positions. With these investments, Nucor is extremely well-positioned to continue our industry-leading through-the-cycle return on capital performance. Our focus remains on being an effective steward of our shareholders valuable capital. We continue to estimate our 2014 capital spending will be approximately $600 million. That would be a significant decline from capital expenditures that exceeded $1 billion in both 2013 and 2012. Most of our recent growth projects have been completed or are nearing completion. Also, the current temporary suspension of drilling new wells by our natural gas working interest investment reduces Nucor's 2014 capital spending by about $400 million. For the third quarter of 2014, Nucor's earnings are expected to show strong improvement over second quarter earnings. We expect increased profits at our structural, plate and sheet mills. Profitability of our bar mills should be stable compared with second quarter's performance. Our fabricated construction products businesses are expected to increase their earnings as non-residential construction activity continues its slow, steady, recovery. In the second quarter, our Louisiana DRI facility completed its planned three-week outage to make equipment adjustments. We expect marked improvement in the performance of this plant in the third quarter and profitability achieved by yearend. The biggest risk to the outlook for our industry continues to be excess global steel capacity and the ongoing threat of steel illegally dumped into the United States. Nucor will again follow our practice of providing quantitative guidance in the final month of the quarter. We appreciate your interest in our company. John?

Thank you, Jim. I would like to share some thoughts regarding the major industry risk that Jim identified, imports. In 2014, we are experiencing in the United States market what can best be described as a Tsunami of imported steel. Given the indisputable fact that mills in the United States are among the lowest cost producers of steel in the world, this makes no sound economic sense. A significant portion of this import surge is being driven by worldwide overcapacity that continues to operate as a result of illegal government subsidies and other trade law violations. The Nucor teams work to build sustainable long-term profitability requires that we fight hard to encourage our government to enforce our nation's credit loss. These trade remedies are not protectionism. The World Trade Organization or WTO established these actions as appropriate and necessary responses to subsidized exports and dumping practices of nations with access capacity. Several current trade case filings underway are of critical importance to Nucor and U.S. manufacturing jobs. These include rebar, pipes and tube products and wire rod. We were pleased by the Commerce Department's recent final decision to assess anti-dumping duties on oil country tubular goods imported from Korea, following a core preliminary finding. Domestic producers of OCTG products are significant and highly value customers of Nucor. Regarding the Commerce Department's preliminary determinations in the rebar case, we were encouraged by the findings on Mexican imports. While the findings on Turkish imports were disappointing, we are advancing small arguments for the Commerce Department to consider as it prepared as final determinations scheduled for release in September. During the second quarter, our team stayed focused on what is under our control today. I am very encouraged by our performance in the second quarter and the first half of 2014. Nucor delivered solid earnings growth in what are still very challenging steel market conditions. First and foremost, each day we pursue continual improvement in the job we are doing taking care of our customers. At the same time, our team has made excellent progress implementing our strategy of investing for long-term profitable growth. Here are some notable achievements during the second quarter. In June, our Nucor-Yamato structural mill completed an approximately $115 million project to expand its sheet piling production capabilities. Trials of the new products are underway this quarter with prime production expected early in the fourth quarter. The new piling sections will increase single sheet widths by 22% and provide a lighter stronger piling covering more area at a lower installed cost. This investment strengthens our market position in the piling business. It also allows us to realize more synergies from our already successful 2012 acquisition of piling distributor Skyline Steel. In late June, our new Louisiana DRI facility completed a planned three-week outage to implement equipment adjustments that will improve yields and conversion cost. Our team has already achieved outstanding quality and productivity in the first six months of operations. In fact, Louisiana has set new world-class quality standards with metallization rates up 96% and carbon content exceeding 4%. It's not surprising that our flat rolls and SBQ steel mills are eager to consume as much of Louisiana's output as they can get it. With the equipment adjustments completed, we expect significant reductions in yield loss in conversion costs during the second half of this year. As Jim mentioned, we also anticipate profitable performance by the end of this year. Our successful startup of the Louisiana DRI plant is a major step forward in the implementation of our raw materials strategy. We view our expanded DRI capacity combined with our natural gas investments to be a game changer for Nucor's ability to grow in the higher value-added sheet, plate in SBQ markets. The benefits from our raw material strategy are many. It significantly improves our long-term cost structure, with a high quality iron units we need to compete in the targeted products. It lowers the operating costs of our mills, through reduced usage of consumables and energy, as well as increased productivity. It enhances our ability to optimize our mix of iron units based on variations and the market pricing of those raw materials. It gives us greater commercial flexibility in working with our contract customers. It reduces the geopolitical risk exposure of our supply chain, given that many of today's merchant pig iron and DRI producers are located in country such as Russia, Ukraine and Venezuela. Finally and very importantly, it protects us from the long-term degradation of prime supplies that result from the growing market share of recycles field. All of these benefits make clear why implementation of our raw material strategy has been so important to the Nucor team. Nucor's Bar Mill Group made excellent progress during the first half of 2014 expanding its penetration of SBQ and rod markets. Our South Carolina bar mill increased production at its new rod mill. Customer feedback has been very favorable, as our Darlington team broadens its product range to include the more demanding, high carbon, wire rod off puts. Nucor Steel Memphis is taking advantage of recently commissioned offline inspection equipment to begin production qualification trials with automotive OEMs. Memphis also completed installation of a fourth caster strainer that will support our growth serving customers in the energy markets. Nucor Steel Nebraska has recently installed quality inspection line is already at full capacity and plans are being made to add a second line in 2015. Nebraska is also installing a fifth caster strainer to take advantage of growing demand from it's customers for high quality SBQ brands and seamless tube round billers. Nucor Steel Berkeley's successful start-up this year of its wide light capital project is building momentum with a growing order book. The new wider and lighter products already account for 5% of Berkeley's order book. The investment provides Berkeley with the capability to roll gauges and spinners 0.042 inches, which is the lightest hot roll gauge capability of any sheet mill in the Southern U.S. market. Berkeley's capabilities also provide a finished width of up to 72 inches. We estimate the size of this new market segment, now available to Berkeley to be approximately 4 million tons of annual volume. Our expanded product portfolio is allowing us to move up the value change in agricultural, automotive, heavy equipments and pipe and tube applications. During the second quarter, our David J. Joseph scrap business acquired two shredders and related assets, one in Tampa, Florida and the other in Salt Lake City, Utah. These purchases are consistent with DJJ's disciplined growth strategy to expand its existing, regional recycling platforms when the marketplace provides us with attractive opportunities. These significant and numerous investments we have been making over the past several years are all within the framework of our well-defined strategic growth plan. The goals of our growth plan are to increase our returns to shareholders by increasing our tons produced, increasing our profits per ton, and adding resiliency to our business against the impact for global steel making overcapacity. We are succeeding at accomplishing these goals. As has been true throughout Nucor's history, our company's best years are still ahead of us. Thank you for your interest in Nucor and sharing a valuable time with us this afternoon. We would now be happy to take your questions.

(Operator Instructions) We'll take our first question from Luke Folta with Jefferies

First question I had was on share. Clearly, you gained some share on the flat rolled side of the business, and also wanted to talk on structural. On flat rolled, I remember some commentary around the idea that if you were going to pick up share from some of the integrated players, given the production outages in the first half, that you would hope to do so by also getting some full year business, implying that you wouldn't sell otherwise. And then also on the structural side of the market, looking at one of your competitors who reported this week, it looks like in aggregate so far from who is from the companies that have reported, we've seen a pretty healthy pickup in demand in that market. How much I guess market share do you think or I guess how big of an impact did you think the outage that you had at Yamato was, in terms of your shipment trends this quarter? And do you get most of that back heading into next quarter?

Well, certainly had a major impact. It was a three-week outage. Our kudos to the team at Nucor-Yamato, they completed the task within the three-weeks. They did a great job. It was a result of quite a bit of advanced planning and advanced work. They came out of the startup extremely well. They're running well. They're going through the trials now with all of the different shapes going through the new equipment. And I'm really pleased with the progress that they are making. It's going much quicker than we thought. And we are confident that we will regain those tons in the second part of this year. Well, I was going to go to your first question, actually. You had a comment about our sheet business, and whether or not our approach, we certainly didn't say we wouldn't sell to anybody, but we did say that we would give preferential treatment to those customers who were in a bind because of the situations with some of our competitors. We would give preference to those who were able to give us business that was not just a short-term business, but it was there for the rest of the year. And frankly, we probably lost a little bit of short-term spot business, as a result of that. But in return, we were able to gain longer-term market share improvements and we're confident that what we gain we'll be able to hold through the rest of the year.

Luke, I'm sorry, one other thing I'd like to add is, as you think about our quarter-over-quarter performance, I remember that the first quarter was four days longer for us, the way we do our calendar cut-off than the second quarter.

And I'd also say that in first quarter we were not impacted by the weather conditions as much as some of our competitors. Our teams, particularly, Crawfordsville, God bless them, I don't know how they did it, but they were able to ship well during some of those polar vortexes, I guess, is what they are called now. But the team did a great job and we were able to maintain shipments through the first quarter. So unlike some of our competitors, we did not have to make up those tons in the second quarter.

And just if I could, on Severstal Columbus, obviously the announced acquisition this week by Steel Dynamics, I guess looking at it, I wanted to understand, is this something that you took a look at? It looks like the valuation seems pretty reasonable. It looks like a fairly accretive deal for them. I would have thought for Nucor, the synergies would be at least as good, if not better, just given the DRI plant located there and just the regional presence. Curious to know what your interest level was or if you participated in that at all and just your thought process on it?

Well, I'm going to have to answer the question in a hypothetical mode, because I cannot say whether or not we actually participated in the process. But if we had been involved in the process, these are some of the thoughts that we would have about the valuation and really what it meant to Nucor. Let me start by saying that Severstal is a good asset. And it's good equipment. It's good quality. But given this location, it was not a particularly good fit for our well-disciplined growth strategy in our vision. And therefore, we couldn't justify paying such a high price for that asset. Again, hypothetically speaking, if we were involved in the process. But I got to say, Luke, that given that it was not right for us, we were pleased that it ended up with an existing domestic competitor, which resulted in further consolidation in sheet industry. This consolidation, when you think about it and you couple it with the TK also a middle consolidation, and the fact that RG is permanently out of the market, means that we've had three major consolidating movements in the sheet market over the last two years. Obviously, this is going to result in a stronger, more competitive sheet industry. Nucor being, given our extremely significant or strong position in sheet, will continue to benefit and try in this new environment. And we get to enjoy the benefit of that better market without having to have spent $1.6 billion to get it. I want to make one more point, just in general, about our strategy and some of our history in the past. In the past, Nucor has been aggressive in growing through acquisition. And we will continue to be aggressive in growing though acquisition in the future, when the target is a good fit for our well-defined strategic plan. You mentioned the fact that we have a strong presence, so you thought that that would provide some synergies for us. Well, we look at it a little bit differently, as we were valuing this potential target and we thought about what we were going to do in the process. Now, Luke, you got to think about the fact that we already have an extremely strong position in the Southeast, with three mills and 9 million tons of capacity. And when we place value, when we go about placing value of potential target, we consider many factors, but three are the really key factors that we consider are: whether that target, that asset, will increase our geographical inch; whether it would expand our customer base; whether it would expand our product portfolio. In the case of Severstal, it did not accomplish any of those objects. We're well-positioned in the Southeast. We have three mills and 9 million tons of capacity in Southeast. In fact, we have one mill, Luke, we have one mill within a 150 miles of Severstal. We have a second mill within 250 miles of Severstal. So clearly Severstal did not increase our geographical reach. When we looked at customers, well, we already touch every customer that Severstal touches, and frankly some of that they don't touch. So it would not have expanded our customer base at all. We can already produce virtually every product that Severstal can make. So it didn't expand our product portfolio. In fact, with the successful completion of our wide light project at Berkeley that I mentioned during the call, we'll be able to offer the market a lighter gauge hot band than Severstal can produce. So given that it really didn't expand our geographical footprint, it didn't help us on our customer base, it didn't expand our product portfolio. We could not just apply the $1.6 billion price tag. It simply didn't bring $1.6 billion of value to Nucor. I covered a lot of information on that deal, so I'm hoping we focus the rest of the call on Nucor and not just one particular deal. Go ahead, next question.

And we'll take our next question from Matt Murphy with UBS.

Maybe now one specifically on Nucor, but more on the industry, where you comment imports have surpassed 2006 levels. I guess I am just wondering what your thinking is on future trade cases, what the hold up is? Is it in sort of information collection time, if you could just expand on that a little?

Well, there is a couple of points to be made there. I think, number one, my general impression is that as I spend time in Washington, I'm a little bit more optimistic that our government is finally to getting to understand some of the importance of these trade cases and the impact that it has on our economy, on our employment situation, particularly in the manufacturing area. So I'm getting a little bit more confident that our government, the Commerce Department, the ITC, is better understanding the impact that not only the imports have on our economy, but also a better understanding of the process and the length of time it takes and the damage that's done as a result of that length of time. And as a result, we continue our hard work in Washington. As a result, as I mentioned, there is a long process. U.S. was holding up some potential trade cases coming down the road, well, it's the process. We are gathering information. I'm not going to give anything more specific about what trade cases might be coming down the pipe. I don't think you have to use too much of your imagination to figure out what it is. We've been pleased with the outcome at the OCTG case. We feel good about the rebar case with. One of the things that I mentioned in script was that, we're working with the Commerce Department to help them better understand facts of the case. And given that, we feel confident that we've got a good shot at a final ruling that's more favorable than the preliminary. So overall, listen, overcapacity in the world is a major issue. It is one of our greatest risk, not only to Nucor, but to our entire industry. Nucor will, as we always have, been very local and we will continue to fight a good fight. And we're confident we're going to be more and more successful going forward, because more and more of our trade laws are being flagrantly violated. So as a result, I'm pretty optimistic about the future, but I'm not going to give any specific sense to what cases might be coming down the pipeline.

And then maybe just one specific on structural. Second quarter realized pricing was pretty strong. How sustainable do you think that is in the second half?

Our backlogs are good. The market is good. Demand is good. We're going to be bringing new products on to the market. Given all of that, we feel it's sustainable through the second half of the year. It's hard to look out much past the second half of the year, so I'm not going to make any comments about 2015. But certainly, we feel good about it, and particularly given the new products that we're going to be able to offer off of that mill. We're excited about it. We really are. And the market is very excited about them also.

And we'll take our next question from Timna Tanners with Bank of America Merrill Lynch

I just wanted to ask a little bit more generally speaking about uses of cash. And I think that you make the point that you're not investing in gas exploration. You made the point that you have very strong free cash flows, great balance sheet. And as such, I think it begs the question or revisits the question of, what you're planning to do with the capital. So I want to ask again, now that we've seen the DRI plant start to work a little bit more in your favor, you're getting a little bit more comfortable with it, and now that you have seen some M&A unlocked, not just the one that was announced earlier this week, but other opportunities that are starting to portray themselves in the market. How do you think about build versus buy? How do you think about the options out in the market? You do have a very strong balance sheet, interest rates are low. Can you just give us a flavor about what you're thinking about and what priorities?

Well, as a general statement, I would say that we're still probably leaning towards buy rather than build, simply because the older capacity that already exists in the world, we don't see any sense in adding to it. Certainly, in the United States market, we've had a fairly good balance at this point, and we wouldn't consider building a new sheet mill, or I feel there might be other products that we would look at, we think that there are some areas where we have potential to grow. A more general answer, Timna, is listen, the world is our oyster. We've got a great balance sheet. We're wrapping up a lot of projects. I think there's a total of 12 projects we've done over the last four years that are starting to come, that has come to conclusion, and is starting to show some returns, so we're feeling better about those. We'll be wrapping up the few remaining ones in the next six months, 12 months. So we're in a position where we will again becoming rather aggressive in growing the company in some possibly new directions. I would also tell you that there are some opportunities out there that fit much better than in Severstal asset fit. Better location relative to our mills, areas where we do not have a strong of a presence and we don't have as high of a percent of market share as we do in the Southeast. And overall, the Southeast, we've got something like kind of 25%, 30% market share. And there's other regions of the country where there is actually more market demand in sheet products where we have a much smaller footprint and a smaller market share. So there is a lot of opportunities out there. On the structural side, we've just completed this new project to get new products out there. Now, we've got to take that to the market. We're excited about some opportunities we can do. And one of the things that we did in addition to the new piling sections that we have is we -- let me see how I can say this, we improved the quality of the products that we are putting through the mill already and with much greater tolerances than have been available in the past. I'll leave it at that. And our customers are very excited about that. Not only do we feel that that will bring some additional business or bring us some additional margin. We feel good about that. So right now, Timna, I'm glad that we had a strong balance sheet, I really am. It speaks once again to Nucor's successful longstanding policy of maintaining a strong balance sheet and then taking advantage of that to grow the company in many ways, organically, incrementally and in larger ways through acquisitions.

If I can follow up. Now that does, except for that you didn't mention DRI once. So I guess I can follow-up there and ask about that, in light of the cancellation of one project that was being contemplated, but pig iron prices staying stubbornly high, how are you looking at DRI now?

You mean someone else canceling a DRI project, whether that impacts the way that we think about DRI.

Just an update, in light of the fact that, A, someone canceled a project; B, pig iron prices have stayed high; and I guess C, you're also seeing your own project come closer to the levels that you'd aimed for. So how do you think about all those in light of your own DRI plans?

Certainly all of those are favorable factors supporting the initial decision to go into DRI. You could argue that the one other company canceling the project might indicate that they felt that it wasn't a good project. DRI wasn't a good way to go in terms of a raw material supply. But I would caution you that you must remember that it isn't, unless you have a gas contract to along with it. Okay. We do, they didn't. I don't blame them. Okay, I'll leave it at that. Certainly, the fact that we've gained some confidence out of the DRI Louisiana plant that we're currently running in terms of the quality that client put out. We are still working through some of our startup issues, no doubt about that. We shut down for three weeks. We made some modifications from information, knowledge that we gained by running. They're in the first period. And I have to say that we're pleased with the results of the equipment modifications that we made during that three-week outage. We still have more work to do, but what we've seen as we came out of that outage. There was great confidence in the long-term success for that plant. So all of that factors into. Certainly ,we're still considering the second DRI plant. I have said many times and I'll say again that we want to get first one up and running and learn all we can from it, so that if we want to make any tweaks, either to the equipment or however, whatever changes we might want to make in the system, we don't want to build the second one until we fully gain all the knowledge we can get out of the first one. We learned a lot in first six months. We'll learn more in the six months. But I will tell you, and this is a good long-term strategy for Nucor, okay. I gave you the reasons, and that the key word that I hope you caught there was, this is a good long-term strategy. This is more than just a short-term boost to earnings, okay. This is something that we believe in five, 10, 15 years from today is going to truly differentiate Nucor from our competitors. And I gave you the list of reasons why I felt that way.

We'll take our next question from Sal Tharani with Goldman Sachs.

My first question for Jim. You have taken your LIFO, cut your LIFO by half for the year. Just wondering, is it your reflection of steel prices or is it the iron ore price? What's driving that?

The biggest driver, Sal, is scrap pricing.

So you think scrap is going to follow iron ore over the period of the next six months?

Yes. We think it's going to be relatively flat. It certainly hasn't trended up to where it would have needed to go to justify what was our original budget for LIFO expense.

John, the Steel Dynamics had made some positive commentary in non-res construction in terms of joist orders and so forth. I was just wondering, and you have mentioned about your downstream business are getting better than you expect, further improvement in third quarter. How quick is this transition going on? Do you think this is going to be a pretty strong recovery over the next year-and-a-half or so or is it going to limp along, 4%, 5% type of recovery from a very low base?

I believe and we believe that it will limp along at a very slow recovery, 5% to 6%. I think what might be misleading some people is the rate of increase in second quarter versus first quarter. And I think you have to be careful about that. First quarter was very heavily impacted by weather in every one of our downstream businesses, and I suspect in everyone else's downstream business. If we look at just our second quarter order entry rate in downstream businesses relative to first quarter, we see a very significant improvement. But some of that, as I said, is a result of catching up from the first quarter's poor weather conditions that really hampered by any kind of non-residential construction. So as we go forward to the rest of the year, we think that there will be continuous improvement, most analyst and we particularly agree with them, saying that by the end of the year, the 2014 versus '13 increase will be somewhere around that 5% to 6% number. And we believe that's accurate.

The next question is on the DRI. And I understand your comment that it's doing better than what you have thought. So your initial assessment was that it would take a year to make it profitable?

Yes. I think we are still saying that we will be profitable by the end of the year.

Yes. I'm not saying that we're going to making up at the end of the year to cover the losses in the first half. We are just saying that the fourth quarter's operations will be generating profits by our current estimation.

And we'll take our next question from Nathan Littlewood with Credit Suisse.

Listen, just wanted to ask a little bit about imports and the OCT trade case. So I guess traditional thinking, up until we saw this one recently, was that there generally wasn't a huge amount of change in terms of the duties or tariffs supplied between the preliminary and final determinations. But what we're seeing here is an example where they have changed quite significantly. I was interested in hearing your thoughts on a couple of things. Firstly, number one, how has the OCTG example sort of changed the way you think about trade cases? How you approach trade cases? And the second part is could you talk a little bit about the number of people and the resources that you allocate to trade case investigations? And are you in any way thinking about increasing that, given the success that we've seen with OCTG?

Let me tackle the first question first. The OCTG case has impacted the way that we view trade cases going forward. One of the things that we believe led to the success here was the fact that we worked very hard with the ITC and with Congress to help them understand the data and look at how that data was being presented by some of the countries in the case. We believed, and apparently obviously we were able to convince them, that the way the data was being presented was very misleading. Helping them walk through that process resulted in a more positive outcome for us and for the industry. How does that impact us going forward? Well, certainly now having learned that, we will present the data in a way that for us makes it some very clear and work with the Commerce and ITC to help them understand the way that the data from the offending countries is presented. So we've learned from the lesson. And how do I feel about things going forward, as I mentioned earlier, it's impossible to say with any level of certainty, but you have a certain sense of feelings when you are in Washington. And my sense is that I feel more optimistic about the cases coming up as we go forward. I think both Commerce and the ITC are seeing the -- what we've been saying for quite some time, the practice of repeat offenders, the practice of product substitution, you win a case on one thing, they immediately win it on structural beams, they got to rebar, you win it on rebar, they go to merchant bar. Now, there's a pattern that's being developed that we're helping the ITC and Commerce Department understand, which points to some very basic flaws in the way our laws are being applied. And we're working hard to help Washington and the proper authorities understand that. And your second question was whether or not we felt a need to increase the size of our team working in Washington. All I can tell you, it's a very small team, but it's extremely effective team. We've got the best there is. And I don't think we need to grow it at all. The team has got a great deal of confidence. They had shown what they can accomplish. And they have been very successful and I don't see us changing that at all.

I just had one final one on back on DRI and the DRI economics. Over the past few months, as Timna, was asking earlier, we've seen pig iron prices hold up remarkably well. The headline finds prices come down, iron ore pellet premiums have come down as well, so one would have to assume that the margin or the raw material spread has gotten a heck of a lot better for you guys over the last couple of months. Could you talk a little about that sort of spread or some of the underlying commodity price assumptions upon which your profitability guidance is based? And as you know, that spread can kind of vary by $100 a ton or more over the course of a few months. So what sort of commodity price environment do you achieve breakeven? And if we saw the current spreads maintained, is there risk profitability may actually be a little bit earlier?

Well, there is always that possibility. In terms of what are the margins given different pricing of the commodity that we used to make this determination, we have a nice spreadsheet that's up on our website and it's a very interactive spreadsheet, very easy to work with, you plug-in whatever numbers you want to plug into with iron and pallet premiums and every other element that goes into it. And it will spread out the differential. So I'm not going to go through the different scenarios. There's just too many of them to consider. But I would point you to that spreadsheet and recommend that if you want to work with those numbers, you will clearly use that spreadsheet and you will get that.

And we'll take our next question from Aldo Mazzaferro with Macquarie.

On the DRI, you said there was a 96% metalization and a 4% carbon. That sounds like a pretty good mix there. I'm wondering, when you say --

Well, let me stop you right there, okay. Let me stop you right there for a minute, Aldo. It's not a very good mix. It's a great mix, it's an outstanding, it's world-class setting mix. Now, you can continue.

So my question is when you say you want to improve the yield, are you talking about the metalization yield or are you talking about a yield to finished product from pellet?

Processed yield. In other words, yield to finished product. Process yield, not the metalization or the carbon rates.

Can you say what that yield is now and what your target would be?

It's not as good as wanted to be. It's a hell of a lot better than when we started. That's the parameters that I'll give you. We made some progress after a few weeks of running. We've recognized some issues that we had to go in and take care of, which we did during three week outage that we mentioned few times. Coming out of that, we saw our yield improve still more. We will continue to work to get it even better by the end of the year. Frankly, I'm hoping our team is listening there, and when I say that our goal, okay, is 99.999% yields.

So right now, you only have two 9's probably, right? So the other question I had, John, is on the shredder acquisition you made. Can you give us an idea of what the volume potential would be of those two things?

I'm going to turn that over to our scrap guru over here, Keith.

Scrap guru, I'm not sure, but between the two of them, it adds an additional quarter million tons of shredding volumes through the facilities. And maybe just one extra point that there was an effort of consolidation. So we operate facilities in both of those regions and are in the process of, and in fact in both cases have already consolidated into our existing shredding platform.

And that's the key point. You made an additional point, but it's really it's a key point of the disciplined structured growth plan at DJ Joseph of building on existing platforms that we have in place, which brings some synergies to it and got a good management team in place. So the growth you're going to see at DJ Joseph going forward will be similar to this, where we grow incrementally at each one of our platforms taking advantage of comp consolidation and the synergies.

And can you just say how much of all the scrap that Joseph handles, I know they do a lot of brokerage and then they also do some shredding, can you say how much they shred versus broker, roughly?

We've shred, what, about 4.5 million tons, but close to the 3.5 million tons. So we shred 3.5 million tons and we broke quite a bit more than that, between 20 million or 24 million tons we broke.

And you got time for one more question, on the acquisition front.

Absolutely.

John, I am very interested in your landscape comments on the industry about where you might see opportunities for acquisitions. And I had the feeling you were talking about the upper Midwest as an opportunity. But they're very big unionized mills up there. I know there's a small one for sale in Kentucky. I'm wondering, the small one for sale in Kentucky, I could see it, but not really a needle mover. But in terms of a big mill in the Midwest, is that something you would consider?

We don't discuss our strategic plan. We've got competitors onshore listening to this call, would love to learn what it is we plan to do going forward. So I'm not going to make any comments at all. Other than we always say, no comment, when it comes to strategic planning and merger and acquisition opportunities.

And we'll take our last question in the queue from Brian Yu with Citi.

A question on the DRI, I think in the last quarter you guys said you would do about 200,000 tons or 500,000 tons in the second quarter. Would you be able to provide some targets of what you guys are hoping to accomplish maybe 3Q and 4Q, as part of this breakthrough to profitability?

I just want to make sure I understand the question. You're asking, how many tons we think we'll produce at DRI during the third and fourth quarter?

Yes. That's right.

We think we'll be somewhere, and again, we're in a ramp up mode, so I'm going to give you a range here, because as I said, we are in this ramp up mode. It's somewhere between 700,000 tons and 900,000 tons.

For the second half of the year?

For the second half of the year.

And are there any other outages that's planned for that facility or is it at this point more of getting the process locked down, and as you mentioned earlier, improving those process yields?

We are and that's exactly what's taking place right now. It's getting the process locked down. As you go through that, you might see different things that you want to make some changes to or improvements with. You might shutdown to do that. But we aren't anticipating any major shutdowns between now and the end of the year. That's the end of the questions. Well, I'm assuming there are no further questions, and I am assuming everyone is still on the line. So let me conclude by saying, thank you to our shareholders. We appreciate your confidence and your support. Thank you to our customers. We appreciate your business. We wouldn't be in business without your business. So thank you. And I want to say thank you to my Nucor teammates, for creating value for our customers, generating attractive returns for our shareholders and building a sustainable future for all of us. And most importantly, thank you all for doing it safely. Thanks for your interest in Nucor. Have a great afternoon.

And that does conclude today's conference. Thank you for your participation.