Nucor Corporation (NUE) Q3 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Nucor Corporation Third Quarter of 2014 Earnings Call. As a reminder, today's call is being recorded. [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 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 on Nucor's latest 10-K and subsequently filed 10-Qs, which are available at the SEC's and Nucor's website. The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligation to update them, either as a result of new information, future events or otherwise. For opening remarks and introductions, I would 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, Ladd Hall, Ray Napolitan, Joe Stratman, Chad Utermark and Dave Sumoski, the newest member of our leadership team. In September, Keith Grass, Nucor's Executive Vice President responsible for our raw material businesses, retired. Keith joined the David J. Joseph Company in 1978. He has served as DJJ's CEO since 2000 and became an Executive Vice President of Nucor when the Joseph Company joined the Nucor family in 2008. Keith's strong leadership has contributed greatly to the establishment of DJJ as North America's premiere metals recycler and the successful implementation of Nucor's raw materials strategy. On behalf of the entire Nucor family, I want to thank Keith Grass for his many contributions to the combined success of David J. Joseph and Nucor. Keith, you have retired, but you will always be part of the Nucor family. Upon Keith's retirement, Nucor Executive Vice President, Joe Stratman, has assumed responsibility for our raw materials and logistics businesses. Joe has served as an Executive Vice President of Nucor since 2007. As noted earlier, Dave Sumoski became Nucor's newest Executive Vice President in September with responsibility for our engineered bar products business. Dave is a 19-year veteran of our company and a proven leader who will be a strong addition to our executive management team. Since 2012, he has served as General Manager of Nucor Steel Memphis. Dave's promotion will enable us to intensify our focus on a highly attractive growth business for Nucor. In recent years, we have invested approximately $290 million to expand our special bar quality, cold finish bar and wire rod product offerings. Dave and his team are well prepared to continue Nucor's highly successful record of profitable growth in engineered bar products. The executive -- the entire executive management team would like 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 third quarter. You worked hard, you worked together, and most importantly, you worked safely to deliver strong earnings growth over both this year's second quarter and last year's third quarter. This growth was achieved despite continuing serious challenges in the U.S. and global steel markets. Our more than 22,000 teammates are doing an outstanding job executing Nucor's strategy for profitable growth. In recent years, our team has 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-margined offerings. We are now just beginning to see some of the early benefits on these strategic investments. As steel markets and non-residential construction continue improving in the years ahead, we expect the returns will grow dramatically. We also want to extend a very warm welcome to the newest members of the Nucor family: our team at Nucor Steel Gallatin in Ghent, Kentucky. Nucor is very proud and excited to have you on board. Nucor's employees, the right people, are our company's greatest asset and our greatest competitive advantage. Keep up the outstanding work you have always done with a focus on safety, quality and productivity. Together, we have a great future taking care of all of our customers, the people who use our products, our teammates and our shareholders. I will now ask our CFO, Jim Frias, to review Nucor's third quarter performance and financial position. Following Jim's comments, I will update you on the progress implementing our strategy for long-term profitable growth. Jim?

Thanks, John. Third quarter of 2014 earnings of $0.76 per diluted share compares favorably with our guidance range of $0.70 to $0.75 per diluted share. It also represents a strong 65% improvement from earnings of $0.46 per share, per diluted share, reported in both the second quarter of 2014 and the third quarter of 2013. A comment about our tax rates, which can be confusing due to the impact of profits from noncontrolling interests. After adjusting out profits belonging to our business partners, the effective tax rate was 34.6% for the third quarter of 2014. Results from our steel mills and steel product segments were significantly improved in third quarter of 2014, particularly improved profitability was achieved by our sheet plate and joist and decking businesses. The third quarter performance of our raw materials segment included a larger-than-expected operating loss of approximately $0.09 per diluted share at our new direct reduced iron, or DRI, plant in Louisiana. Nucor's overall third quarter performance again demonstrates the value of one of our key competitive strengths. We are North America's most diversified producer of steel and steel products. Our sheet mills did an excellent job of capitalizing on pricing strength in flat-rolled markets this past quarter, but our robust earnings growth was also driven by increased contributions from a number of other product lines. Our plate mill group is benefiting from the investments made during the downturn to expand our value-added product capabilities with the addition of heat treating, normalizing and vacuum tank degassing. All 3 of our fabricated construction products, joist and decking, preengineered metal buildings and rebar fabrication delivered significant earnings improvements in this year's third quarter and the first 9 months. At the same time, we continue to enjoy healthy earnings contributions from our bar mills, cold finish B mills and raw materials brokerage businesses. David J. Joseph Company's scrap processing business has also achieved improved profitability over this period. As John mentioned, the entire Nucor team is working hard to deliver attractive returns on the capital we have invested during the downturn. Our investments totaled nearly $6 billion over 2009 through 2014 period, with about 2/3 going to capital expenditures and 1/3 going to acquisitions. We believe the robust 59% increase in earnings year-over-year through the first 9 months of 2014 is strong evidence that these efforts are beginning to pay off for our shareholders. Most importantly, we believe that this is only an early indication of greater earnings power to come as continued recovery in nonresidential construction gains momentum. On October 8, we completed our purchase of all the equity of Gallatin Steel for a cash purchase price of approximately $770 million. The acquisition was funded from cash on hand and the issuance of approximately $300 million of commercial paper. Drawing from Nucor's strong generation of cash from operations, we expect to retire our commercial paper borrowings within the next 12 months. Our team is excited about the opportunities the Gallatin acquisition provides Nucor to create attractive long-term value for our shareholders, customers and employees. Adjusting for the next -- for the net present value of the anticipated tax benefits, the realized effective purchase price is approximately $630 million. The acquisition is expected to be immediately accretive to cash flow and accretive to earnings after working through purchase accounting value to finished goods inventories. Due to Gallatin's 4-week inventory turnover rate, we would expect purchase accounting expenses, net of operating profits, to result in a negligible impact to the fourth quarter of 2014 results. John Ferriola will discuss in his comments the compelling strategic value Gallatin provides Nucor. The Gallatin transaction highlights the strategic value of our company's financial strength. Nucor is the only North American steel producer to hold an investment-grade credit rating. Our strong balance sheet and healthy cash flow generation through the economic cycle allow Nucor to make strategic acquisitions when the right assets at the right price become available in the marketplace. Our cash and short-term investments totaled $1.4 billion at the end of the third quarter. Following the purchase of Gallatin, after the close of the quarter, cash and short-term investments remain well above our targeted minimum level of $500 million. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn. This facility does not mature until August of 2018. Our next significant debt maturity is not until 2017, including the recently issued commercial paper of Nucor's pro forma gross debt-to-capital ratio is approximately 37%. 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 large-scale growth projects have been completed or are nearing completion. Also, the temporary suspension of drilling new wells by our natural gas working interest investment is reducing Nucor's 2014 capital spending by about $400 million. We recently reached a joint decision with Encana, our working interest investment partner, to extend our drilling suspension through the end of 2015, other than drilling several wells required to maintain leasehold rights. Nucor's strong relationship with Encana gives both partners a win-win approach to deploying capital in the current natural gas price environment. We, together, retain the valuable option to resume drilling in a higher natural gas pricing environment where more attractive returns are generated. Nucor also maintains our desired hedge on gas consumption for decades into the future. It is important to note that our Louisiana DRI plant's expected gas usage in 2015 and 2016 is covered by production from our existing wells, plus financial hedges we have recently secured. Nucor's capital spending plans for 2015 will not be set until later this quarter. With no new major projects currently anticipated, we would expect next year's capital expenditures to be approximately $500 million. That would compare against a preliminary estimate of 2015 depreciation and amortization of approximately $700 million. Nucor Steel Gallatin is expected to account for approximately $40 million of that estimated total depreciation and amortization expense for next year. Fourth quarter 2014 earnings are expected to show a moderate decline from strong third quarter earnings due to typical seasonal factors, but should be well above 2013 fourth quarter earnings of $0.53 per diluted share. Nucor will again follow our practice of providing quantitative guidance in the final month of the quarter. The biggest risk to our outlook for our industry continues to be excess global steel capacity that has resulted in large quantities of steel illegally dumped into the United States. Nucor and other steel producers in the U.S. are working hard to bring attention to the need for free and fair trade, which is simply rules-based trade as established by the World Trade Organization or WTO. We applaud several recent actions by the U.S. government to enforce our nation's trade laws. Last week, the U.S. Department of Commerce notified the Russian government that it is terminating the suspension agreement for hot-rolled sheet steel imports. Russian hot-rolled sheet imports have surged by more than 2,500% or 25x in the first 9 months of 2014. The suspension agreement will be replaced by an anti-dumping duty order, which we expect to be more effective. Earlier this month, the U.S. International Trade Commission, in a unanimous 6-0 vote, ruled that the domestic rebar industry is materially injured as a result of dumped and subsidized rebar imports from Turkey and Mexico. In August, the ITC found that domestic oil country tubular goods, or OCTG, producers were materially damaged by dumped and subsidized imports of OCTG from South Korea and 5 other countries, and duties have been assessed by the Commerce Department. Nucor is the market leader in serving these highly valued customers in the pipe and tube industry. In July, the Commerce Department issued positive preliminary determinations on dumping duties against wire rod imports from China. While we are encouraged by these several rulings, we realize that more work remains in a fight for effective and timely enforcement of rules-based trade. Supporting our mission is the indisputable fact that our domestic industry is among the lowest-cost producers of steel in the world. As always, our team will remain focused on executing our strategies for profitable long-term growth in whatever economic and steel industry conditions we face. We appreciate your interest in our company. John?

Thanks, Jim. During the third quarter, our team stayed focused on what is under our control today. I'm very encouraged by our performance in the just-completed quarter and first 9 months 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 do, taking care of all of Nucor's customers. At the same time, our team continues to aggressively implement our strategy of investing for long-term profitable growth. I will now update you on our recent achievements. Our targeted acquisition of Gallatin Steel is a significant step forward in building a long-term earnings power of our sheet mill group and Nucor overall. Here are some of the key strategic benefits. Nucor -- excuse me, Gallatin enhances Nucor's leadership position in the flat-rolled hot band products market. Gallatin strengthens Nucor's capabilities to serve the flat-rolled customers in the growing pipe and tube industry. Gallatin broadens our footprint in the Midwest region, which is the largest flat-rolled consuming market in the United States. Gallatin's location on the Ohio River strongly complements our raw materials strategy as it is well positioned to receive DRI from our Louisiana facility. Gallatin represents Nucor's fourth sheet mill located on the U.S. river system, broadening our commercial reach and access to our materials. Gallatin's annual capacity of approximately 1.8 million tons increases our hot-rolled sheet steel capacity by 16% to more than 13 million tons. Gallatin also fits well with Nucor's footprint of downstream businesses that consume and process flat-rolled steel. Finally, Gallatin provides a number of future strategic growth options for Nucor. Most importantly, we share a strong cultural compatibility with our new teammates at Nucor Steel Gallatin. Particularly significant is the common, unrelenting focus on safety, quality and productivity. We are very excited about the many opportunities ahead for profitable growth with having the Gallatin team join the Nucor family. In the fourth quarter, our Nucor-Yamato structural steel mill will begin prime production of its new sheet piling sections. Results from the production trials completed in the third quarter were very positive. This $115 million project expands our product offerings to include new, wider piling sections that are lighter and stronger, 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 strategic 2012 acquisition of piling distributor, Skyline Steel. Our Nucor Steel Berkeley sheet mill's successful start-up this year of its wide, light capital project continues to build momentum. During the third quarter, our Berkeley team produced new, wider products for several customers in the appliance and lawn and garden offerings. This $95 million investment provides Berkeley the capability to roll gauges as thin as 0.042 inches, which is the lightest hot-rolled 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 the new market segment now available to Berkeley to be approximately 4 million tons annually. During the third quarter, our new Louisiana DRI facility continued to work through equipment adjustments that will improve yield and conversion costs. There is no question that the start of this plant has been very challenging in the early going, but that's no different from what we experienced in starting off our first DRI plant, which is located in Trinidad. What has been different with the Louisiana start-up has been the additional burden of today's low raw material pricing environment. However, a significant positive achievement in the start-up this year at Nucor Steel Louisiana is the outstanding quality achieved by our team. As we have discussed in previous calls, Louisiana has set new world-class quality standards for DRI with metallization rates of 96% and carbon content exceeding 4%. That's why our flat-rolled and SBQ steel mills are eager to consume as much of Louisiana's output as they can get. As a result of our cumulative learning curve advances and resulting equipment adjustments, we expect to realize significant improvement in the financial performance of the Louisiana DRI plant by the end of this year. It also remains our view that our expanded DRI capacity, combined with our natural gas investments, uniquely positions Nucor for profitable long-term growth in the higher value-added sheet, plate and SBQ markets. Recent significant declines in iron ore pricing, accompanied by relatively more stable scrap pricing, currently supports our confidence in the value of Nucor's DRI-based raw materials strategy. We are very encouraged by the Nucor team's progress in the third quarter, but we are never satisfied. That is why the more than 22,000 men and women of Nucor remain strongly focused on execution and delivering strong returns on the valuable capital entrusted to us by our shareholders. 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 your valuable time with us this afternoon. We would now be happy to take your questions.

[Operator Instructions] Our first question comes from Evan Kurtz with Morgan Stanley.

So first question is on the trade case, specifically the potential trade case, I should say, on cold-rolled products and some coated sheet products that we keep hearing about. Kind of the latest I've heard is that there may be some disagreements amongst some of the mills that are involved in the case about the breadth of the case, and that may be delaying it. And I'm just hoping you guys could kind of give us an update and let us know what could debottleneck that process?

Well, I can't speak to others' opinions on this history, but I can share with you Nucor's opinion. When you look at the increase in cold-rolled imports this year, they've increased by about 100%; galv has increased almost 50% year-over-year. As I mentioned to you on the last time on the last conference call, I have been spending a lot of time in Washington, and I've gained more confidence in our elected leaders' ability to connect the dots between the illegally traded products and the slow recovery in the economy. That said, specific to your question, we are working with our trade attorneys in Washington to collect the data that we're going to need to file the case at the appropriate time. We are confident in our ability to present a good case, and we will present that case aggressively, and we will aggressively pursue critical circumstances with the associated retroactive penalties.

Great. And then maybe just one question on DRI. How do you, when you report losses, how do you factor in the revenue? Are you basing that off of a discount to pig iron price? Or is it more based on some mix of scrap? How should we think about that?

We price internally based off of pig iron with a value-in-use adjustment.

Got it, okay. And then one last question maybe on Gallatin. Have you got any chance to kind of go in there and see what commercial practices have been like? Is there any changes that you think you might want to make going forward?

Well, we have just closed just a few weeks ago, so we haven't had a lot of time to go in and look at what they have been doing. What I can tell you is -- what I can speak to is what they will be doing more in the future, and that's working with our commercial team, as we always do, to present a single one-Nucor approach to the marketplace. We will follow our practice of not having any CRU or any index-minus pricing in the marketplace. And we will continue to provide a great value to our customers at a fair price. We're anxious to have them join our team. As I mentioned during my comments, it does give us a better presence in the Midwest. It supports our mill in Crawfordsville. It's on the water, and it's going to give us ability to reach into the Southeast market as well as the Midwest market. And we have a very strong position today in the growing pipe and tube market, and this just enhances that. They have a great position in that also. We share some customers, but frankly, not many. So this is a great chance for us to expand our geographical reach, to expand our product breadth, and frankly, to expand our customer base.

Our next question comes from Brian Yu with Citi.

Jim, I wanted to ask you a question about your comment earlier about the U.S. steel-making cost advantage. As you know, the domestic scrap prices are about flat, while in the international markets, Turkey scrap import cost is down $50. China is down $100, and then the drop in iron ore and met coal translates to about $100 per ton drop for blast furnace costs. How do you see this playing out, either from a market standpoint or actions that Nucor can take to try to narrow some of the gap?

Okay, well, let me -- I'll give Jim a chance to add any comments that he wants at the end, but I will -- let me start by making a couple of comments. First of all, as you mentioned, because of the lower-priced scrap in areas like Turkey and all those places, the United States will not -- and combined with the higher dollar value, the United States will not be exporting more scrap at all to those regions, which will give us a bit of an excess of scrap here in the United States, which should help our scrap pricing of our product. But bear in mind that scrap, although it's a significant input cost, it's one of many input costs, particularly in electric arc furnaces where scrap is consumed. Electrical energy, it's a very large cost, and we have a significant cost advantage here in the United States compared to those regions that you mentioned. Natural gas could be another example where we have an energy benefit. As I've mentioned a couple of times in the past, one of the greatest benefits we have is the productivity and the ingenuity of the American worker. And here at Nucor, we have the added benefit of the DRI, which, in fact, benefits from the lower iron ore pricing that you mentioned in other regions of the country. When you think about how iron ore and scrap has behaved over the last year, it's kind of an interesting situation. Iron ore pricing is down about 42%. Scrap pricing is down about 14% so far this year. So that kind of points to the benefit. With those kind of numbers, it pays to be able to have an input into your furnaces that's based on iron ore pricing such as our DRI. And I would also point out that, that's the way it is today, but that reverses. It has reversed in the past; it will reverse again in the future, which again points to one of the great strengths of our DRI strategy and our overall raw materials strategy by having both the DJ Joseph as part of the Nucor family and the ability to produce 4.5 million tons of DRI. We have the flexibility to flip back our product -- our scrap mix if that relationship between scrap and iron ore does reverse. So kind of a long-winded answer to your question, certainly, we are cognizant of the situation with iron ore pricing and scrap pricing in countries that we compete with. As long as they continue to play fair, we feel confident because of the reasons that I've mentioned, that we will compete successfully against them. We say it all the time, we can compete against any company in the world and do so well. It's more difficult when we have to compete against governments, and we will not allow that to happen.

Let me just add one thing, John, and that is, Brian, when you think about this question, at any point in time there could be temporary inflection points where raw material costs, whether it's scrap or iron ore, move in different markets to different places but they eventually equalizes -- they eventually equalize and balance each other out. And so my comments about our -- the U.S. being a low-cost producer is not at this exact moment today compared to everybody; but just over time, if you look at the historical numbers, it's well-documented that the U.S. is one of the low-cost producers in the world.

One more comment, if I may, on this. Obviously, you're leading to up to the point that, well, will all of this result in an even greater influx of imported steel into the United States? And certainly, we're keeping our eye on that situation. Jim's point about the raw material commodity eventually equalizing, well, the same happens with pricing the products. We'll monitor carefully what's happening with imports, and you'll see that gap that exists today in pricing begin to narrow. It'll narrow as a result of both the domestic price moderating and the foreign input price increasing. When you combine that with what's happening on some of the trade cases and the transportation issues that you see in the United States today once the product reaches a new port, all of that combined, we feel very confident that we can compete successfully despite the point that you made about the raw material costs in our competitive nations.

Good. That was a very comprehensive answer. And maybe I could just switch topics here, quickly. Just on the realized pricing side, you guys are getting -- the core-on-core increase in pricing is a bit better than what we've seen in the markets, and I was wondering if there's a way for you guys to help us understand what portion of that might be due to some of these value-add projects you put in place: wide and light and heat treat, normalizing plate? And then how much of it would be more markets related?

I'm not sure that I could split -- spread that out, but I would -- but I'd make a few comments just to support the fact that it is a large portion of the value-added that we invested in.

At least in the plate business.

At least in the plate business. But I would also comment that it's more than just that. It's the value that we bring to our customers. It's the quality that we deliver. It's the service that we provide. It's the metallurgical support that I believe is the gold standard in the industry that we can give to our customers. And it's our focus on on-time delivery, which brings value. All of those items bring value to our customers.

Brian, further to those points, I don't think we've really seen the benefits at all yet from the sheet piling project. And we've just started to see the benefits from the new lighter gauge sheet steel at Berkeley. We're seeing some benefit, but again we're early in the process of getting the full benefit of that project. We guess, in the SBQ side, we're probably about halfway towards achieving some of the benefits of the things we've done there, not so much in the volume, but more on in terms of the pricing value-add element. And of course, there's going to be a volume benefit coming as well. I think -- maybe, John, you could speak about the status of the caster upgrades at both Memphis and Nebraska.

Well, we've completed both, okay. Memphis is finished and, of course, [ph] strand is completed. On the fifth strand in Nebraska, we're in the process of shutting down now to make the final installation. So they're moving along. We feel really good about when that was completed, all of the upgrades at Darlington. And we've got a little bit of tweaking to do, but basically we've completed that. So I would say that for the most part, by the end of the year, we will have completed virtually all of our SBQ modifications to add value. And let me just throw in one more point to Jim's comments, which were spot on. But bear in mind that the improvements that you're seeing in our performance, as Jim pointed out, we're just beginning to see the benefit of the investments that we're making. These -- all the improvements that you're seeing in our margins and our profitability are happening in a market that is still extremely challenged. We see this year, the marketplace in nonresidential construction having improved a little bit over last year, and we expect even further improvement next year. But when we see those markets return to the full strength that we know will inevitably be achieved, that's when you're going to see the full impact of these investments are bearing fruit for our company.

Our next question comes from Matt Murphy with UBS.

Just wondering if you could comment on what you're seeing in the structural market. I know you had a high year-over-year comparison, but only category where it was slightly weak year-over-year. Just wondering how you're seeing that market.

The structural market has always been a good market for us. It's holding pretty steady. We've seen it pick up a little bit this year. We expect next year to also be a little bit better in the structural market as we see the continued improvements in nonresidential construction. I would also tell you that we're really excited about, again, just the beginnings of what we see from our piling project. We expect a good benefit from that. In terms of this year's performance relative -- you asked about why we seem to have been a little bit off last year's performance. It's a result of all those shutdowns that we had at NYS, installing the wider piling project that we've mentioned several times.

Okay. So still some pickup from the shutdown. Okay, got it. And Jim, just on SG&A at $153 million this quarter, was there anything in particular driving that up?

Well, we have a highly variable compensation system, profit-sharing system. So when profits go up, our profit-sharing expense goes up. 10% of pretax is how we fund our employees' retirement accounts. And of course, the other thing that went through there was the charge that we'd noted before on the write-off of assets. It was $0.03 per share.

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

We're starting to hear a lot more enthusiasm over non-res and I thought you might have sounded a little bit more chipper on the topic. So I guess I wanted to dive into that a little bit more and ask you about long products in general. Specifically, can you hold onto margins? Scrap prices are definitely falling. You guys are importing it, and so that can help offset some other weakness. But just wondering if margins on long products might be holding up better if non-res is recovering.

Well, we think that -- and this is our opinion and also the opinion of the experts that go out and give these kind of estimates. We think this year -- by the end of this year relative compared to last year, you'll see somewhere around a 7% or 8% improvement in non-residential construction based on square footage. And we anticipate next year seeing maybe the same kind of growth, maybe a little bit better, somewhere between 7%, 8%, 9% growth in square footage next year. So that is certainly helping to support not only our structural business, but also our downstream businesses, our Vulcraft and Verco business, and frankly, our building systems business also. So yes, we see a pickup this year compared to last year. We see further improvement going forward into next year.

Okay. And on the marketing -- go ahead, sorry.

I was just going to say, Timna, our comments are generally focused more on the quarter, and we don't generally say that much about what's happening in the future. Obviously, the fourth quarter is going to have a seasonal slowdown. But the comment I made in the script or I talked about the building momentum is this idea that an improvement of 8% this year, another improvement of 8%, 10% next year in square footage orders, yes, there's going to be some value to that; and so we are in agreement that there is some nice momentum happening in non-res and starting to get back to a level that is more sustainable.

In terms of the margin, specifically, certainly, we're going to work really hard to maintain that margin. We think, as we mentioned in the script, that in the fourth quarter, we'll see some seasonal adjustments that happen every year, combination of the holidays and the weather. But we expect it to come back strong in the first quarter, and we look forward to a good year next year and we anticipate being able to hold onto those margins.

Okay, cool. And then if I could, just one more. Clearly, you're hinting, at this point at least, a pretty low CapEx number and assuming this growth that we're talking about, a lot of cash flow. Just so, can you remind us about how you're thinking about opportunities for that use of cash? Would you consider the special dividend that you've done in the past? Do you like the M&A opportunities that have presented themselves, maybe further ones ahead? If you could just give us a categorization of what you're seeing out there.

Well, I think it's -- I'll speak -- I'll let Jim speak to the special dividends, but I think it's -- I think I know where he's going to go with that one, okay, and appropriately so. Frankly, we're in a growth mode. We're a growth company, and we look for opportunities to grow the company. We believe that there's still plenty of opportunities out there. Remember that, as we talked about in the past, if we look at the way our company is structured, basically in the upstream, what we call core or side stream businesses, and our downstream businesses, we have numerous platforms in which we can grow, and that just multiplies the number of opportunities that we can look at out there. So we see opportunities downstream coming up that we're looking at. We have some upstream opportunities that we're continuing to look at. There's always the potential of expanding our DRI facility once we get past some of these typical start-up issues that we've been facing. And of course, you've seen what we've done with Gallatin. That was a great strategic opportunity, which not only provided us benefits today but positions us for other growth opportunities in that region. So I would not be looking to say that we're going to have a special dividend. I would say that a strong cash-generating position will be used to continue to grow the company, both in volume and in margin-enhancing improvements to our existing mills. And when the right acquisitions become available at the right price, we stand ready to aggressively pursue and be successful in acquiring them.

And the only thing I'd add, Timna, is that we strongly believe in our dividend and a strong base dividend and a really strong earnings cycle. We will contemplate the possibility of a supplemental dividend. We're not there yet. We need to be north of $1.25 per share before we start thinking about something like that.

Our next question comes from Sal Tharani with Goldman Sachs.

I have a couple of questions on DRI. First of all, forgive me if you have already -- just your DRI cost was much higher -- I'm sorry, the start-up cost was much higher. I was wondering, did something special happen versus what you gave as the guidance?

Let me take that one on, Jim, okay, because I'll address some of the -- I'll just kind of give you a little bit of history of the start-up and that has, obviously, impacted our costs that you're referring to. And there's no doubt we've had some start-up issues with our equipment in Louisiana. But I got tell you, we've been very happy with the technology. You all have to remember, this is not new technology. This is proven technology. And this year, it's the first year of operation and we've had -- in this first year, we've had some issues, but we've also had some periods of operation where the plant operated over 90% of capacity with excellent quality; quality that, frankly, can only be described as world class. Now frankly, I would say it's quality that we define as world-class quality. And let's remember that year-to-date, we produced about 1.2 million tons of DRI in just the first year of production. We expect to produce another 500,000-or-so tons in the fourth quarter. And when we've met that expectation, and we believe we will, we will have produced about 1.7 million tons of DRI or about 70% of the capacity rating of that plant in the first year of operation. And that's operating at 70% of capacity in the first year with outstanding quality. Now we've had some start-up issues and let's maybe take a minute, since you've asked about the impact of those, to talk about it. We did have a design issue that we had to deal with in the second quarter of this year. We rectified that design issue. That was the flow feeders, we removed them. We removed them to improve the yield and the productivity of the facility. When we accomplished that, when we took them out and started up, we saw that we did, in fact, kill the problem. We achieved the expected improvements in both productivity and in yield. The start-up's strong in the second quarter, but a few weeks into the second quarter -- excuse me, third quarter, we experienced a failure of several wells in the process gas heater tubes, which was, frankly, completely unexpected. We repaired the wells and the plant operated in a very stable manner for the next 56 continuous days with excellent quality. And late in Q3, we experienced another issue with our process gas heater completely unrelated to the first issue of the wells on the tubes. They're a refractory problem, again, in the process heater, creating a potential for overheating and damaging that piece of equipment. So we made a decision to shut down and perform the repairs before we damaged the equipment. The plant was down for about 2 weeks. We made the necessary repairs. Since the repairs in the third quarter, the plant has been operating very stable, and we are confident in the completeness of the repairs that we've made to the gas processor. Both unexpected issues, both problems were on the same piece of equipment, a single part of the DRI production process: a process gas heater. The other plant, parts of the plant, very complex plant, have been operating with great reliability. I would also mention, since I'm on the topic here and since you asked the question, that these issues are not uncommon for a start-up. Remember, we had some similar issues in Trinidad. There, the problem was a reformer; different piece of equipment but very similar problems. We overcame them, and today, the plant in Trinidad is running extremely well and with good quality coming out of Trinidad also. So that's a little basket of color around why you're seeing the start-up costs higher than we might have expected at the start of the project. You want to make a comment about...

Yes. And specifically to the comparison to what we were guiding, Sal, because our guidance was obviously for a smaller number. We were off by about $0.04. About $0.02 was the impact of the 2-week outage that happened right after we gave our guidance. And then the other $0.02 was related to -- each quarter end with a major capital project, we go through the details of the expenses that have been capitalized. And with all the work that was done in the third quarter on flow feeders and other things, we identified expenses that had been capitalized earlier in the quarter in July and August that we had to reverse into expenses that we didn't anticipate when we gave the guidance on September 17. So half of it was because of the issue that John talked about, the last one with the heat process...

Process gas.

Process gas, whatever they are. And the other $0.02 because of reviewing fixed asset accounting.

Great. No, this is good color, appreciate it. And running 70% of the first year is certainly a remarkable achievement. John, you mentioned about the...

Particularly, this is the largest DRI plant in the world, okay, that we're starting up. So we are very pleased with that.

Certainly, certainly. You also mentioned, John, that the way you look at your cost is -- or pricing is pig iron less a value-in-use adjustment. Do you -- have you shared or would you like to share the number, what that number is for the value-in-use adjustment?

That would be a no.

So it could change over time. I mean, we have a fixed number we're using now, but as we assess how DRI works in the process, we could come to the conclusion it needs to change. So we're doing basically what we think the real value is.

Yes, let me -- maybe I was a little bit too blunt there. Obviously, that -- at some point, we believe that there could be a merchant market for the DRI, so we don't want to give out of that information. But I will say this, that when we went into the project, we had a certain value-in-use penalty in mind, and again, as a result of the quality of the DRI that's coming out of Louisiana, it has performed much better than we anticipated in our furnaces. I think I mentioned in the past that we've seen a productivity increase. We've seen a decrease in our energy consumption as a result of the better quality coming out of that. We've seen a reduction in our electrical consumption. We've seen a reduction in our refractory life -- I mean, an improvement in our refractory life, excuse me, a reduction in our cost of refractors in the furnace. So we're really pleased, very, very pleased with the way that the product is performing in the furnace. And to Jim's point, as we continue to refine our process in Louisiana, we believe we can even hone in more carefully on a higher-quality product. And of course, as we learn to use the product more efficiently in our existing furnaces by changing our melt shop practices, that will also have a positive impact on the value-in-use.

Great. And one last thing, you mentioned that at Gallatin, you can do further improvements over time or move up the value chain or something. I was just wondering, that value you're going to get out of Gallatin in the future, is that expanding the capacity? Or is moving up the value chain in terms of putting cold over galvanized capacity or...

It would be moving up the value chain. There's many possibilities -- many possible ways of accomplishing that. At some point, we might put further processing in, in the plant or around the plant. I would also tell you that they've done a great job of establishing themselves in the pipe and tube market and known for good quality. As you know, some of our other sheet mills have expanded into higher-value products such as automotive, appliance, lawn and garden. There is absolutely no reason why we cannot transfer that knowledge from our mills to the mills at -- to the Gallatin mill. One area that I would specifically mention is the phenomenal work we've done at our other mills with high-strength, low-alloy steels and advanced high-strength steels. Those all go into additional margin and are value-added products that we can transfer without a lot of investment into the Gallatin facility.

Our next question comes from Nathan Littlewood with Crédit Suisse. Nathan Littlewood - Crédit Suisse AG, Research Division: Sal did ask most of my DRI questions, but I just had one on the gas hedging. Jim, I was surprised to hear you say just now that you had recently entered into some financial hedges for gas. My understanding previously had been that the Encana JV basically provided you with pretty much 100% of your gas requirements. Could you just help me sort of bridge the gap there and maybe [indiscernible] requirement...

Yes, it's good for 2014. I'm sorry, the process -- we have over 300 wells producing right now. And those wells provide enough gas to cover full usage this year. And as we go into 2015, I think we start the year with enough gas to cover it. But as the year goes on, the wells will be in a decline curve. If there comes a point, and we're not saying there's a specific point, but we've got a -- quarter-by-quarter, there's a different amount that, at some point, will start being just a little bit short and we're hedging that portion that will become short. But I don't think that even by the end of 2015, what's the -- it's still more than 50% is coming from...

[ph] Yes, I don't know the exact percentage...

It's somewhere in the neighborhood of 50% of gas is still coming from those 300 wells. They might be -- it's probably higher than that.

[ph] I think, Nathan, the -- as we look at -- in Jim's comments, in the prepared comments, he referred to the natural gas pricing environment today. And really, it's a fantastic option that we have, that we can produce gas from our own wells or hedge ourselves through a financial derivative, depending on which makes the best economic value. So we can always go back to drilling. The program we have available to us, if the economics are right, you are correct. We have enough gas that we will provide ourselves the DRI hedge for decades. It's just in the current moment, the economics would drive which is the best opportunity or option to cover that gas usage.

And just to clarify because we've said in the past that the program would not only cover all of our DRI needs, but it would also provide enough gas to cover all of our steel mill gas consumption needs also. And -- but Joe is right. This gas isn't going anywhere. It's in the ground. Today, the gas price is somewhere around $3.75 or in that neighborhood, so we can get out of the ground then. We were able to secure a hedge, which really gave us a better economic opportunity to leave it in the ground for what we believe will be the day that gas will ultimately be more expensive. Nathan Littlewood - Crédit Suisse AG, Research Division: Got it. Just on this DRI plant a bit further then, I mean, you guys are obviously making sort of strategic decisions and thinking quite a lot about the raw material input costs here. Obviously, the bigger part of your cost base, though, is not gas at all; it's actually iron ore. We're now in an environment where we've got the lowest commodity price for 6 or so years. Asset values for iron ore businesses are probably as low as they've been in a decade. How are you thinking about potentially moving into iron ore at this point? Is that...

Again, as I mentioned, with all potential acquisitions or opportunities, it's a function of the value of the asset that we're looking at and the price that it takes to own it. So are we looking? Certainly, okay? Is the environment today a whole lot better than it was 4 years ago? Absolutely, okay? Another -- this has been another example where Nucor's patience and tenacity has paid off. And we talked many times about Nucor's long-standing practice of buying during the downturns. This is clearly a downturn for that asset and we -- it's given us new opportunities to take a look at. I'm not going to comment on anything specifically, but certainly we are looking at those opportunities. Nathan Littlewood - Crédit Suisse AG, Research Division: Got it. And are you having to go out and seek those sort of things? Or have you got people coming in knocking on your door, so to speak?

Knocking on the door, let's just leave it at that.

Our next question comes from Phil Gibbs with KeyBanc Capital Markets.

Had a question on the automotive market. Can you give us a feel for how much of your volume, including some of the downstream products, went into that market, maybe through the first 3 quarters of this year?

Yes, we're running -- if you look at sheet -- I'll answer the question from 2 perspectives. I would answer in terms of our sheet products and I would answer in terms of our SBQ. In both cases, about 11% -- 10% or 11% of our total production of SBQ and sheet go into those markets. So 10% of our SBQ production is going into automotive today. About 10% or 11% of our sheet production is going into automotive today. I've mentioned in the past that our goal was 15%, so we're working to grow that. I can tell you we have many trials and qualifications going on in both -- with both SBQ and with sheet. And we remain confident that we'll be able to grow in those -- in the automotive market, which, as you know, is an extremely strong market. It has been growing. The market -- the automotive market has been growing, and frankly, we've been growing each year within that market. So we expect that to continue. Some of it is a result of the investments that we've made. One example would be the quality line at our mill in Memphis. That has really gone a long way towards getting us qualified at our Memphis mill in automotive applications.

Terrific. And I just had a question off of Nathan's here on the gas side. So as the year goes on in 2015, that you may be a little bit more than 50% practically. Were just you talking about the DRI facility? Or were you talking about your steel side?

I'm talking about the DRI facility with the gas coming out of the wells. And what I meant to say is by the end of '16 because we've done hedges through '16. It's by the end of '16 that it gets to be about 50% hedged. It's much higher than 50% for all of '15.

So you're just talking about the DRI, you're not talking about the steel mills?

Exactly. Yes.

Correct.

Our next question comes from Aldo Mazzaferro with Macquarie.

I just had a question for you on the Russian news yesterday and then also for Jim on the -- if I could give Jim the first one. I see the $45 million of start-up costs in the DRI. Jim, were there any other start-up costs that you could quantify in the quarter? I know you have a few other projects going, right?

Yes, nothing else that has resulted in any material start-up costs.

Okay. And then -- so John, on this Russian deal, right, I can see how the hot-rolled coil and plate get tariffed pretty heavily and that's good news for the market. I'm looking at the 75% of their inputs that are in the form of slab, and I know the integrated mills buy a lot of those. I know Nucor probably doesn't buy those because you have thin slab mills and you probably can't roll the thick slabs. I'm just wondering, do you think those slabs are dumped and possibly subject to trade cases in the future?

Well as you mentioned, and you're correct, we don't buy slabs, so we're not that intimately involved with trade cases that are going on, on slabs. So I really don't want to comment too much on that. I'll make a general comment, though, about the termination of the suspension agreement. We see that as a positive certainly, and it's more than just taking the tons out of the markets, although there's a lot of tons that will be coming out of the markets at that low price. I mean, I think, year-to-date, there is somewhere around 700,000 tons of Russian pile coming in and -- but the more important factor, frankly, is by the termination of the suspension agreement, it raises the floor of the sheet pricing in the market. They were certainly -- the Russians were certainly setting the floor. There was a very low floor. By taking their ability to do that out of the market, that's going to be a plus for us and for our competitors.

Our next question comes from Jorge Beristain with Deutsche Bank.

I was just following up on one of your earlier comments made about the spread of U.S. pricing, domestic versus imports, and that, that convergence could be met through a slight decline in U.S. prices but maybe an increase in foreign prices. And I was just wondering if you could just flesh out your thinking as to why you think foreign prices may be coming up.

Well, I think it's a case of necessity. At some point, even with companies, competing companies that are getting subsidies, you've got to make some kind of a return. And some of the pricing that we're seeing from some of these companies today are just not sustainable. We believe that they are not sustainable, even with the government support. And frankly, if they depend more and more upon the government support, more government subsidies, that just enhances our ability to take action on the trade front because, obviously, that's a violation of the trade laws. So I think it's a combination of their costs. They've got to show some kind of a profit, and today, their pricing is, frankly, unsustainable. So we think that they're going to have to make some adjustments there. They see increasing costs just as we do, and frankly, they've got to be careful on the trade side.

Great. And then another question was just if you could kind of talk about the context. You're obviously looking forward to a recovering non-res and ultimately residential construction market in the U.S., and we haven't really seen the steel sector at full throttle since '06, '07. And do you think that there's enough growth in the market that imports will sort of be held at bay, or in kind of percentage terms, they've kind of taken your historic highs again and that there's structurally reasons in the U.S. market why imports will just level off, whether it's trade case related or just the ability of the end consumers to rely too heavily on imports that's just capped by the natural way the business is done in the U.S.? If you could just maybe talk to that point about, will imports level off, do you think? And is the growth sufficient enough in the domestic U.S. market for all participants?

First comment, I do believe that the non-residential construction will continue to improve and that will provide a better market. To your second comment, there certainly are some issues that make it tougher for imports these days than they have in the past. One great example would be transportation in the United States. It's one thing to get the product onto the ports of the U.S. It's another to get it delivered to the final customer. Trucking is an issue. Frankly, we're seeing some evidence of delayed deliveries at the ports due to congestion. We've got the winter months coming up, that weather becomes a function or becomes an issue. So when you look at the final customer bringing in an import, he's got to look at several risks. I mean, obviously, he takes on risks in doing that: the delayed deliveries, the production delays or disruptions. Clearly, if there's a -- when you start talking about the higher-valued mark products, if there's a quality problem, the problem resolution becomes much more difficult. And frankly, we're seeing there's always a risk of unexpected increased costs in freight and other issues. And we serve a large portion of the market, particularly in our structural business, the fabricated markets, which really they cannot rely on inflected systems. They are not practical for them. So as we see non-residential construction continue to improve, clearly, the business for fabricated will continually improve, and our ability to serve them as a domestic supplier will continually improve.

And we'll take our next question from Andrew Lane with Morningstar.

Given the steep decline in iron ore prices and lower natural gas prices, could you provide an update as for the likelihood that you'll move forward with the second DRI module in Louisiana? I'm imagining it's probably looking more and more likely. But in regards to the timing, would you be waiting for concrete evidence that you've established profitability with only the first module in place?

Certainly, we would be looking at the performance of the first module. As I mentioned, we've had some unexpected failures. We've gone in and we were able to correct them. We would want to run -- a couple of things. Number one, we want to get more faith in the reliability of the operation. Our team in Louisiana, they've done a great job of fighting through the issues, but there's still work to be done in how to perfect the operation of that furnace. Before we moved on with another one, we want to make sure we understood all the potential issues with that technology. We have to make a decision, frankly, whether we stayed with that technology or because of a competitive pricing situation, move back to the Midrex. Certainly, there's been a -- we would expect there to be some spirited competition for that second vessel. I hope all of the potential suppliers are listening. And we will move forward when we gain confidence, as you said, in the lower input costs of the iron ore and the natural gas, although we don't worry about the natural gas because we have our own supply of natural gas. So it's really taking a look at the iron ore picture, but currently we believe that we're going to see the lower iron ore pricing probably for the next 3 to 5 years to be certain. And as we mentioned earlier, there might opportunities during that time for us to make an investment where we can secure the pricing for iron ore. That would be a positive factor in moving forward with the second unit. So those are the major issues we would use to determine when we would move forward with the next unit.

Okay. And then just another question. Could you provide some color as to what mix of scrap to iron ore derivatives the Gallatin operation currently applies and then what supply contracts are in place? And then also, does your plan for adding value to Gallatin involve applying the DRI you produce in-house? Or will you maintain the supply arrangements that are already in place for those non-scrap iron units?

Well, currently, Gallatin's mix is about 80% scrap and 20% alternative iron units. We think that -- we would see that increasing to a much larger percentage after we had time to install the necessary feed equipment. That said, we certainly would feed the Gallatin facility from our in-house supplier. I'm not sure what contracts they have for the supplier from other sources. Nucor is a high integrity company. We will honor it, if they exist. But frankly, we're not -- we believe it's minimal, if they have any at all. And bear in mind that we have a major scrap processing facility right up in that same area, so it's -- we see synergies to be gained from our DJ Joseph family member with the Gallatin organization also.

And that concludes today's question-and-answer session. I would like to turn the conference back over to John Ferriola for any additional or closing remarks.

Well, thank you, and let me just conclude by saying thank you to all of our customers. Thank you to our shareholders for your confidence and your investment in us. And thank you to our customers. Obviously, without your business, we would not be in business. And certainly, I want to say thank you to all of our 22,000 teammates for what you do every day, what you contribute to our company. Thank you for what you do, and most importantly, thank you for doing it safely. Thanks for your interest in our company. Have a great day.

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