Nucor Corporation (NYSE:NUE) Q1 2023 Earnings Call Transcript April 20, 2023
Nucor Corporation beats earnings expectations. Reported EPS is $4.45, expectations were $3.81.
Operator Good afternoon, and welcome to Nucor’s First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise and today’s call is being recorded. After the speakers’ prepared remarks, I will provide instructions for callers wishing to ask questions.I would now like to introduce Jack Sullivan, General Manager of Nucor Investor Relations. You may begin your call.Jack Sullivan Thank you, operator, and good afternoon, everyone. Welcome to Nucor’s first quarter 2023 earnings review and business update. Leading our call today is Leon Topalian, Chair, President and CEO, along with Steve Laxton, Executive Vice President and CFO. We also have other members of Nucor’s executive team with us, including Dave Sumoski, Chief Operating Officer; Al Behr, responsible for Plate and Structural Products; Noah Hanners over raw materials; John Hollatz, Bar Products and Fabrication; Doug Jellison, Corporate Strategy; Greg Murphy, Business Services, Sustainability and General Counsel; Dan Needham, Commercial Strategy; Rex Query, Sheet and Tubular Products; and Chad Utermark, New markets and Innovation.This morning, we posted our earnings release and an updated slide deck to the Nucor Investor Relations website.
We encourage you to access these materials, and we will cover portions of them during the call. Today’s discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements and involve risks outlined in our safe harbor statement and disclosed in Nucor’s SEC filings. The appendix of today’s presentation includes supplemental information and disclosures, along with a reconciliation of non-GAAP financial measures.So with that, let’s turn the call over to Leon.Leon Topalian Thanks, Jack, and welcome, everyone. I’d like to begin by thanking our 31,000 team members for delivering another strong quarter for our shareholders while continuing to deliver on our most important value, the health, safety and well-being of the entire Nucor family.
We’re coming off our fourth consecutive year setting new safety records and the team is off to a strong start again in 2023, ahead of last year’s record performance through the first quarter.Turning to our financial results in the first quarter. Nucor generated EBITDA of approximately $1.9 billion and net earnings of $1.1 billion, or $4.45 per diluted share. This strong performance was due in large part to the ongoing profitability of our steel products segments, along with increased volumes and margins at our steel mills segment compared to Q4. In our steel products segment, net earnings were down 10% from Q4 levels, but remained 42% ahead of the prior year quarter and significantly above historical averages. Shipments out of our steel mills rose 18%, taking utilization to approximately 80% during Q1 compared to 70% in the prior quarter.
And finally, the performance of our raw materials segment improved in the first quarter due to higher volumes.Nucor has created significant long-term value over many years and cycles by executing on its strategy. And today, we continue to position the company for further value creation. We are advancing several large capital projects to drive continued earnings growth, market share gains and margin expansion in our core steelmaking businesses. In our sheet mill group, Nucor Steel Gallatin continues to ramp up production. We’ve invested in Gallatin mill to completely modernize its operations and more than double its capacity, and we’re pleased with the progress the team has made to date. During the second quarter, we expect Gallatin will continue ramping up to its full run rate of 2.8 million tons and return to profitability.
We remain confident Gallatin will be a strong contributor to Nucor’s bottom line in the second half of 2023 and for many years to come.Shifting to West Virginia. Progress continues with our new sheet mill. The team has received all preconstruction state permits and is awaiting final federal permits, which we anticipate being finalized in the next few months. We expect to complete construction approximately two years after the receipt of all permits. And as previously announced, Nucor’s Board of Directors approved an updated budget for the West Virginia project, which is now estimated at a net cost of $3.1 billion. Once completed, the new mill will have an annual capacity of 3 million tons per year and advanced capabilities that will enhance our ability to provide customers with high quality, low embodied carbon steel products, particularly for the demanding automotive and construction applications.Turning to our plate operations, the team at Nucor Brandenburg has had a productive quarter focused on continued commissioning of the mill and beginning shipments to customers.
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Throughout Q1, the team has made significant headway dialing in the rolling mill and caster as we bring online a mill with the broadest offering of plate products in the Western hemisphere. Every month, we continue increasing casting rates and the range of production capabilities. Over the balance of 2023 we expect the Brandenburg Mill will produce up to 500,000 tons of steel and turn profitable by year’s end. This game-changing plate mill gives us a unique capability and will play a pivoted role in building out our nation’s infrastructure across multiple growth sectors.Moving to our Expand Beyond strategy, we’re pleased with the success of our new platforms, especially the diversification and accelerated growth they bring to Nucor’s earning profile.
As we’ve shared before, we look for efficient manufacturers of steel-related products when evaluating candidates to expand beyond our traditional steel making operations. The most attractive opportunities are those where we can create incremental value through operating synergies, supply chain efficiencies, and revenue enhancements. We also see companies whose values match Nucor’s, especially when it comes to taking care of their team.As part of our Expand Beyond strategy, Nucor established four new platforms helping to grow the size and diversity of our Steel Product segment. In the past three quarters in which we’ve owned these platforms, they have generated combined EBITDA of roughly $350 million or annualized EBITDA of approximately $465 million, which puts them on track to reach the $700 million through cycle annual EBITDA goal we described at our Investor Day in November.In the first quarter, steel products represented approximately 52% of our segment earnings mix.
We plan to keep growing the earnings potential of our steel products segment over time through both organic growth and acquisitions. In fact, just last month, we announced the location of our first of two new production facilities for Nucor Towers and Structures, which will help meet the growing demands of our nation’s transmission infrastructure.As we execute our Expand Beyond strategy, we are maintaining a selective and disciplined approach, seeking those that enhance our service offerings for customers and generate superior returns for our investors.Our competitive advantage lies not only in the breadth and quality of the products we produce, but in how we make them. As more customers look to reduce emissions across their supply chains the low embodied carbon and Nucor Steel is a real differentiator for us.
Over the past few years, we’ve developed numerous supplier partnerships with the likes of General Motors and Trane. And this week we’re adding to that with a supplier partnership with Johnson Controls. Nucor will recycle nearly all of the scrap from Johnson Controls facilities and repurpose it as low embodied carbon steel to be sold back to Johnson Controls for future use. This closed loop recycling partnership helps both companies pursue our decarbonization goals.In May, we will publish our updated sustainability report, which speaks to the commitment our teammates have in living our culture and protecting our environment. I encourage you to take the time to review it as it describes what makes Nucor so special. Things like our industry-leading safety record and the pride of our teammates have in working for Nucor.
Being the largest recycler of any product in the Western Hemisphere allows us to make steel with a fraction of the carbon footprint compared to the global average. And the various ways we support and invest in our communities. This is what makes Nucor a world-class manufacturer as recognized by Fortune Magazine where we were ranked number one among steel companies for the second consecutive year as one of the world’s most admired companies.Before turning it over to Steve, let me wrap up by sharing some perspectives on the U.S. economy. Despite the economic uncertainty, we see a constructive long-term outlook for Nucor and the broader U.S. steel industry. And when economic conditions do change, our highly variable cost structure and flexible operating model allows Nucor to toggle our production and efficiently match demand.
Nucor has a track record of operating profitably through downturns and emerging from them even stronger.The long-term investments we make and our conservative capital structures are designed to withstand all economic cycles in this time is no different, but for now, the fundamentals driving non-residential construction and infrastructure projects appear to be quite healthy.Three pieces of legislation, the Infrastructure Investment Act, the Inflation Reduction Act and the CHIPS Act, provide a combined $975 billion of funding or tax incentives, which will have a multiplier effect on the actual amount of capital deployed. Taken together, we believe that these three programs have the potential to generate up to 8 million tons of incremental steel demand per year over the balance of this decade.
According to the American Iron and Steel Institute, an estimated 5 million tons of steel is needed for every $100 billion in infrastructure spending.On top of that, we expect IRA will derive significant investment in clean energy, adding approximately 2 million to 3 million tons of annual steel demand for wind, solar, and transmission projects. There also have been more than 30 announced semiconductor plants or expansions in response to the CHIPS Act. These are massive steel intensive factories that take billions of dollars in years to build and Nucor’s unrivaled domestic production capabilities and low carbon footprint position us favorably to provide the steel for these projects.As I’ve said in the past, the green and digital economies are being built with steel and the steel that they get built with matters.
The future looks bright for Nucor and we’re excited to continue building on our company’s long track record of driving profitable growth and delivering outstanding returns to our shareholders.With that, let me turn it over to Steve Laxton, who will share additional details about our Q1 performance and outlook for Q2. Steve?Steve Laxton Thank you, Leon. Our net earnings of $4.45 per diluted share for the first quarter is the product of another strong performance by our team. In fact, with total earnings of just over $1.1 billion, our first quarter marks the eighth consecutive quarter where Nucor has exceeded $1 billion in earnings, a measure unattained prior to 2021, despite our long and profitable history as a company. These results highlight the advancement of our strategy and the growing earnings power of Nucor’s diversified portfolio and industry-leading capabilities.During the first quarter, steel mill earnings of $838 million represented a 62% increase in the prior quarter, driven predominantly by higher shipments.
We also saw efficiency gains from Q1’s higher utilization rate, allowing us to achieve lower conversion cost. Improving cost for energy, alloys and consumables were also a factor.Shifting to our Steel Products segment, we again saw excellent quarterly performance with segment earnings of $971 million. While this is a slight moderation from the prior period, it remains a historically strong result. During the quarter, we realized attractive pricing from margins across many of our product lines. This performance is further evidence of the strong non-residential construction market commented on by Leon. Our Raw Materials segment produced earnings of $58 million for the quarter. We realized higher pricing in our recycling businesses and shipped higher volumes out of both DJJ scrap operations and our DRI facilities.You may recall DRI volumes in Q4 were lower than normal and large part due to planned maintenance activities.
Our corporate eliminations expenses increased for the quarter in line with the outlook we shared during our fourth quarter earnings call in January. As a reminder, this segment includes several key activities including our teammate incentive compensation programs for all segments, interest expenses, selling, general and administrative expenses, and the elimination of intercompany profits.Included in this is the elimination of profits or losses on intersegment sales when one segment supplies product to another segment, but the final sale to an external customer has not yet been recognized. With roughly 20% of Nucor steel shipments going to downstream businesses and the vast majority of Nucor’s raw material shipments going to our Nucor steel segment.
Our intercompany eliminations can increase or decrease meaningfully, particularly during periods of rapid price change.In addition to producing strong earnings in the first quarter, Nucor’s efficient manufacturing business model was on display again, generating cash from operations of $1.2 billion. This allowed the company to continue its long established and balanced approach toward capital allocation, investing $532 million in CapEx, while maintaining its commitment to making meaningful direct returns to shareholders. During the quarter, we repurchased 2.7 million shares valued at approximately $426 million and made dividend payments of $131 million for a total of $557 million returned directly to shareholders or 49% of our net earnings.
Over the last three fiscal years, we’ve returned $7.6 billion to shareholders representing approximately half of the net earnings for the period.It’s worth noting our dividend payment in Q1 was Nucor’s 200th consecutive quarterly dividend. That’s a half a century of paying and raising our dividend and a long track record of creating shareholder returns that very few companies in any industry can point to.Nucor’s balance sheet continues to be a fundamental underpinning for Nucor’s capital allocation framework and an enabler of our value creating strategy. At quarter end, Nucor had more than $4.7 billion in cash and short-term investments, and our $1.75 billion revolving credit facility remains undrawn.Given the potential economic uncertainty, we’ve been intentional about fostering a resilient and flexible liquidity position.
This position of strength gives us confidence. We can continue our balanced approach of executing Nucor’s growth strategy while also providing meaningful direct returns to shareholders.As we look ahead to the second quarter, we expect earnings from our steel mill segment to increase compared to the first quarter results on modestly higher shipments and improved margins with better results from our sheet business being the biggest driver.In our steel product segment, we expect performance will moderate slightly from the historically high earnings level of recent quarters. As the impact of lower pricing offsets the benefit we expect to see from seasonally higher volumes. Our raw material segment is expected to continue to improve on higher shipment volumes.Overall, we expect the second quarter consolidated earnings to be higher than the first quarter, and we remain optimistic that 2023 will be another strong year of earnings for Nucor.
As Leon mentioned, federal support for infrastructure projects, clean energy investments and advanced manufacturing facilities will begin to impact demand in 2023.In addition, non-residential construction remains elevated and positive trends in both the automotive and energy sector will impact demand. In short, we believe medium and long-term fundamentals of our industry and key demand drivers remain relatively positive. This coupled with our strategy to grow our core and expand beyond position Nucor for strength well into the future.With that, we’d like to hear from you and answer any questions you might have. Operator, please open the line for Q&A.
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Question-and-Answer Session
Operator: Thank you. We’ll now begin the question-and-answer session.
[Operator Instructions] Today’s first question comes from Emily Chieng with Goldman Sachs. Please go ahead.Emily Chieng Good afternoon, Leon, Steve and team. Thank you for taking my question. My first one is just around the state of the steel market outlooks as you see it. I guess could you help us provide some color around what level of confidence you have or what’s sort of the extent of your visibility around the outlook for steel demand in this current macro environment? And how that perhaps compares to other economic down cycles that we’ve seen in the past?Leon Topalian Yes, Emily, thanks for the question. I’ll kick it off. For the last three years, we have been focused on executing on our mission, which is to grow the core, expand beyond and live our culture, ultimately generating higher highs and higher lows and providing a capability set to our customers that provides them a differentiated value proposition.And so while there’s an awful lot of talk about looming recessions and headwinds we’re facing and whatnot, I just tell you that the objective measures as we look into Q2, we think Q2 is going to be a stronger quarter.
If we look at our backlogs, our steel segment backlogs, Emily have increased 30% from the lows in the fourth quarter of last year.The demand picture as we think about automotive approaching 15 million units in 2023 remains really bright. And then some of the other things that I mentioned the opening script like the IRA and CHIPS Act and the Infrastructure Bill are already having meaningful impacts in our business segments today.But if we just take and unpacked just for a second the CHIPS Act, a $55 billion act signed into law, that $55 billion investment has spurred 34 projects that are on the books today. Those 34 projects represent $374 billion of semiconductor factories that are going to be built in the United States. And as our customers continue to shift to higher demands in what they’re looking for and what were in body carbon, it sets up incredibly well for Nucor as the most diversified product offering everywhere to help them build those facilities.Then the full cycle of that is, as they build those facilities, they’re going to provide the chips to our end use Tier 1 automotive customers, our HVAC customers and our heavy equipment customers that are all waiting for those and we’re ready to grow at that demand.
So again, we look forward to, and I think the brightest days for Nucor are still in front of us. And yes, that’s really where I would point to. And again, non-res construction continues to be incredibly resilient and we think strong going forward.Emily Chieng Great, that’s really helpful, Leon. And a follow-up, if I may, around non-resi construction demand there, you’ve certainly positioned yourself quite well with the cash flow business, the warehouse racking piece there, but as you think about the mix shift in projects within this segment. Where are you seeing a lot of pent up demand for certain non-resi construction product types and what are the projects that you are seeing Nucor specifically benefit the most from?Leon Topalian Yes.
Look, I appreciate that question and we are excited. We’re incredibly excited about the expand beyond piece of our businesses, the warehouse systems, the racking, the CHI Overhead Doors, and what those teams have been able to already generate in their earnings power and we’re just getting warmed up. I’m going to ask Chad Utermark, who’s over that product group and as well as the new markets and innovation teams to give you some more flavor.But I would just remind you all that, hey, that’s a segment in the construction and non-res. It represents over half of Nucor’s overall mix. It’s a market we know incredibly well, a customer base that we’ve had for going on six decades now, and one that we continue to partner with to provide a differentiated value proposition.
Our investment strategies were two-thirds of the way through a $14 billion capital campaign that’s going to double Nucor’s earnings powers from pre-pandemic levels. So Chad, why don’t you provide Emily just a little more detail in what we’re seeing in the non-res sector and some of the optimism we have.Chad Utermark Yes, thank you, Leon, and hello, Emily. Thank you for the question. As Leon stated, we are very excited about the demand picture that we see in non-res. I would categorize it as healthy and resilient as we move into Q2 and Q3. Some datasets I’d like to give you would be when you look at our backlogs, most of our downstream construction product backlogs are still at historically strong levels. As an example, two of our largest businesses that serve the non-res business they’re combined backlogs are 56% higher than their average during the time period of 2017 and 2019.
