Nucor Corporation (NYSE:NUE) Q4 2022 Earnings Call Transcript January 26, 2023
Operator: Good afternoon and welcome to Nucor’s Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise and today’s call is being recorded. After the speaker’s prepared remarks, I will provide instructions for those wanting to ask questions during the Q&A session. I would now like to introduce Jack Sullivan, General Manager of Nucor Investor Relations. You may now begin your call.
Jack Sullivan: Thank you, and good afternoon, everyone. Welcome to Nucor’s Fourth Quarter and Year-end 2022 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 who may provide comments during the Q&A portion of the call. They include Dave Sumoski, Chief Operating Officer; Al Behr, responsible for Plate and Structural products; Noah Hanners, responsible for 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 Products 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 as 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 and uncertainties outlined in our Safe Harbor statement and disclosed in Nucor’s SEC filings. The appendix of today’s presentation includes supplemental information and disclosures, along with a reconciliation of non-GAAP financial measures. So with that, let’s turn the call over to Leon.
Leon Topalian: Thanks, Jack, and welcome, everyone. I would like to begin by highlighting some recent organizational changes. Earlier this month, Noah Hanners joined the executive team as EVP for Raw Materials. Noah is a West Point graduate with his Bachelors of Science in Mechanical Engineering and his MBA from UNC Chapel Hill. He also served our nation in the United States Army for nine-years. Noah began his career with Nucor in 2011 at Nucor Steel Darlington and has worked at several of our divisions, most recently serving as Vice President and General Manager of the David Joseph Company. Doug Jellison, previously EVP of Raw Materials has accepted the newly created role of EVP for Strategy. Doug has been with Nucor for more than 30-years and has a great understanding of all of our business segments.
As we continue to grow Nucor, Doug will continue to help ensure we are further leveraging our competitive advantages across the enterprise. Congratulations to both Noah and Doug. Now turning to our year-end review. I’m proud to announce that 2022 was the safest and most profitable year in Nucor’s history, breaking prior record set in 2021. In the face of uncertain and at times volatile market conditions, we stayed focused on our goal of becoming the world’s safest steel company and our mission to grow the core, expand beyond and live our culture. In terms of safety, we established another record low injury and illness rate for the fourth consecutive year. 20 Nucor divisions went the entire year without a single recordable injury, and we set new records across each of the four primary safety metrics that Nucor tracks.
And we achieved all of this during a period of rapid growth welcoming over 2,000 new team members to the Nucor family throughout the year. I’m inspired by the way, each member of the Nucor team has embraced our most important value, the health, safety and well-being of all 31,000 team members who make up our family. Turning to financial performance. We earned $4.89 per share in the fourth quarter of 2022 on her way to setting a new earnings record of $28.79 per share for the full-year. This represents a 24% increase over the annual EPS record we previously set in 2021. Our operations continue to generate strong cash flow with a record 11.6 billion of EBITDA. This allowed us to advance our strategy along several fronts, while also returning 3.3 billion to shareholders through dividends and share repurchases, consistent with our capital allocation strategy of returning at least 40% of earnings to Nucor shareholders.
Our return on invested capital stands at a healthy 35%, and we closed out the year by announcing the 50th consecutive annual increase to our regular dividend following Nucor’s original listing on the New York Stock Exchange in 1972. This places Nucor among an elite group of roughly 40 dividend kings referring to publicly traded companies that have consistently increased annual dividends to shareholders for over a half a century. These successes were in large part made possible through their hard work and dedication of the Nucor team who executed our strategy to achieve world-class performance. As most of you know, we share our profits with our team and in just a few weeks, we will reach a milestone never achieved before Nucor’s history, delivering nearly $1 billion back to our teammates.
In 2022, we made considerable progress along all of our strategic initiatives, deploying approximately $2 billion in CapEx and completing five acquisitions valued at approximately $3.6 billion, to grow our core and expand beyond. But we didn’t just invest in new assets and business lines. We invested in a more sustainable future. We did this through new partnerships and capital commitments to our technologies that can help reduce our carbon footprint even further. In December, we announced an equity investment in Electra, a boulder-based start-up that has developed a process to produce carbon-free iron used in making steel. In November, Nucor became the first major industrial company in the world to join the United Nations’ 24/7 carbon-free energy Global Compact which aims to accelerate the world’s transition to clean, affordable and reliable electricity.
Nucor also cofounded the Global Steel Climate Council in International Coalition advocating for a single, transparent global emission standard that is focused on steelmaking emissions and last week, the NRC officially certified new scales design to build a small modular reactor, the first of its kind approved for use in the United States. Nucor’s minority investment in NuScale will continue to support the development of this technology with the goal of producing 100% of carbon-free electricity. Our mission to grow the core, expand beyond and live our culture is delivering results for our company and our shareholders. In our steelmaking operations, we invested in new capabilities to produce more value-added products and improve operating efficiencies that can earn higher and more sustained margins.
In our downstream operations, we continue to expand into new steel adjacent markets where we can offer differentiated solutions, including overhead doors and utility towers. These represent unique opportunities in faster-growing markets where Nucor can leverage its core competencies, supply chain efficiencies and market channels to create incremental value for shareholders. And we lived our culture. For over 50-years, Nucor’s unique culture has created value for shareholders as it empowers and incentivize teammates to take ownership of decision-making, drive efficiency and pursue innovation. Let me provide an update on some of our larger initiatives to grow the core, starting with our Brandenburg Plate Mill. Nearly four-years after it was first announced, the Brandenburg team rolled their first steel plate on December 30.
They are now focused on final commissioning of the mill and plan to begin customer shipments by the end of the quarter. Last week, we announced the Brandenburg mill would produce a new product called Elcyon, a sustainable heavy-gauge steel plate designed to meet the growing demands of the offshore wind industry. Congrats to the entire Nucor Brandenburg team for delivering one of the safest mill start-ups in Nucor’s history and for completing it on time and on budget. Turning to our sheet operations. We announced plans to build a continuous galv line at California Steel Industries to serve construction markets in the Western United States. Recent closures of galvanizing capacity by other suppliers in the West presented Nucor a unique opportunity to better serve this region.
This new galv line along with the line we completed at Nucor Gallatin in 2019 and future lines planned for Berkeley and Nucor West Virginia will position the company as a supplier of choice for the cleaner, value-added sheet products our customers are seeking in several key markets. Investments like this help forge even stronger relationships with our key customers, like Trane Technologies, which honored Nucor last week with their 2022 Supplier of the Year award. Now shifting to our Expand Beyond strategy. I would like to provide an update on a few of our recent acquisitions we have completed, beginning with our midyear purchase of C.H.I. overhead doors. When we announced this transaction and held a special investor call last May, we spoke about C.H.I.’s $230 million LTM EBITDA, it is 30% EBITDA margins and average annual revenue growth of 10%.
In the last six-months following our June closing, C.H.I. generated record EBITDA of nearly 170 million, finishing the full-year with over 320 million of EBITDA and expanding margins. Within the first six-months of closing, we have taken our implied trailing EBITDA acquisition multiple down from 13 times to just over nine times. Going beyond the strong financial results, I want to commend the entire C.H.I. team for executing such a quick and seamless integration into Nucor. We are already seeing the benefits of our combined operations, including improvements to C.H.I.’s safety performance. Thank you. Thank you, team C.H.I. and all of the Nucor team members had have come together to make this an incredibly successful transition. And we are starting to realize supply chain synergies as well with C.H.I., developing plans to source most of its cheap bar and tube from Nucor divisions.
The sales team at C.H.I. is collaborating with Nucor’s regional commercial groups and cross-selling efforts have begun as C.H.I. grows its share of the commercial overhead door market. Last year, we also acquired Summit Utility Structures, producer of steel structures for the utility, telecommunications and transportation sectors. It is an area that we see considerable growth potential in. Then in December, we announced plans to construct two new state-of-the-art tower production plants. These highly automated facilities will help meet the growing need for utility infrastructure as our nation’s electric transmission grid is modernized and hardened. Turning to the broader economic backdrop. We recognize there continues to be uncertainty, but we also see tailwinds that should benefit Nucor as well as the American steel industry throughout this decade, including the Infrastructures Act, the CHIPS Act and IRA that are all starting to work their way into the steel sector.
These programs align perfectly with Nucor’s unmatched and unrivaled product capabilities to meet the growing demand of our customers today and well into the future. With that, let me turn the call over to Steve Laxton, who will share more about our Q4 performance. Steve.
Stephen Laxton: Thank you, Leon. As Leon mentioned, our earnings of $28.79 per share established a new record for the company. These results highlight the earnings power of Nucor’s diversified portfolio and industry-leading capabilities. 2022 was also a noteworthy year for cash flows at Nucor. For the year, cash from operations exceeded $10 billion for the first time in our history, and free cash flow topped $8 billion. Over the past five-years, Nucor has generated $16.6 billion in free cash flow. During that same time period, we returned $9.7 billion directly to shareholders through dividends and share repurchases and while at the same time, investing over $12.8 billion in our business through capital expenditures and acquisitions to further strengthen and grow our earnings base.
These results demonstrate continued and consistent adherence to our balanced capital allocation framework. Nucor’s efficient manufacturing business model is a powerful through-cycle cash flow generator. Turning to our financial results for the fourth quarter. Earnings for the Steel Mills segment were down nearly 60% from the prior quarter. Shipment volumes fell 13%, reflecting normal seasonal weaknesses and some purchasing hesitancy as prices were trending lower for much of the quarter. Overall, metal margins contracted as lower realized pricing outpaced lower cost for metallics. Conversion costs were slightly lower compared to the third quarter despite lower utilization rates, in part due to energy cost, which fell approximately 10% on a per ton basis.
Alloys and consumable costs also trended slightly lower. Shifting to our Steel Products segment. We continue to see very strong performance with segment earnings of $1.1 billion in the fourth quarter. This is down about 10% from the third quarter’s record results, but still represents the third best earnings quarter ever for this segment. Contributions from most product lines were down from their respective third quarter levels, reflecting normal seasonality. And C.H.I. overhead doors was a notable exception, as Leon touched on earlier, posting fourth quarter earnings 20% higher than the prior quarter. Turning to Raw Materials. This segment saw negative earnings for the quarter as DRI and scrap processing results were impacted by lower volumes and falling prices for much of the quarter.
We also took both DRI facilities off-line for planned maintenance and elected to extend those outages for additional service until we saw signs of improving conditions later in the quarter. On the capital deployment front, Nucor’s CapEx for the quarter totaled approximately $520 million, bringing total CapEx for the year just under $2 billion. We are forecasting CapEx in 2023 at $3 billion, including some catch-up spending originally slated for 2022, new growth initiatives and general maintenance. The earnings presentation we posted on our Investor Relations site this morning has additional details on our 2023 capital spending plan, including projected allocations among primary CapEx categories, and a preliminary look at the anticipated pace of spending on a few of our major growth projects over the next couple of years.
I would like to take a minute and provide an update on the strong results we are already seeing from recently completed investments. While strong conditions in 2022, certainly aided performance, we believe these were prudent, timely and well executed investments that are yielding excellent returns and position the company for continued future success. The roughly $2.2 billion we invested in sheet and bar projects that have been up and running for the past few years, generated an estimated $620 million in EBITDA for 2022. In the businesses we acquired over the last two-years for around $4.5 billion, establishing four new downstream platforms generated EBITDA of nearly $500 million over the course of the year. We believe this puts us well on our way to reaching our annual run rate EBITDA goal of $700 million for our Expand Beyond businesses.
Collectively, these strategic investments in those to come, provide significant earnings catalysts and position Nucor for sustained value creation long-term. Turning to our balance sheet. We finished the year in a very strong liquidity position with over $4.9 billion in cash and short-term investments, and our $1.7 billion revolving credit facility remains undrawn. We have been intentional about building liquidity toward the end of the year in light of uncertain economic conditions, coupled with near-term uses of cash, including our 2022 profit-sharing payouts that are earned by our teammates, our capital spending plans and maintaining our commitment to meaningful direct returns to shareholders. In addition to ample near-term liquidity, Nucor’s balance sheet continues to be in a position of strength with total debt to capital of around 25% at the end of the year and debt to EBITDA well under one turn.
Earlier this week, Fitch Ratings published its first credit rating on Nucor with long-term and short-term unsecured ratings of A- and F1, respectively. We were pleased to see Fitch recognize Nucor’s credit strength. During the quarter, we repurchased 3.1 million shares valued at $403 million and made dividend payments of $130 million for a total of $533 million return directly to shareholders, which represents more than 42% of our quarterly net earnings. Over the last five-years, we have returned $9.7 billion to shareholders, representing approximately 52% of total net earnings for the period. As we look ahead to the first quarter of 2023, we expect earnings from our Steel Mills segment to increase compared to fourth quarter results on higher shipments, improved metal margins and expected higher realized prices.
In our Steel Products segment, we expect lower earnings in the first quarter compared to the fourth quarter due to seasonally lower volumes and lower pricing in some products. However, it is worth noting that earnings are expected to remain higher than the first quarter of 2022. Our Raw Materials segment earnings are expected to improve on more stable pricing and higher shipment volumes. While operating income from these three segments is expected to be higher compared to the fourth quarter, we expect consolidated earnings for the first quarter to be lower due to higher intercompany eliminations and the absence of onetime state tax benefits that were realized in the fourth quarter. We remain relatively optimistic 2023 will be another strong year of earnings for Nucor despite entering a period of increased economic uncertainty.
Overall, non-residential construction spending continues to be robust, federal support for infrastructure and energy projects will begin to show impacts on demand in 2023. Other positive drivers of demand include re-shoring of manufacturing, energy infrastructure demand, clean energy and storage projects, EV factories and semiconductor plants. In closing, we believe medium and long-term fundamentals of our industry and key demand drivers remain relatively positive. This coupled with our growth initiatives and investments that advance our strategy to grow our core and expand beyond position Nucor for strength well into the future. With that, we would like to hear from you and answer any questions. Operator, please open the line for Q&A.
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Q&A Session
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Operator: And our first question here will come from Lawson Winder with Bank of America. Please go ahead.
Lawson Winder: Good afternoon, Leon, Steve, the presentation. Also congratulations to Noah and Doug on the new roles. And also, I would just say nice work to whoever help create those slides, the deck looks great. So wanted to follow-up, Steve, on your last comments on market demand, could you maybe provide a sense to the extent to which demand might be driven also by restocking versus some of these actual real demand drivers that you are highlighting? And then in terms of these real demand drivers, you highlighted nonres, electricity grid, which is moving the needle most for Nucor? Thank you.
Leon Topalian: Lawson, I will start this off and ask Dan Needham, our EVP of commercial to jump in and paint some perspective around what we are seeing in terms of the traction we are getting from some of the programs that we discussed. But I want to begin with saying, hey, thank you for recognizing that. And thank you to the 31,000 team members who made a historic year for our company. Thank you to our customers who made all of that possible. I couldn’t be more proud that our team executed its fourth consecutive safest year in our history, it is the most important value that we have at Nucor. And none of us and our executive team take that for granted and I look forward to 2023, setting a new safest year in our history. So as we unpack the first question that you began with or started in really understanding the demand trends real versus the restocking.
Look, I think we have certainly hit the bottom as we think about distribution, and we are going to see that continue to restock as we move into the Q1 but that to me is not what is driving demand. If you actually look over the, let’s say, the last eight or 10 weeks in the sheet group, for example, our bookings are up 45% to 50% during that time period. Our backlogs over the last – I don’t know, let’s say, Q-over-Q have climbed about 16%. So that drive is there. That demand is there, that is pulling that. The other side is the nonres construction. Obviously, Nucor is channel in that market is over 50%. So we are heavily invested in that. But there were so many incredibly positive signs. And while 2022 as a historic year, and we are slightly off in terms of order activity, we think it is going to be another very strong year that nonres construction will remain robust as we move forward.
And there are several things that are going to drive that, that we will touch on here in just a second. And then really, the other piece is our plate strategy and long product strategy that continues to produce and perform incredibly well as we move through the back half of 2022 into 2023. But as we talk about the Infrastructure Act, the CHIPS Act, Inflation Reduction Act, automotive improvement for 2023, all others are going to have meaningful, intangible impacts to our business. Dan is going to touch on a second, the infrastructure bill. But I just want to put some context to the CHIPS act. It is a $55 billion package that Congress passed. What does that translate to? To about 27 different meaningful chip plants that are going to be produced some of which are pushing $20 billion on their own individual plants.
Well, what does that actually translate – what is that look like? That market segment, as we think about advanced manufacturing is requiring something different for its future. Our customers in that sector are requiring the most sustainable, comprehensive, differentiated value products and solutions that are available to the market. Nucor is incredibly well positioned to meet that growing demand in every category in every sector. So we feel very good as we enter 2023, that will be a strong year, maybe not as strong as 2022, but a continued strong year. But Dan, why don’t you paint a little context around the Infrastructure Act and what we think we will see in 2023.
Daniel Needham: Okay. Appreciate the question, Lawson. In particular, what we are seeing forecasts out there from construction indices or are predicting infrastructure starts to increase 16% in 2023 and additionally, 10% in 2024. But more specific to that, we are seeing activity today on the infrastructure bill. In January, the Biden Administration announced $2.1 billion in funding for four major bridge projects. The most notable being the bridge over the Ohio River connecting Ohio and Kentucky on I-75 and I-71. You also asked a little bit, and Leon touched on the advanced manufacturing, but the other thing around the advanced manufacturing, the activity is increasing tremendously in that space, not only in chips, but also on the EV space and batteries.
But those plants are quite large and the requirements from a grade and size standpoint, there is only a few suppliers that are capable of serving that and Nucor is well positioned to do that. If you think about the breadth of our products, our capabilities in the construction side from structural buildings to racking systems to now insulated metal panels and garage doors. Our capabilities are unparalleled. One thing you also mentioned was the inflation Reduction Act around energy. We are seeing activity grow in that space as well. And additionally, our breadth of capabilities fit that space very well additionally. And if you think about our leading low greenhouse gas intensity offerings, the requirements in that space, we are well poised to help the U.S. energy market move towards decarbonization.
So the last point I would like to make is, in all of these, they are not mutually exclusive. They are all interconnected. And we have customers in these spaces in automotive and energy that have requirements on the construction side. And a couple of years ago, we created our focus on our solutions teams. And we have teams around construction, automotive and energy that are best poised to recognize these opportunities early in the design conceptual phase of these projects and work with the owners, developers, engineers to provide a valued solution for all involved, including Nucor.
