Nucor Corporation (NYSE:NUE) Q4 2023 Earnings Call Transcript

Nucor Corporation (NYSE:NUE) Q4 2023 Earnings Call Transcript January 30, 2024

Nucor Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Nucor 2023 Fourth Quarter Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jack Sullivan, General Manager and Investor Relations. Please go ahead.

Jack Sullivan: Thank you and good morning, everyone. Welcome to Nucor’s fourth quarter and year end 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; Brad Ford over Fabricated Construction Products; Noah Hanners, Raw Materials; John Hollatz, Bar and Rebar Fabrication; Doug Jellison, Corporate Strategy; Greg Murphy, Business Services, Sustainability and General Counsel; Dan Needham, Commercial; Rex Query, Sheet and Talent Resources; and Chad Utermark, New Markets and Innovation.

We have posted our fourth quarter earnings release and presentation 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 maybe 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 congratulating our 32,000 Nucor teammates for delivering another strong year of financial results. We closed out 2023 with solid performance earning $3.16 per share in the fourth quarter on our way to $18 per share for the full year. This represents the third most profitable year in Nucor’s history behind 2022 and 2021. In fact, Nucor’s combined net earnings over the past 3 years, exceeds the combined net earnings of the last 20 years. This is a testament to the focus and dedication of our team as we execute our strategy to grow the core, expand beyond and live our culture. In keeping with our commitment to shareholders and our balanced approach toward capital allocation, Nucor invested $2.2 billion in CapEx and returned $2.1 billion to shareholders in 2023, representing 46% of our net earnings.

We are coming off the 3 best years in Nucor’s history, but in spite of that, we are even more excited about what lies ahead. The U.S. economy continues to be resilient and steel-intensive megatrends are starting to drive increased demand for the products we make and our focus on expand beyond businesses downstream are generating excellent returns. Turning to our safety performance, 2023 statistically was the safest year in Nucor’s history making 5 straight years of improvement. We also had 29 divisions going the entire year without a recordable injury. We finished the year with a company-wide injury and illness rate of 0.79, which is 17% lower than 2022 and well below the steel industry average. However, with that said, Nucor will not internally acknowledge 2023 as a record year in safety, will not celebrate 2023 as a record year, because on November 3, we lost a Nucor team member to a workplace accident.

Subsequently, on November 9, we had a company-wide safety stand down. It was a chance to honor our fallen team member and his family, reflect on our most important value, safety and reinforce that the health, safety and well-being of every Nucor team member is what matters most. Our team members come to work each and everyday to support themselves, their loved ones and they must go home each and everyday. That is our greatest responsibility to all 32,000 team members who make up our Nucor family. Every leader inside of Nucor is committed to delivering our mission to become the world’s safest steel company and there is no doubt in my mind, we will achieve our goals together. Nucor is the largest and most diversified steel producer in North America.

We pioneered the commercial application of EAF steelmaking over 50 years ago, and today, we own and operate 30 electric arc furnaces with 4 more under construction. EAF steelmaking and our unique entrepreneurial culture have made us the industry leader and our current strategy, we will keep Nucor out in front as we continue to deliver the financial results and capabilities our investors and customers have come to expect. Today, Nucor leads the North American steel industry across financial, operational and environmental criteria. Value creation for shareholders through prudent capital deployment is our primary financial objective. Since the beginning of 2020, we have invested over $12 billion in CapEx and strategic acquisitions to grow our core and expand beyond.

During the same time, our average annual ROE has exceeded 30% and our annualized EPS growth rate has exceeded 40%. In terms of operation, Nucor makes approximately 1 out of every 4 tons of steel produced in the United States. We have a highly efficient business model and our unrivaled breadth of products and capabilities serve the widest range of end markets. Sustainability is a key differentiator for Nucor and a major part of our growth strategy. We are the largest recycler in the Western Hemisphere and among the lowest in greenhouse gas intensity across global steelmaking. And we are taking steps to position us even better for the future. Supplying customers with the sustainable solutions they have come to expect. That’s why we helped create the Global Steel Climate Council and announced a commitment towards net zero steelmaking by 2050 across Scopes 1, 2 and 3.

Our business strategy and investments are driving growth for shareholders. In raw materials, we are leveraging our market intelligence and flexible supply chain to provide more sustainable inputs. We are investing in advanced scrap separation technologies and near zero emission iron-making and we have partnered with ExxonMobil to capture and store up to 800,000 tons of CO2 per year at our Louisiana DRI facility beginning in 2026. In our Steel Mills segment, we are shifting the mix toward higher margin value-added products. We continue to ramp up Brandenburg, the most capable EAF plate mill in the world. We are constructing a state-of-the-art sheet mill in West Virginia. And we are expanding our rebar micro mill footprint, targeting some of the highest growth regions in the U.S. Turning to Steel Products, we have a strategic advantage on the supply side, given the integration between our mills and steel product teams.

We’ll continue to leverage this advantage while pursuing more cross-selling and companion tons through our solutions teams and we are investing in automation and technology to improve efficiency and reduce the risk of injuries. And finally, our Expand Beyond strategy into its steel adjacent platforms is paying off. We are leveraging our core competencies to grow into higher margin businesses aligned with steel-intensive megatrends. We are executing this strategy through a combination of acquisitions and organic growth, including the construction of 2 new utility structure production facilities. For 2023, our Expand Beyond platforms contributed roughly $415 million in EBITDA, led by overhead doors and insulated metal panels. We remain confident in hitting our $700 million EBITDA run-rate goal for Expand Beyond divisions in the coming years.

We believe the American steel industry is still on the front end of megatrends working their way into steel markets. We are starting to see some increased activity in certain markets like bridge and highway, semiconductor chip plants, EV factories and renewable energy. And as we have shared before, Nucor expects the federal programs that support these megatrends to add somewhere between 5 million to 8 million tons of incremental annual demand for steel over the next several years. While the long-term trends look favorable, we have seen some pockets of slower-than-expected activity. For instance, adoption rates for electric vehicles are tracking lower than some have predicted and several offshore wind projects have been canceled or delayed due to supply chain challenges as well as higher costs.

Warehouse starts are expected to decline again in 2024, but we still expect them to stay above pre-pandemic levels. And despite some of these near-term headwinds, Nucor remains optimistic about the longer term prospects for these end markets. Non-res construction is our largest end market and it has proven to be incredibly resilient. Some of the strongest growth is coming from the sharp rise in advanced manufacturing and infrastructure investment, both expected to rise double-digits over the next 2 years according to Dodge construction forecast. This is helping to offset some of the softness we are seeing for more rate sensitive sectors, which should begin to pick up later in the year if interest rate cuts occur as many expect. Before turning it over to Steve, I’d like to share a few thoughts on how Nucor’s business model continues to deliver attractive returns for our shareholders.

From 2020 to 2023, we have generated a combined EBITDA over $30 billion, net earnings of nearly $20 billion, and returned nearly $10 billion to our shareholders. Throughout it all, we have maintained the strongest balance sheet of any North American steel producer, allowing us to grow the company by investing in higher margin, less volatile businesses. As our results demonstrate, Nucor is a growth company. And given our investment plans and the long-term outlook for steel in the U.S., we see more opportunities for growth in the years ahead. With that, I will turn it over to Steve who will share additional details on our financial results and near-term outlook. Steve?

Steve Laxton: Thank you, Leon and thanks to our shareholders for joining us this morning. Nucor ended 2023 on a strong note with fourth quarter consolidated net earnings of $785 million, including $127 million of pre-operating startup cost. We exceeded the midpoint of our guidance due primarily to better-than-expected performance from our Steel Mills segment in the month of December. In addition to solid earnings for the quarter, the power of Nucor’s business model allowed us to generate more than $1.5 billion of operating cash flow during the quarter, with working capital contributing about $250 million of that total. Turning to our operating segment results, our Steel Mills Group generated $588 million of pre-tax earnings in the fourth quarter, a decrease of 33% from the third quarter.

Total steel mill shipments declined 4% from the prior quarter and realized pricing for the segment was lower across all major products. Our mill utilization rate was 74%, down from 77% in the prior quarter, but higher than the 70% in the fourth quarter of 2022. In the back half of the fourth quarter, we saw an uptick in customer confidence as the UAW strikes were resolved and the Federal Reserve signaled the end to interest rate hikes. Shipment volumes increased as the quarter progressed and we began to realize higher pricing for sheet steel consistent with pricing trends in the published indices. We are expecting further improvements in both shipments and realized pricing to favorably impact results in the first quarter of 2024. Our Steel Products segment delivered another strong quarter with pre-tax earnings of $656 million.

This represented just over half the total segment earnings for the fourth quarter and is the sixth consecutive quarter with Steel Products contributed at least 40% of our total segment earnings. For the year, Steel Products generated segment earnings of $3.4 billion, its second best year behind 2022. Realized pricing and margins continued to moderate in the fourth quarter, but on an earnings per ton basis for the full year of 2023, only gave up about 6 percentage points. Our Raw Materials segment posted a pre-tax loss of about $14 million for the quarter. Compared to the prior quarter, pricing was relatively stable, but output was lower and per ton cost rose due to planned outages at our DRI facilities. Now turning to capital allocation, with $2.2 billion in capital spending and $2.1 billion in shareholder returns in 2023, Nucor once again demonstrated a measured and balanced approach to its capital deployment.

With respect to our shareholder returns, it’s worth noting that next week we will pay our 203rd consecutive quarterly cash dividend in the amount of $0.54 per share. This represents a 6% increase over the prior dividend. As Leon highlighted, Nucor is taking meaningful steps to grow its earnings power and cash flow potential. Since 2018, we have been able to increase our dividend by 42% and reduced our shares outstanding by 23%. For the foreseeable future, we remain confident we will continue to be able to return at least 40% of our net earnings to shareholders by way of dividends and share repurchases. A cornerstone of our capital allocation framework is a commitment to a strong investment grade credit rating and liquidity that enables our strategy.

Nucor’s balance sheet remains well positioned to enable continued execution of our balanced capital allocation philosophy, with a debt-to-capital ratio of 25% and a debt-to-EBITDA ratio of less than 1%. We have a long history of putting capital to use and returning capital to shareholders. Given that principle and our ambitious growth plans, we do expect to end 2024 with a lower cash balance than when we started the year. We finished 2023 with a strong cash position for several reasons. First, with more than $7 billion of cash from operations, we generated robust cash flows throughout the year. Second, we experienced some timing delays in our planned capital spending. And finally, we were preserving liquidity for possible acquisition opportunities, which ultimately did not materialize.

Now that we have broken ground in West Virginia, the pace of our capital spending should accelerate. For 2024, we expect total capital expenditures of approximately $3.5 billion, with our 7 largest growth projects represented approximately two-thirds of this total. In addition, we are firmly committed to growing our portfolio of solutions and expand beyond footprint through value-creating acquisitions. To that end, we are actively fostering a pipeline of acquisition candidates. As always, we will be selective, opportunistic and disciplined in our approach. But unlike our organic growth strategy, the timing and size of potential acquisitions is far less predictable. Looking ahead to the first quarter of 2024, we expect consolidated earnings to be higher than the prior quarter, with improved performance from the steel mills and raw materials segments, partially offset by weaker earnings from the Steel Products segment.

For the Steel Mills segment, we expect quarterly earnings to increase due to higher realized pricing and higher volumes, in particular, from our sheet mills. In the Steel Products segment, we expect lower realized pricing compared with the prior quarter. Across most of our steel products groups, current backlogs are consistent with historic norms, while margins have remained higher than historic averages. For the Raw Materials segment, we expect modest profitability on higher shipments and relatively stable pricing. Looking ahead, 2024 appears to have a more stable outlook than may have been expected just a few months ago, with a reasonable probability of seeing the much discussed soft landing. As Leon mentioned in his opening remarks, the U.S. economy appears relatively healthy with inflation and unemployment metrics continuing to trend favorably.

Market expectations for gradual declines in interest rates could result in more demand for consumer durables, light vehicles and increased activity across a broad construction sector. As the most diversified producer of steel and steel products with the widest array of market solutions, these potential expectations bode well for Nucor. Looking beyond 2024, several steel-intensive megatrends are only in the early stages. While economic cycles will continue to impact the markets, we broadly see positive demand drivers that provide a constructive backdrop to Nucor’s midterm growth potential. With that, we’d be happy to take your questions. Operator, if you would, please open the line for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Curt Woodworth with UBS. Please go ahead.

Curt Woodworth: Yes. Thank you. Good morning, Leon and team. And I am sorry to hear that you guys lost a team member in November, but overall congratulations on what’s been a pretty strong safety performance the past several years. My first question is more end market related though in your slide deck, you did have a generally constructive outlook to use your words with regards to commercial construction as well as infrastructure. But when we look at the volume performance of the Bar and Beam mills and even plates to some degree, it’s been pretty choppy to down for almost 2 years now. So I guess what gives you confidence that, that market can inflect? What signs are you seeing in terms of either increased bidding activity on the Highway Bridge side? Or how your order book is shaping up?

Leon Topalian: Yes, Curt, I’ll kick it off, and if there is any other comments for our team. I’ll certainly let them jump in and thank you for the condolences regarding our team number. As we’ve mentioned for decades now, the health, safety and well-being of our 32,000 Nucor team member family is the greatest responsibility we all bear each and every day. They are the ones that are delivering every result we’re about to talk about. So again, thank you for acknowledging that. It’s interesting. There is a lot of talk about new capacity, particularly in the sheet. And we get a lot of questions, Curt, as you know, around well, as we think about new market entrants or increased demand won’t that flattening of the cost curve change the profile and earnings.

And what I would point to is what you really asked about is the longs as we look at structural and while we don’t break out the individual structural mill Nucor-Yamato were Berkley being on the financial performance or the individual rebar mills. I would tell you the performance of our long products divisions has been incredible from a financial result. They are generating incredible returns for our company. Nucor-Yamato is operating at a much higher utilization rate. And so over the last 2 or 3 years and they have been 10 prior, I think prior to the pandemic our average utilization rate at NYS, for example, is in the upper 60s to low 70s that shifted much higher to the mid to upper 70s, low 80s. So that flow through and that run rate is generating great returns.

So I would tell you, the outlook and continued demand for our structural products and loan products remains pretty optimistic. Again, we’ve seen incredibly consistent returns in our longest products divisions and groups that we think will continue into 2024.

Dan Needham: Curt, this is Dan. I’ll give a little perspective on what we see in the market, in particular, with funding programs as well. But if you think of the trends, right now, we are seeing activity in some of the reshoring in the advanced manufacturing, so you are seeing in the EV battery plants those types of things. From a standpoint of IRA, CHIPS and the Infrastructure Act, there is more activity going on on the energy side with the IRA and also with the CHIPS. We are active in shipping to multiple CHIPS plants that are under construction today. From an IRA standpoint, we have seen a lot of activity in solar, particularly 2023 was a record shipment year for us on Torque 2 to go into these solar projects. And we see in that growing into 2024.

It is about 22 gigawatts built in ‘23. We say go in to 22 – about 36 gigawatts in ‘24. What I would say is some of the headwinds, we see the peak of those activities in the volume and demand coming in the next few years. And the reason for that, there is a couple of things that are headwinds now. One is we have talked about on past calls is the labor constraints. That’s real out there. A lot of these projects are competing for the same labor pool. So we do see that having an impact. And then the other thing that’s also impacting the pace of these projects is really around regulations. And what I mean by that is getting access to energy for some of these plants is important. That’s a slow process. The other thing is environmental permitting.

So we’re seeing some headwinds with those, but not just delaying the projects. And lastly, around the infrastructure it can take upwards of 18 months to go from when these projects are announced is actually when they start getting shipped. So that’s why we still see some optimism and are very positive in the outlook and we’re well positioned to take advantage of all of these trends going forward.

Curt Woodworth: Great. And then just as a follow-up for Steel Products. You noted incremental pricing weakness in the quarter. Can you just comment – can you give any more specificity around how you see margins trending in this quarter or the margin profile of the backlog? I mean obviously, there is a lot of moving pieces within the Steel Products segment. But do you have a view on where margins should normalize? And then with respect to getting up to that $700 million EBITDA number, can you do that organically or would you need to acquire as well to reach that? Thank you and best of luck.

Leon Topalian: Yes, Curt, that’s a lot to unpack in there. What I would tell you on the macro, and I’ll let Brad Ford share a little bit more of the details, could be more proud of how our products groups and teams and divisions have performed over the last several years. The non-res sector of our economy has remained incredibly resilient. We had 10 straight quarters over $1 billion earned in that business on the downstream side of our portfolio. And while it was a little bit under that for Q4 of ‘23, its continuing performance is strong. We’re seeing order entry rates that are strong. As we move into Q1, we see that moving upwards. I’m not going to get detailed on the margins, but we see that improving. And so Brad, maybe provide a little bit more context to what we’re seeing as we enter 2024.

Brad Ford: Yes. Thanks, Leon, and thanks for the question. Like Leon, I couldn’t be more pleased with the performance of our downstream product teams. Performance of safety, the clear step change in earnings and the solutions and value we’re providing to our customers and our team is executing extremely well. Joist and Deck tends to get a lot of headlines. And while Joist and Deck is coming off its second best year ever, Nucor Downstream Products is far more than just Joist and Deck. For example, our insulated metal panel group is coming off a record year; rebar fabrication, a record year, pre-engineered metal building, second best year ever; our tubular products group, second best year ever; garage door, fasters, towers, structures, warehouse, systems, skyline on down the list.