At the end of June, Nucor completed the acquisition of Skyline Steel, a partner of Nucor for over 20 years. The combination of Nucor and Skyline Steel uniquely positions the company to grow in the steel piling business. Nucor is the North American leader in production of steel pilings and Skyline is the North American leader in the distribution of steel pilings and is a significant consumer of Nucor's H-piling and sheet piling products. Skyline's product portfolio includes H-piling and sheet piling, 80 percent of which Nucor was the supplier. Skyline also fabricates its own pipe piling and Nucor's mills will allow for growth in that area. Nucor expects the acquisition to be accretive to cash flow immediately and to earnings by Q4.
Nucor's projected 2012 capital spending is roughly $1 billion. It does not believe money should be spent adding capacity since there is currently overcapacity due to slow economic conditions in the United States, Europe, and now Asia. Instead, it is using capital to shore up existing operations, strengthen vertical integration and focus on new product and process developments.
One current project involves the construction of a direct reduced iron (DRI) raw materials facility in St. James Parish, Louisiana. Nucor is on schedule for a mid-2013 start of DRI production and Nucor has no concern that the project will be delayed by the permitting process because the permits are already in place. Nucor is currently permitted for 2 DRI facilities and a blast furnace and coke oven operation. The project is a huge step toward implementing Nucor's raw material strategy. Its annual capacity will be over 2.5 million tons and the ramp up to 2.5 million tons will take only a few months. When combined with the 2 million tons annual capacity from Nucor's Trinidad plants, Nucor will be about 2/3 of the way to its goal to control from 6 million to 7 million tons of annual capacity in high-quality scrap substitutes. Nucor plans to use the mill for either steelmaking activities or downstream activities and an expansion of the company's raw material strategy could be possible in the future.
Nucor expects its raw material strategy to be “a game changer” for growth in the sheet and special bar quality (SBQ) markets for the following reasons: (1) Nucor has already achieved world-class performance in quality, productivity and DRI production at its Trinidad plant, (2) Nucor's investments in natural gas assets have secured it a long-term and low-cost energy supply. Accordingly, it will be able to produce the high quality iron units necessary to produce higher value-added, higher margin, sheet and SBQ products.
Nucor's sheet and SBQ mills are growing their presence in the automotive market. Shipments to the automotive markets increased by 20 percent in the first half of the year and direct shipments to OEM customers increased 25 percent year-over-year. A year ago, 10 percent of Nucor's shipments currently go to the automotive market and that number has risen about 12 to 13 percent and continues to grow. In addition to construction, Nucor is participating in other markets, such as automotive, energy, heavy equipment, consumer durables, agricultural, transportation and industrial goods.
Shortly after the acquisition of Skyline closed, Nucor announced a $115 million project to add several new sheet piling sections, which highlights the growth prospects of the Skyline acquisition. The project will add several new sheet piling sections, which will increase the single sheet widths by 22% and provide a lighter, stronger sheet covering more areas at a lower installed cost.
Profitability at Nucor's steelmaking business was severely impacted by an import surge across most products and its sheet metal business has been challenged by new domestic supply beginning in 2011. Nucor's price per ton declined by 1.4 percent in Q2 versus Q1 as a result of product mix, imports and economic conditions. The fact that Nucor's price declined less than the market is due to Nucor's stickiness with the consumer, which gives it greater pricing power.
Nucor has begun to see a reduction in sheet imports and recently shuttered capacity and reduced operating rates by newer domestic entrants in the business. It has had some success in raising sheet metal prices above recent lows.
Lower scrap pricing has negatively impacted the profitability of Nucor's scrap processing business. Although lower scrap prices benefit Nucor in the long run, they are a short-term negative as there is a lag for the lower prices that make their way through the transportation system and into its actual usage in the mills.
Nucor has seen some slowing of orders through the month across all product lines. However, its backlog and order entry rates are stable for most of its products. For Q3, it believes volumes will hold steady.
Nucor's downstream products business, which makes fabricated construction products, joist and decking, rebar fabrication and preengineered metal buildings had its first profit since 2008. The profit was the result of market share gains, improved pricing and cost management.
S&P ranked Nucor #1 (out of 72 companies) for credit rating and credit outlook in the North American Metals and Mining Company sector. Nucor was also the only metals and mining company in the group that S&P awarded a strong business risk profile and the only steel producer in North America to have an investment grade credit rating. The benefits of the credit rating include a lower cost of capital, financial flexibility and the lowest risk counterparty for customers and suppliers. Globally, Nucor's credit rating is matched only by Nippon Steel.
Financials.
Earnings in the first half of 2012 decreased by 44% from a year-ago.
Q2 earnings per diluted share
was $.35. The results were negatively impacted by a noncash charge
of $0.02 per diluted share due to purchase accounting charges and
intercompany profit eliminations related to the Skyline acquisition.
These costs were not factored into Nucor's guidance for Q2. EPS was
also negatively impacted by a $0.09 per diluted share charge
related to the Duferdofin-Nucor joint venture located in Italy.
Nucor acquired a 50 percent interest in Duferdofin, a producer of
beams and bars in 2008. The charge resulted from Duferdofin's
disappointing performance through the first half of 2012. Nucor's
acknowledges that the timing of its Duferdofin purchase was poor in
the short run, it believes the acquisition is still attractive long
term.
In Q3, Nucor expects a modest reduction in earnings from Q2, excluding the onetime charge of $0.09 per share and adjustments related to the Skyline acquisition. Nucor's Q3 results should benefit from lower scrap costs and an improvement in customer buying patterns if scrap pricing stabilizes, which Nucor expects. However, global uncertainty is a short-term risk. Nucor's guidance recognizes that the economic climate is still very unstable economic and things are moving in both directions. It is still unknown what direction the economy will take.
Cash generated from operations increased by more than 50% to $446 million in the first half of 2012. Nucor's cash cushion tends to grow during downturns because lower scrap and steel prices reduce its working capital investment.
Cash and cash equivalents were $2.2 billion at the end of Q2. Nucor's $1.5 billion unsecured revolving credit facility is undrawn and does not mature until December 2016. Nucor has no commercial paper outstanding. Long-term debt at the end of Q2 was $4.3 billion. Nucor has $650 million of long-term debt maturing in Q4 and an additional $250 million in 2013. It plans to fund those maturities from its current liquid assets and cash flow.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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