Growing Stronger

We are obviously in the midst of a very severe economic downturn, one that we have not seen the likes of in the history of our company. But it is providing Nucor (based in Charlotte, N.C.) and our team opportunities to grow stronger. For Nucor, downturns don’t represent threats to our existence and our survival. What they represent is a challenge and an opportunity to grow stronger, to continue investing capital in strategic initiatives that create long-term earnings power for our shareholders.

FINDING BALANCE

The Nucor team grows stronger in downturns because of a number of factors. First and foremost is our financial strength. We also have a highly variable and low-cost structure. We also have a highly flexible production process that allows us to adjust our production levels to the demands that we see in the marketplace. We also have a very diverse product portfolio and we are a market leader in all of the products that we compete in. Most importantly, our people and our culture are very strong and they allow us to have an approach to the market that takes a long-term perspective in everything that we do. 

Because we are in a cyclical business, we are committed to having a strong balance sheet. At the end of the third quarter [of 2010], our cash and short-term investments were about $2.1 billion. We also in September [of 2010] issued $600 million in 12-year notes with a coupon rate of 4.125 percent. The use of proceeds for that debt offering was the retirement of some debts that mature in 2012. Our total debt at the end of the quarter was $3.7 billion, of that total, $2.35 billion matures in 2017 and beyond. So we have a lot of flexibility in our liquidity position and our balance sheet. In November Nucor issued $600 million in tax-exempt Gulf Opportunity Bonds that mature in 2040, and those are to help fund our DRI (direct reduced iron) project, which we will talk more about later. Finally, I think it is worth noting that Nucor has no material pensions or post-retirement obligations on its balance sheet.

Our financial strength means that we are not encumbered by restrictive debt covenants and we are able to continue the long-term focus of our business model by investing in profitable growth and competitive advantage throughout the economic cycle.

Nucor generates strong cash flows from operations, even at the bottom of the cycle. Our highly variable cost structure reduces our working capital needs in the down cycle, and that partly offsets the effect of lower earnings. In 2010, our cash flows from operations remain positive but they are slightly lower, as working capital needs have been larger this year with some improvement in business conditions from last year.

SCRAP’S CONTRIBUTION

Earlier I noted that Nucor has a highly variable cost structure, and scrap is our largest single cost item.

Scrap prices are driven by the same supply and demand factors that steel prices are driven by. So when demand for steel weakens, scrap prices fall, and this limits the margin squeeze that we experience. Conversely, when scrap prices rise, we have historically enjoyed our highest metal margins and profits. Our founder, Ken Iverson, used to be famous for saying, “I like high scrap prices.”

Our steel mills melt scrap using electric arc furnaces; we don’t operate blast furnaces. These electric arc furnaces are able to start and stop in very short cycles. We can shut them down in 10 minutes. We buy power on a variable basis, on an interruptible basis, from the

marketplace.

This combined with our no-lay-off practice and our highly motivated team allow us to quickly adjust our volume to meet market demand. This flexibility is an excellent tool for taking care of customers and gaining market share as the economy recovers. We are able to more quickly respond to changes in demand since we have our full workforce available.

COMPANY CULTURE

I touched on this already, but the Nucor culture was built around a long-term focus and this is consistent with how we approach every aspect of our business. This long-term perspective when we combine it with valuing our teammates means that we put safety first. That may seem like an odd thing for me to talk about, but safety is the first metric reviewed at every significant meeting across the company, whether we are talking about our general manager meetings at corporate or we’re talking about meetings at the plant. And this gives recognition to the importance of those people and the importance of them going home in a healthy condition every time they come to work.

Our safety focus, our no-layoff practice, our paper performance and our teamwork-focused operating practices result in a workforce that is highly motivated and takes ownership in taking care of our customers and, thereby, taking care of our shareholders. 

Nucor’s long-term focus is evidenced by the sustainability of our business

model. Nucor’s business model is focused on long-term profitable growth. Our team is not interested in just being bigger, we care passionately about growing profitably and generating attractive returns on our shareholders’ valuable capital through the cycle.

STRATEGIZING FOR GROWTH

We have a four-prong growth strategy. The first and biggest opportunity is always to optimize our existing operations. That is why we continue to invest capital in those businesses. We have got a new galvanizing line that is being started up at our Decatur (Ala.) mill, we are adding heat treating at our plate mill in Hertford County, N.C., and those are just a small fraction of the investments we continue to make in our base businesses. We also pursue greenfield growth where we can exploit new technologies or market niche opportunities. The cash strip two that we are building at Blyville is an example of a new leap-frog technology, and the Memphis SBQ (special bar quality) mill is an example of a market niche where large SBQ rounds were not available on the marketplace adequately in North America. We are filling that niche. Item three is international growth via strategic partnerships, such as what we have done in Italy (with Duferdofin-Nucro S.r.l.). And finally we have done a lot of acquisitions in the last few years, and we will do more acquisitions in the future where they make strategic sense.

Nucor’s financial performance through the cycle has been very good. Obviously, though, 2009 was not a very good year for us. The last recession we experienced began in 2001 and ended late in 2003. If you look at that period, there were a number of growth investments during that time that were incurring significant loses. These included our Hertford plate mill, the restart of the acquired Tryco Assets that are now the Nucor Steel Decatur plant, the first caster facility, the second caster at our B mill in Berkeley (S.C.) and a number of other investments. Although these new growth investments diluted earnings during that period, they became significant profit generators and they remain profitable today.

In 2009 we incurred our first loss in the company’s history dating back to when Ken Iverson was the CEO of the company in the ’60s. Our steel mills and most of our downstream businesses operated at less than 50 percent capacity in 2009 as the supply chain experienced a massive destocking. At least demand didn’t get that low for most of our steel products but the demand we saw was reduced as the supply chain went through the destocking process. We also have incurred some significant charges related to the import of pig iron inventories. We had a number of long-lead-time purchases of pig iron under contract and we honored our contracts, because that is the way we do business.

Nucor’s again incurring significant startup losses relating to some of our current growth investments. These future profit earners include our new SBQ mill in Memphis, Tenn., our new galvanizing line in Decatur, our newest caster facility in Blytheville, Ark., and our new heat-treating facility in our plate mill in Hertford County.

In addition we have a lot of latent capacity embedded in our downstream products businesses. Our rebar fab business is bigger today than it was at the peak of the cycle. Our metal building business has been retooled and is stronger and has a stronger distribution network.

Our competitive strength is best demonstrated by looking at our return on capital through the cycle. Nucor outperformed our peers in 2004 through 2009. And what is interesting about that is that we achieved that best-in-class performance with less leverage with a stronger balance sheet.

ONGOING INVESTMENT

Nucor has made some significant capital investments in recent years to expand our long-term earnings power. Over the last four years ...we invested $2 billion in capital expenditures and we invested $4 billion approximately in acquisitions. A number of those investments have not really started generating the returns that they will make through the cycle, so we have got a lot of latent earnings capacity on our balance sheet today.

We recently announced plans to build a DRI facility in St. James Parish, La. This project is expected to cost about $750 million and it will provide 2.5 million tons of iron units to complement the 1.8 million metric tons that we receive from our facility in Trinidad and Tobago. We expect final permitting to be completed by early [2011].

Nucor is now a proven and experienced producer of DRI. [Our Trinidad and Tobago plant] achieves metallization and carbon rates that are higher than we thought were possible. That is one of the reasons that caused us to be excited about building another DRI plant in the U.S.

Nucor Steel Louisiana is another major step forward in our implementation of our long-term plan of having one-third of our iron units under our own control with high-quality scrap substitutes. I am extremely confident and excited about Nucor’s opportunities to grow profitably and to take care of our customers. Jim Frias