Good day, everyone, and welcome to the Nucor Corporation fourth quarter and year-end 2015 earnings call. As a reminder, today's call is being recorded. Later, we will conduct a question and answer session, and instructions will come at that time. Certain statements made during this conference call will be forward-looking statements that involve risks and uncertainties. The words we expect, believe, anticipate, and variations of such words and similar expressions are intended to identify those forward-looking statements, which are based on management's current expectations and information that is currently available. Although Nucor believes they are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy. More information about the risks and uncertainties relating to these forward-looking statements may be found in Nucor's latest 10-K and subsequently filed 10-Qs, which are available on the SEC's and Nucor's website.
The forward-looking statements made in this conference call speak only as of this date, and Nucor does not assume any obligation to update them, either as a result of new information, future events, or otherwise. For opening remarks and introductions, I would like to turn the call over to Mr. John Ferriola, Chairman, Chief Executive Officer, and President of Nucor Corporation. Please go ahead, sir.
Good afternoon. Thank you for joining us for our conference call. As always, we appreciate your interest in Nucor. With me for today's call are the other members of Nucor's senior management team, Chief Financial Officer, Jim Frias, and our other Executive Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Joe Stratman, Dave Sumoski, and Chad Utermark. Your leadership team in Charlotte would like to thank everyone on our Nucor, Harris Steel, David J. Joseph, Duferdofin-Nucor, Steel Technologies, and Skyline Steel teams for your hard work every day to build a safer, stronger, and more profitable Nucor. In extremely turbulent global steel industry conditions, we are taking advantage of Nucor's unrivaled competitive position and highly flexible business model to grow our company's long-term earnings power.
While many of our competitors are fighting to survive this protracted downturn, our more than 23,000 teammates are positioning Nucor to continue to thrive in the years ahead. Jim Frias will now review Nucor's fourth quarter performance and financial position. Following his comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?
Thanks, John. Fourth quarter of 2015 adjusted earnings of $0.46 per diluted share, excluding impairment charges of $237 million, exceeded our guidance range of $0.15-$0.20 per diluted share. Fourth quarter results included a LIFO credit of $218 million, somewhat higher than the $181 million LIFO credit projected in our guidance. The larger than expected LIFO credit increased our earnings for the quarter by approximately $0.07 per diluted share. The biggest factor driving our fourth quarter outperformance was stronger than forecast results for the month of December at our steel mills, particularly the sheet mills and our downstream product segments. Nucor continues to benefit from effective execution of our channel to market strategy and our ongoing investments to expand our offerings of value-added products.
At the same time, all of our Nucor teams continue their unrelenting focus on maintaining our position as the low-cost producer across our extremely diverse product portfolio. During the fourth quarter of 2015, we recorded two non-cash impairment charges totaling $237 million. A $153 million charge reduced the value of our equity method investment in the Duferdofin-Nucor steelmaking joint venture in Italy. In addition, an $84 million charge was taken to write off the entire amount of certain assets, primarily engineering plans and equipment, related to a potential blast furnace project at our St. James Parish, Louisiana site. Due to technology advances and other factors, we no longer expect to use those plans if we proceed with the blast furnace project. Including these impairment charges, Nucor's consolidated net loss for the quarter was $62 million or $0.19 per diluted share.
Our Duferdofin-Nucor impairment charge reflects the ongoing financial performance and deterioration in near-term projections for this business. The 50% ownership in Duferdofin-Nucor was acquired in July 2008 for approximately $667 million. Although market conditions in Europe remain extremely weak, we are very pleased with the dedication and hard work of our approximately 700 teammates at Duferdofin-Nucor. They have achieved very significant improvements in costs and product mix. As one example, conversion costs at our San Zeno melt shop have reached world-class levels. Duferdofin-Nucor is also successfully expanding its portfolio to include value-added and more import-resistant products, such as engineered bar blooms and billets, as well as special profiles. Across the entire organization, our Duferdofin-Nucor teammates have embraced and taken ownership of a culture focused on safety, environmental stewardship, and production efficiency.
All of these initiatives are focused on achieving consistent profitability for the joint venture in the near future. A quick comment about our fourth quarter of 2015 tax rate, as it can be confusing due to the impact of profits from non-controlling interests and the impairment charges. Excluding profits belonging to our business partners and the two non-cash charges, the effective tax rate was approximately 31% for the fourth quarter. Nucor continues to generate very robust operating cash flow in extremely challenging steel market conditions. With our highly variable and low-cost structure, we benefit from significant reductions in working capital during downturns. 2015 cash provided by operations was approximately $2.2 billion, a dramatic increase from 2014's operating cash flow of about $1.3 billion. It also represents our strongest cash flow performance since 2008's record level of $2.5 billion.
Over this prolonged steel industry downturn that began in 2009, Nucor's annual operating cash flow generation has averaged approximately $1.3 billion. That compares with average annual operating cash flow of $500 million through the previous cyclical downturn from 2001 to 2003. 2015 capital expenditures were $365 million. For 2016, we estimate capital spending of approximately $500 million. Depreciation and amortization for 2016 is expected to total about $700 million. Most of our recent larger-scale organic growth projects have been completed or are nearing completion. Nucor's financial strength allows us to invest in capital projects and strategic acquisitions during severe industry downturns when the long-term returns are most attractive. Through the downturn that began in 2009 and continued with a vengeance in 2015, Nucor has invested more than $6 billion to grow our long-term earnings power. That includes capital expenditures of approximately $4.4 billion and acquisitions totaling about $1.9 billion.
Rather than fighting for survival, the Nucor team is executing our strategic plan for driving profitable growth and delivering attractive returns to our shareholders. Nucor's disciplined and balanced approach to capital allocation also allows us to reward shareholders with attractive cash returns on their investment. Over the 10-year period ending in 2015, Nucor has returned a total of approximately $6.8 billion of their capital to our shareholders through dividends and opportunistic share repurchases. With the dividend increase announced in December and effective with next year's quarterly payment, Nucor has increased its base dividend for 43 consecutive years, every year since it first began paying dividends in 1973. Reflecting our success in growing long-term earnings power, the base dividend has increased fivefold over the past 10 years. In December, we began repurchasing shares of our common stock under the $900 million program approved by our board in September.
Our repurchases totaled about 1.7 million shares at an average cost of just under $40 per share. Nucor's financial position remains strong. Our gross debt-to-capital ratio was 36% at the close of the fourth quarter. Cash and short-term investments total approximately $2 billion, which compares with total debt outstanding of $4.4 billion. Our next significant debt maturity is not until December 2017. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn. The facility does not mature until August of 2018. Nucor is the only North American headquarters steel producer to hold an investment-grade credit rating. Market conditions for our steel mill segment remain extremely challenging as a result of global overcapacity and import levels that remain at extremely high levels.
However, we anticipate some improvement in the steel mill segment in the first quarter of 2016 compared to the fourth quarter 2015 due to a lower average cost of inventory to begin the first quarter, a small decline in imports, and more balanced inventory levels at service center customers. The performance of our downstream steel product segment will be lower due to typical winter seasonality. We expect downstream products for the full year of 2016 to achieve notably improved performance compared to 2015. Performance in the raw material segment should increase slightly over the fourth quarter level as Nucor Steel Louisiana resumed production earlier this week following its extended fourth quarter maintenance outage. Margins are expected to improve modestly in our scrap recycling business.
We are confident that Nucor's significant competitive advantages and highly adaptable business model will allow our team to continue to execute our proven strategies for delivering profitable long-term growth and attractive returns to Nucor shareholders. We appreciate your interest in our company. John?
Thanks, Jim. I am proud of the results achieved by our teammates in one of the toughest steel markets in decades. Because of their work, Nucor is growing stronger and actually thriving compared to our peers. First, I will comment on the overall industry issues we face today. It is not an exaggeration to say that the global steel industry is in a crisis. The crisis is a direct result of foreign governments, particularly China, blatantly subsidizing their steel industries. In further violation of international trade rules, this glut of global steel production has led to the dumping of steel products into the U.S. market. Despite the highest level of domestic steel consumption since 2006, the American steel industry capacity utilization in 2015 was around 70%. Pricing for most steel products essentially collapsed.
Nucor's culture has always been defined by our willingness to tackle challenges head-on and focus our energy on what is within our control. To that end, Nucor continues to be proactive and aggressive in pursuing trade cases whenever and wherever it is appropriate. When foreign producers and governments break mutually agreed upon trade laws, there must be meaningful consequences. Nucor has joined other U.S. steel producers in filing trade cases for hot-rolled, cold-rolled, and corrosion-resistant flat-rolled products. We are pleased that the International Trade Commission made preliminary determinations of injury in all three cases. Regarding the preliminary duties announced by the Commerce Department, we are satisfied with the duties applied to products from China in the corrosion-resistant and cold-rolled cases. But we are extremely disappointed in the other determinations and believe that the facts support higher duties.
However, we are confident that the government will be more aggressive in its final determinations after further analysis is done. Another important trade issue in 2016 is China's bid to gain recognition as a market economy under its protocol of accession to the World Trade Organization agreed to in 2001. Over the past 15 years, China has failed to implement the reforms necessary to become a market economy. China remains a government-run, non-market economy today. Therefore, the U.S. has no reason to change its treatment of China as a non-market economy. Great challenges provide great opportunities for great companies that are ready to seize them. At Nucor, we are more than just ready. We are doing it. We are on the offensive and growing stronger. Our multipronged growth strategy is simple and flexible.
That strategy is supported by Nucor's five drivers to profitable growth, which highlight where we are focusing our energies to build long-term earnings power and provide our shareholders with attractive returns on their valuable capital. Here they are. One, strengthen our position as a low-cost producer. Two, achieve market leadership positions in every product line in our portfolio. Three, move up the value chain by expanding our capabilities to produce higher quality, more import-resistant products. Four, expand our downstream channels to market to increase our steel mills' base load volume, especially in weak markets. Five, achieve commercial excellence to complement our traditional operational strength. Our performance in 2015 provides numerous examples of how we are growing stronger in this downturn and positioning Nucor to deliver higher highs in profitability during the inevitable cyclical upturn.
Despite the challenges, illegally traded imports, and less than robust capacity utilization rates, our bar mills delivered solid profitability in 2015. The keys to their success are powerful and sustainable. Market leadership positions, strong channels to the market, and an unrelenting focus to drive costs lower. Our Fabricated Construction Products group achieved very strong year-over-year profit growth in 2015 and actually approached the record profitability reached in 2007. That is very impressive when you consider the fact that U.S. non-residential construction activity for 2015, as measured by square footage, represents less than 60% of 2007's peak activity. In addition to their strong market leadership positions, Nucor's Fabricated Construction Products enhance the through-the-cycle profitability and flexibility of our steel-making businesses. Our structural steel business also delivered attractive earnings growth in 2015 while working against strong headwinds from high import levels and low mill capacity utilization.
Impressive results were delivered by all of our structural steel teams, our Nucor-Yamato mill, our Berkeley County, South Carolina mill, and our piling distribution business, Skyline Steel. Nucor's ongoing success in the structural steel business continues to be powered by our market leadership position, strong channels to the market, and the new product introductions that continue to move us up the value chain. Our Nucor-Yamato structural mill is continuing to expand its value-added product portfolio. In 2015, Nucor-Yamato began shipping its wider sheet piling sections. These new products are already enjoying strong marketplace success. We see significant opportunities for profitable growth in this market, which currently is largely supplied by imports. Further, during the second half of 2016, Nucor-Yamato will begin commissioning its $75 million quench and self-tempering project. This investment will position Nucor as the sole North American producer of high-strength, low-alloy beams.
Our Berkeley County, South Carolina sheet mill achieved a very solid fourth quarter and full year 2015 profitability in what can best be described as horrific flat-rolled market conditions. The Berkeley team continues to capitalize on their investments in vacuum degassing and the wide-light capabilities provided by caster and hot mill equipment upgrades. New products from the wide-light modernization are allowing us to gain new business in a wide range of end-use markets, including metal buildings, rail cars, water heaters, automotive, heavy equipment, and motor lamination. Of particular note, Nucor's automotive business continues to grow with work awarded by a diversified and high-quality portfolio of automotive OEM customers. Highlighting Nucor's overall commitment to profitable growth in the automotive market and our strategic focus on commercial excellence, we opened a Detroit sales office earlier this year.
Our shipment rate to the automotive market from our sheet and SBQ bar mills increased by about 20% in 2015 versus 2014 to approximately 1.4 million tons. We believe the time could not be better for a financially strong and technologically advanced steel supplier, such as Nucor, to make a more significant contribution to the automotive industry. In November, we acquired Gerdau's cold finish bar facilities located in Ohio and Georgia. Adding combined annual production capability of 75,000 tons, this acquisition strengthens Nucor's market leadership position in this very attractive value-added business and important channel to the market. I warmly welcome to the Nucor family all of our newest teammates in Orrville, Ohio, and Cartersville, Georgia. Our list of five drivers to profitable growth begins with the objective to strengthen our position as a low-cost producer.
Nucor's DRI production capability, with its excellent conversion cost structure, has significantly strengthened our position as a low-cost steelmaker. It gives us the flexibility to optimize Nucor's overall iron units mix, and most importantly, cost. Consistent with our announcement earlier this month, our DRI plant in Louisiana has resumed operations and is producing high-quality DRI. Recent changes in raw material pricing led to this decision. These are challenging times in the steel business. But for a company such as Nucor, one that is in a unique position of strength, these are also times of great opportunities. Here's what I see throughout Nucor. The right people working with that typical high energy level and sense of urgency to seize these opportunities for profitable growth, ensuring that Nucor's best years are still ahead of us. Thank you for your interest in Nucor. We would now be happy to answer your questions.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Tony Rizzuto with Cowen and Company.
Hi, all. Hi, John.
Hey, Tony. How are you?
Good. Happy New Year, everyone.
Happy New Year to you.
John, my first question to you, I just wanted to know on the trade side, what gives you the confidence the final decision will bite harder and be more broad-based, first of all?
Well, let me start by saying that we take a hard look at the data. As we view the data, and as we are anxious to go back and present it to the Commerce Department, we feel confident that we can prove a stronger case than came out in the preliminaries. We are pretty confident that as they look at all of the facts, remember that during the preliminary findings, they see only some of the facts presented by, frankly, from the countries that we are looking to gain some tariffs or duties from. They do not see the whole picture. We have an opportunity during this period to present our case, and we are confident that when we get to present our case and get a more balanced view in front of them, they will come out with a stronger duty determination in the final determination.
Fair enough. In this environment, provided that they do see a little bit more on the way of the industry and their final determination is a little bit stronger. We still have, obviously, there are certain end markets which are, some call in recession, and the U.S. dollar is still fairly strong, raw materials at depressed levels. Can you envision hot rolled moving sustainably above $450 per ton?
Well, I will tell you what, it is very difficult to project where pricing is going to go. Let me answer maybe by addressing your earlier point that we do recognize at Nucor that despite our best efforts and effective trade cases, effective trade action, we recognize that because of the dollar, there is always going to be some challenges on the import front. Which is why when you look at our strategy and how we have developed our products to move up the value chain, we have got a strategy that we use to help insulate us as much as possible from the imports. Higher valued products that are harder to import. We continue to develop a stronger channel to the market. That provides a nice barrier for us, gives us some protection from the imports. We are taking this from a two-front battle.
One, we are continuing to fight the imports, the illegal, unfairly traded imports. Let me be real clear about that. We do not have a problem with imports. We have a problem with illegal, unfairly traded imports. We will continue that battle, and we will continue with our strategy of moving up the value chain, gaining more market leadership position in the products in which we participate, and to continue to develop our channel to market.
Thanks for that. Just talking a little bit further about that, I was intrigued by your comments about market opportunities you see. I wonder if you could talk a bit further about the opportunities you see to further penetrate the automotive and maybe HVAC. Is it possible to quantify the opportunities in terms of volume and margin potential that you see? Sounds like a lot of things you're doing.
Let me address that from the automotive front.
Yeah, sure.
That's probably where we feel that we have the greatest opportunity.
Right.
As you know, that we've increased the sales in automotive on a delivery basis by about 20% over last year. Today, we're at about a 1.4 million ton a year market penetration. We fully expect to be able to get up to 2 million tons over the next couple of years, and that's going to be in both sheet products and in our SBQs. As we continue in sheet, we move up the value chain into the advanced high-strength steels. Particularly when you think about what we've done at our Berkeley facility with the Wide-Light project, that's given us the ability to continue to move even higher in the strength sheet steel products while maintaining the light gauge that they need in the automotive applications. We feel very good about our sheet penetration into automotive.
I'll also point out that on our SBQ, we continue to develop more and more products. Bear in mind, Tony, that as our team does a great job selling to the automotive market, our products present great opportunities for the automotive customers. But let's be honest. The automotive industry is taking a look at the entire steel industry today, and they look at Nucor and our balance sheet, and they see a long-term, sustainable supplier. When you think about how they order steel, they order steel today. It takes a long time to get qualified. It takes you years to go through that entire process. The steel that they're ordering today can show up on a flat that's not even going to roll out for two to three years from today.
They want to make absolutely certain that after they've gone through the entire qualification period, that when they roll that product out, that new flat out in two to three years, they want to make certain that their steel supplier is going to be there and able to supply the steel that they need to keep their factories running.
Great points. I wonder if you could comment. I've been hearing about a competitor perhaps losing some people on the R&D side out in the heavy auto area in Michigan. Since you guys opened up that office out there, I'm wondering if you might have been able to attract a few of those folks over to your shop.
Well, let me just answer the question this way. The most qualified people that are out there are going to look for companies to work for, companies that they know are going to be around for the long term. All I'll say is that when you look at our balance sheet, and when these potential candidates take a look at our company, one of the things they bring up to us all the time is that, "Look, we want to get with a company that we know is going to be there for the long term. I want to finish my career with a company." Not only are they impressed with our balance sheet, but once they come down and spend some time with us, they like our culture. They like the concept of working for the Nucor family.
Yes, we have great potential to attract the best people out there. Having opened this office in Detroit, I'm telling you what, that was a great move, and we opened it, I guess it was two months ago, we had the grand opening. I'll tell you, Tony, we had over 200 customers come by and talk to us, and the one thing that we heard consistently through that two- to three-hour period was there's a major concern about the sustainability of some of our competitors in this industry, and they're anxious to do more business with Nucor as a result of that. Now we're going to move on and give someone else a chance to ask some questions. Thank you, Tony.
Absolutely. Thanks, John.
We'll take our next question from Matt Murphy with UBS.
Hi, good afternoon. Maybe just picking up from there in terms of R&D and auto. Can you summarize what some of the main steps the mini mill industry has to do to make more inroads on auto? What is the key quality steps you've got to make, and how quickly can you make them to make more meaningful inroads?
Well, I'm going to speak just to Nucor because I can't speak for other competitors. Probably the biggest issue we have in front of us today is getting through the qualification period. It's an issue of timing. When you talk about what products do we need to develop to be able to get a piece of penetration into it, I would tell you that today, we're producing just about all the products we need to get our full penetration into automotive. We're making advanced high-strength steels. We have great quality steel going to the automotive industry. So we're where we need to be in terms of products today. Now, having said that, what's good today is not good enough tomorrow.
We need to continue to work on developing even more sophisticated grades that have higher strength while still maintaining flexibility or improved flexibility for the designs that are coming out in the future. So there's always more to do, but I want to be clear about this point. Today, at least at Nucor as a mini mill, we can produce virtually every type of steel that's needed in automotive. One of the questions that I'm always asked is about exposed automotive quality, and I've answered this question several times, but I'll say it one more time. Today, we have the ability to produce exposed automotive that is actually out there on cars going through a qualification period. We're very comfortable with the products that we can supply and the quality that we can supply.
Now, as I mentioned earlier, there's a very long qualification period, and then after the qualification period, you have to wait for the flat to be introduced that your steel is being specified on. So there's a period of time it's going to take to grow to this 2 million or better tons a year level with automotive, but it's strictly a question of working our way through that time period now.
That's helpful. Thanks.
You're welcome.
We'll take our next question from Chris Olin with Rosenblatt Securities.
Hi. Thanks for taking my question. Just wanted to talk a little bit about the rebar market. I know you mentioned that December shipments were running a little bit better than you guys expected. I was just curious if you saw any order strength from the impact or the implementation of the new highway bill. Are you seeing public spending dollars starting to flow into your business?
It is really too early to see much of an impact on the highway bill, although we really are pleased that the government, after what has it been, more than a decade of having short periods of time, it is great to see them come out with a five-year plan. Frankly, we believe that they need to go even further and have a longer-term plan for the infrastructure of our country. It is desperately needed. To answer your question directly, we haven't seen much of an impact right now. We expect probably in 2016, we will begin to see some effect, but we believe that we will see the more significant impact starting in 2017.
Just as a quick follow-up, have you ever tried to calculate the potential market impact from the spending dollars? Any thoughts on how much volume could be generated for the industry just from roads and bridge projects coming up?
I don't know that we've ever tried to figure out an exact number. I will tell you, when you look at the product breadth that we have to offer, the types of products that we have to offer, not only are, you mentioned rebar, but think about the plate applications that go into infrastructure, okay. So we've got bar products that go in there. We've got plate products that go in there. Oh, by the way, don't forget, a lot of this work is going to be going into bridges, and we've got great piling that we can offer today. We offer piling products that only we produce domestically. As I always like to say, when you're going to build a bridge, we can supply every type of steel you need in that bridge.
When you're all said and done, we will sell you the nuts and bolts to put it together from our fastener division. When I look across the spectrum of companies in our industry, Nucor, I believe, is positioned better than most to take advantage and gain the most out of this highway bill as it comes into fruition and the dollars begin to flow.
Thanks, John.
We'll take our next question from Chris Terry with Deutsche Bank.
Hi, guys. Just after a little bit more detail on the CapEx outlook for 2016. I think you mentioned a number of $500 million and talked about $75 million for Yamato. Just wondering if you can give a breakdown of how the CapEx layout looks for the year.
I'm sorry, I missed the second half of the question.
The question is, we mentioned the $75 million going to QST, and we talked about a total budget of about $500 million. He's looking for a little bit more color on how the rest will be distributed. Couple of things. We always have our maintenance CapEx, which accounts for somewhere around $300 million to $350 million, typically. Is that a good number?
Yeah, that's right. There aren't as many large organic projects right now in the pipeline separate of the quench and temper project at Nucor-Yamato.
I would mention one other, Jim, if I would, and that's the Memphis heat treating project, right. We're going to be adding heat treating capability at our Memphis facility. An earlier question was about automotive. That'll also help us move further into the automotive. We can heat treat our own product coming out of Memphis.
Although we've already spent most of that money because it was required. It's just going to be more installing than spending fresh capital.
Okay. But that's another project that we're doing.
It is, yeah.
Those are two that we can mention. As Jim said, most of the large ones, and we're kind of happy about it, most of our large ones, we're past the phase of where we're spending the money. We're well into the startup, and frankly, past the startup, and we're beginning to see some of the returns from these projects that we've invested in heavily. We mentioned several times the wide-light project, we mentioned piling project, I'll mention the DRI project. So it's nice to be past the point where we will have spent on the existing projects. Now, having said that, I want to be very clear that I can't give you any specifics as to what we're doing, but we believe that there's many opportunities, both organically and through M&A activity, to continue to grow our business, and we're anxious to do that.
Just because we're planning on a $500 million budget, that doesn't mean that that's where it will be at the end of 2016.
Okay. Thanks very much. Is there anything else you wanted to say on the acquisition side or the competitive advantage? You've obviously talked quite a bit about the auto space, but specifically what sort of industries you're looking at there or what opportunities you actually see.
Well, I tell you what, I would love to talk about that, but I don't want to go to prison. Okay? There's really nothing that I can say about it other than this. I'll make this a general comment, and it's going to go back to our five points of profitable growth. If you look at those areas that we talk about, they're going to be things in which we can continue to improve our market leadership position in the markets in which we compete. There'll be things that strengthen our channel to the market. There will be things that continue to move us up the value chain, our products up the value chain, making them more import resistant.
I don't want to leave out one of the most important ones, and that is we will continue to invest in our operations in ways that will continue to lower our cost of operation. Because at the end of the day, we're in a commodity business, and we're in a global commodity business, and the way to succeed in a commodity business in a global marketplace is to be the low-cost producer. We will continue to invest to lower our cost of production, which obviously was one of the big reasons we invested our $750 million, $780 million in our DRI facility. That's more of a general answer to your question, but that's really all I can give you.
No, that's fine. That's all I was after. Thanks very much.
Thank you.
We'll take our next question from Timna Tanners with Bank of America Merrill Lynch.
Yeah. Hey, good afternoon, everyone.
Good afternoon, Timna. How are you?
Good, thanks. Wanted to ask about your costs and about uses of cash. Just for starters, can you provide a little bit more clarity on your SG&A run rate since it dropped off sharply fourth quarter versus your run rate first three quarters of the year with $125-ish, then went to $84 million. Similarly, getting a lot of concerns over the LIFO swing potential into the first quarter. Can you provide a little bit more context for how to think about that?
Yeah, I'll take that. First on the SG&A, we are a pay-for-performance company. We have a significant amount of our compensation across the company, including profit sharing for all employees that's affected by our profitability. The impairment charges did result in a reduction of our obligations to incentive compensation. That's the first point, and that's why the second half run rate is different than the first half. The second point you asked about was, remind me again, Timna.
Oh, yeah. The concerns over the LIFO swing.
Yeah, LIFO. On LIFO, it's based on where we have a view about where the long-term raw material prices are going. It's hard for us to predict what scrap is going to do over 2016. We begin every year with kind of a conservative view that scrap is going to go up some, and we book some expense in the first quarter, and that's what we're being more transparent about in our guidance regarding the first quarter. But clearly, with that view, without knowing what the final outcome is going to be, we are going to have some LIFO expense. It's non-cash, but we will have LIFO expense in the first quarter to position ourselves to move either way based on what really happens to scrap prices as the year unfolds.
Okay. My other question was regarding uses of cash, and I know you've already highlighted your five areas of focus and talked a little bit about what M&A might look like. But if you could comment specifically on the buybacks. We couldn't find evidence of much buyback since 2008. Does this mean that this is a new focus for the company? Does it mean you're not finding better M&A alternatives and therefore finding your shares a better use of cash? Or can you talk to us a little bit about your thinking there?
Yeah, I'll be happy to address that. We always have three approaches to our capital allocation, and let me make sure that I highlight the first one, and the first one is to invest in profitable growth of our company. That is always our first focus. I want to be clear, Timna, we believe strongly that there are many opportunities to continue to invest in the profitable, sustainable growth of our company, both internally through organic and externally through M&A activity. So that's the first objective. That'll always be our first objective. Second objective in capital allocation that we always look at is to make sure that we return our shareholders' valuable capital to them in an appropriate way. We look at a dividend as being a very appropriate way to do that. We think it's a good dividend. We think it's a well-balanced dividend.
We look to maintain a prudent payout ratio between the supplemental and our base. We look forward to the days like we had in 2005 and 2006, when we have such good cash flow coming in that we can increase the supplemental dividend and return more of the capital to our shareholders. So that's our second objective. Our third objective, as you mentioned, when we can't beat either of the two first ones, is to look at stock as a potential buyback. So those are the three areas that we look at. I'll point out that there's a lot of questions about the cash and our cash position today. When you look at 2015, we generated a lot of cash in 2015. If I have it correct, I think it's the second highest that we've had since, what? About 2005?
It's our highest since 2008, which is our record year.
Highest since 2008. Now we have a lot of cash on hand, but let me be clear again, we feel that we have a lot of opportunities to spend it wisely in a disciplined manner, okay? In a flexible, disciplined manner to grow our company. If we don't see opportunities out there that return on our capital, return on invested capital that we're looking for, then we'll do the prudent thing and either return it to our shareholders or buy stock. Right now, when we look at all three of those, we saw during the past month, stock was a good opportunity, and we bought some stock. It is definitely not a major change in our position or direction or anything like that. I want to be really clear about that.
Okay.
Does that help, Timna?
Yes, totally. Thanks a lot.
You're welcome.
We'll take our next question from Phil Gibbs with KeyBanc Capital Markets.
Hey, morning. Excuse me, good afternoon. Long day. It's been a long day.
Boy, you're just trying to throw me a curve, weren't you?
Yeah, something like that. I had a question just on your sheet mix and how much of the shipments last year went to the hot roll market versus the downstream market. Any way that you could help us think about that?
Well, when you look at our mix, about 55%-60% of it goes to hot band, and the rest is pretty well split evenly between cold roll and galvanized. Maybe we are just a bit heavier on galvanized. Basically, I would say, an easy way to remember the numbers, which is what I need, I use 60% hot band, 20% cold roll, and 20% galvanized. That is pretty close.
Okay. I appreciate that. I was interested in the comments on notable 2016 improvement in the Fabricated Construction Products piece of the business, and given the fact that at least we were thinking that there were some pricing resets occurring on maybe some rebar fab and potentially some cold finished bar product. How are you thinking about the meaningful improvement? Is it volume related? Is it pricing related? How do we get there?
I am going to toss that over to Ray.
Yep. Thank you, John. Our improved profitability in 2015 and expected in 2016 is a result of a couple of things. A strong operational performance by our teams led the way, in my view, with lower costs, and we expect those to continue in 2016. We also continue to see improving demand for our products and services in our downstream businesses, and we continue to lead the market in technology such as our 3D BIM modeling, and again, continue to add value to our products.
I hope everyone understood the comment about the BIM. What that allows us to do, that's a very sophisticated computer system that we use that helps us design buildings. What it allows us to do is to tackle and build more complex structures, which are higher margin structures, and it also impacts our cost. So it has two very positive effects for us. Ray hit the nail on the head. I want to just make a shout-out to my team out there and say, great job, guys. I'm really proud of the fact that if you look at all three of our downstream businesses, we had a very good year. We expect another one in 2016.
Ray, maybe a comment about our shipments in 2015, how they compared to the previous year, given the fact that when you look at McGraw-Hill Construction, the demand for non-residential construction was actually down 5% or 6%.
Yep. Sure, John. The non-res market is, as you said, it was down in 2015 about 5% to 6% in new construction starts, and backlogs in all of our key downstream business segments are up.
Our shipments-.
And our-.
In 2015 were basically-.
Basically-.
The same, a little higher.
Flat. Up a little bit. Yes.
Up a little bit than 2014.
Correct.
The team did a great job. Even though the demand was dropping, we were able to maintain our shipments, and we were able to improve our profitability. That's the formula for long-term success right there. Great job, team. Thank you.
Hey, John?
Yes.
Then just the last one I had. You said the recent changes in the raw material price environment led to getting the DRI back on track. Just clarifying what you meant on that, given that iron ore prices and pig iron prices have been relatively stable over the time frame. Just looking for some more color on that, and I think it's just a question that I've been getting a lot from investors. Thank you.
Well, the key word that you used there is relatively stable. When we look at it and we see an increase of $20-$30 a ton on scrap and a $10 increase in pig iron, that might be relatively stable, but when you buy 15 million tons of scrap and 5 million tons of pig iron, that's a big change. We felt that, as we talked through with our DJJ team, who's out there all the time working in the marketplace, we felt that we could attribute at least half of that to the fact that we were taking the DRI plant offline. Since when we finished the maintenance outage at the end of last month, we were at a point where we had to make a decision as to bring it back on or not.
We were basically break even on a marginal contribution basis. We were kind of up in the air as to what to do. We thought it was a good opportunity to leave it off. We've always believed that bringing it online had a significant impact for us on our cost of scrap and pig iron, so we said, "Hey, here's an opportunity to take a look and see in fact what happens." We left it off. We saw a bump go up in scrap, $25-$30 a ton across the spectrum on scrap and about $10 on pig iron. Well, again, that's a huge impact for us. We brought it back online because of that.
I came away from the whole thing, and the team came away from the whole thing more convinced than ever that although you might not see immediate profitability in the DRI plant itself, when you look at the overall impact to our company on iron units, which represents 60% of our costs, the overall impact to our company is significantly better running that DRI plant than not running the DRI plant, even if it is not profitable in its own right.
Thanks, John.
Okay.
We'll take our next question from Andrew Lane with Morningstar.
First, just from a housekeeping perspective, my apologies if I missed it. I heard the comment about $300 million-$350 million of maintenance CapEx. What's your full-year CapEx guidance figure, and then also for D&A?
The depreciation and amortization is about $700 million, and the CapEx is about $500 million based on the things we have planned today.
Okay, great. Thanks. I wanted to ask about scrap flows. How are you seeing scrap flows currently in the recycling market, and would we need to see a significant improvement in scrap flows for your recycling operations to restore positive margins?
Joe, you want to take that one?
Sure, I will. Thank you. Scrap flows over the last 60-90 days have been basically flat. But on a year-over-year basis, they are still down, running down probably 25%-30%. The second part of your question, I think, let me take a shot at looking at it this way. Our DJJ business model is a very diverse business model. We sometimes get caught up in thinking that it is only a recycling business with scrap yards. But we have five or six different business elements in our DJJ business, and the recycling group alone, as a part of that, only represents about 15% of the DJJ revenue flow. So the DJJ business model financial performance does not extensively rely on the recycling group. For the recycling group to see improvements, really all you need, it is not as much flow-based as much as you need stability in the pricing.
In other words, for most of 2015, we were seeing significant drops in the market price for scrap, and that is kind of like catching a falling knife. You can never really catch up with it. Once prices stabilize or shows any sign of increase, then that is what drives margins and profitability at the recycling group more than just volumes.
Does that help?
Yeah. Great. Thanks very much.
We'll take our next question from Brian Yu with Citi.
Thanks, and good afternoon, John, Jim, and team.
Good afternoon, Brian. How are you?
Good. First question is this touches on your auto comments a little bit earlier, but a bit broader. The various blast furnace operators out there have said contract price will reset lower, but they're really not giving any indications of whether or not they've lost business in that process. I know you mentioned your auto shipments are going to improve. If we just look at the broader contract picture and the OEMs that you have done business with in the past or any new ones you've got, were you able to win in new customers going into 2016? Is it possible to give us an order of magnitude? How much more does that baseload your order book for this year?
Well, I can only talk in terms of what I've always said in terms of the amount of tons that we are selling into it. So our order entry rate will result in about 1.4 million tons we sold in 2015. We think it'll be up a little bit in 2016, maybe to the order of 1.5 million tons or 1.6 million tons. But we do think over the next two to three years, based upon the interest we have, people that are working with us on qualifying our products, we feel very comfortable in saying that we'll be up in 1.9 million tons or 2-million-ton-a-year range within the next couple of years. Does that answer your question, Brian?
Yeah, it does. I was thinking maybe a little bit more broadly than just autos and appliance producers and machinery companies.
Oh, I'm sorry. Okay.
Yeah.
Well.
I think, John, in that case, the 2 million ton number is right for next year versus in two or three years.
Oh.
When you include the broader market.
Yeah. If you take the entire market, if you call it across the market, I would say that we're looking at about 2 million tons.
Of contract business.
Of contract business next year.
Of next year. What is that versus what you did in 2015?
It was a little bit less, not significantly less in terms.
10%.
Maybe an improvement of about 10%.
Okay, that's helpful. The second question I've got is, this goes back to the fabrication business. As you guys have noted, profitability is up. Shipments were kind of sideways, and pricing is down a little bit. The one thing, and not taking anything away from your team there, but steel prices did come down a lot.
Oh, yeah.
I am thinking that maybe the drop in steel prices did improve margins.
We were remiss in not mentioning that. You are absolutely correct, and frankly, I apologize for that because one of my notes that I have right in front of me here said steel pricing, and we forgot to mention it. But I have to tell you that we looked at this carefully, taking that into account, and we are very comfortable saying that still our team did a great job on lowering the cost exclusive of our steel costs. And we are confident that the other things that we mentioned played a large role in the profitability picture.
John, if I might add, and adding value to the construction projects we work on, and through our channel to market and with our customers. So our team has done well in that area, but certainly to reinforce, reduced steel prices certainly helped in 2015.
Okay.
Thank you.
The other part of my question was just going to be, given that you are guiding for increased profitability in 2016, it sounds like you are getting better prices above your input cost in 2016 versus 2015. On the volume side, are you looking for a pickup in volumes out of the downstream business in 2016?
Well, the only thing I can tell you on that is, we look at our order entry rate, and we look at our backlogs. We feel that the backlogs are very strong. Our order entry rate is strong. Our best estimate today is that we will see an improvement about 5%-6% in all businesses in 2016 versus 2015. If you look at the pundits, the McGraw-Hills and so forth, they are saying, I think 6%-7% improvement. We think across the industry, that might be a little bit aggressive, but we think in our business we will see 5%-6%.
Great. Appreciate it. Thank you.
We'll take our next question from Garrett Nelson with BB&T Capital Markets.
Hi, good afternoon. There's been some data suggesting there's been a bounce in domestic steel capacity utilization rates over the past month or so. Is that consistent with what you're seeing across the industry? Should we expect to see a rebound in Nucor's volumes with utilization appearing to be moving up and with imports and inventories having come down a bit?
Well, you kind of answered the question for me. Imports are coming down a little bit. In addition to imports coming down a little bit, the service center inventories are down a little bit. Bottom line is, yes, we do see our utilization rates increasing as we go into the first quarter. Also remember that we're moving into a period where we've kind of come out of. Well, fourth quarter is usually the weakest quarter in terms of the steel business. We're kind of coming out of that quarter. First quarter, second quarter, we typically see an improvement in utilization rates, and we think that we'll continue to see that. You mentioned the slowdown in imports. You mentioned the reduction of the inventories in our service centers.
But I would also mention to you that there's been quite a few shutdowns from some of our competitors, and we believe we'll see some improved utilization as a result of that also. Also, look at with pricing, we're seeing a small bounce in pricing. When you see a bounce in pricing, typically that kind of gets things going again. Customers, when pricing is going down, are kind of waiting till they hit the bottom. As you know, we've increased pricing in several of our products, and those price increases have been holding. We feel pretty confident that we've stopped the slide, and we're moving back up. Customers see that also, and the order entry rates go up.
Okay, great. In the past you've said one of Nucor's goals is to control 6 million-7 million tons of annual capacity in scrap and scrap substitutes. Is that still your goal, or has your thinking changed at all in light of the drop in scrap prices that we've seen over the last several quarters?
Frankly, our thinking has not changed at all. We still see that as a key long-term strategic goal. Again, I've said this several times that at Nucor, all of our strategies are pointed towards long-term, sustainable, profitable growth. At the end of the day, we still believe very strongly that I'm not sure whether it's going to be 5 years, 7 years, or 10 years. But we believe that as a result of the manufacturing decreasing in the United States, and several other things, we'll be glad we have that DRI plant. Just remember one other thing. We're very heavy into pig iron. That's very important to us. Right now, we get about 70% or 80% of our pig iron out of Russia. The rest of it is coming out of Brazil. Those are not the most stable places in the world geopolitically.
HBI, which is another potential product that we could use as a scrap substitute, comes out of Venezuela. That's also not a very stable geopolitical area. So when you look at all of these facts and you look at our goal of being flexible, okay? Long-term, having flexibility and balance across our portfolio. In a cyclical business, whether scrap pricing is cyclical, iron ore pricing is cyclical, pig iron pricing is cyclical, steel pricing is cyclical. When you look at that, I believe that the key to long-term stable returns to our investors, the best way to accomplish that is to have a nice balanced portfolio and a flexible portfolio that allows us to move things around as we need to optimize the cost, provide the lowest cost of product inputs, and to optimize our margins coming out of our mills.
Sure. Makes a lot of sense.
So, long-winded answer to your question, but no, our strategy hasn't changed. We believe it's the right strategy, and we're going to continue with it.
Makes sense. Thanks for those comments.
We'll take our next question from Aldo Mazzaferro with Macquarie.
Yeah. Hi, good afternoon, Jim and John.
Afternoon.
I noticed how sharply your scrap costs fell in the fourth quarter, and I note also, though, that it's been lagging the index on the industry, if you take some of the published numbers. I am wondering, your comment on the first quarter, that low scrap would help you in the first quarter, do you think there's a chance you're going to see, even if the index is, say, flat to slightly up in the first quarter versus the fourth, the actual cost of your scrap that you consume probably goes down a little bit?
John, let me start that. You're right. There is a lag between the index and our performance because we always have some scrap inventory we own in our steel mills. The indexes don't reflect what we're consuming, they reflect what we're buying. So you're right.
Right.
The bottoming of scrap prices that happened during the fourth quarter, we're going to benefit from some of that to start the first quarter. John, if there's more you want to add to that.
You took the words right out of my mouth, Jim.
Okay, I'm sorry.
It's okay.
Then Jim, one other follow-up on that. The large LIFO credit you took in the fourth quarter, does that help? Would that lower the average cost of scrap in the first, or would that actually keep it higher than it may be?
It does not go through the scrap line, so it doesn't affect the scrap costs we publish at all. It's in the corporate elims line where we show the segments, in fact.
And also, Jim, there might be one thing that I would want to add to your comments, and that is you have to look at that by segment, right? Because when you look at our bar mills, we have a lot less scrap on the ground. In fact, some of our bar mills, just because they're geographically challenged, okay. We don't have a lot of room. Some of them have as little as two to three weeks of scrap on the ground. Then you take a look at our sheet mills, and not only do they necessarily have to have more on the ground, but it's a different mix. And the mix that they use will depend upon the mix of products that they're producing.
So it's a very complicated process that you go through, but the impact that you mentioned, Jim, will occur more on a larger plate and sheet mills.
Thank you.
Just to give a little more color.
Right. Could I give one more question? Separately, is there any way you could comment on your lead times in the sheet products and the long product?
Yeah, we can do that. Hot band, that's the shortest lead time. We're probably only out a couple of weeks, maybe three or four weeks in hot band. But when you look at cold and galvanized, we're probably out to March, towards the end of March for our cold and galvanized.
Great. Thank you.
We'll take our next question from David Lipschitz with CLSA.
Good afternoon.
Hey, David, how are you?
Good. How are you? Good. You might have answered this a couple questions ago, but a couple of your competitors have taken impairment charges on their scrap facilities. I was wondering, where do you guys stand with DJJ?
Well, we are not going to answer that question directly. What we will say is that we do our impairment testing every year, and we always look at all of our operations, and we are comfortable with where we are with that. I am going to refer back to what Joe said earlier about the business model at DJJ being different. We are not going to comment on what our competitors have done in terms of write-downs. But when we look at our business model, as Joe mentioned, it is much more than simply recycling. In fact, the vast majority is out of recycling. And when we look at our brokerage, when we look at how they are performing, we are very comfortable that we are well within the range of having a comfort level on impairment.
Dave, if I could add, John's absolutely correct. When you look at that mix within what we call the DJJ business, the non-recycling components, the recycling components can be a little bit cyclical, but the non-recycling components provides a very, very stable and very, very healthy earnings and cash flow stream. That diversity adds a lot of strength to the value of the DJJ model.
Okay. Thank you very much.
With no further questions at this time, I'll turn the call back over to Mr. Ferriola for any additional or closing remarks.
Let me conclude by saying thank you to all of our customers. We really appreciate the opportunity to earn your business every day. If we're blessed with your business, we won't let you down. Thank you to our shareholders. We appreciate your ongoing confidence and support. It means a lot to us. To my teammates, I want to say thank you for creating customer value, generating attractive returns for our shareholders, and building a sustainable future for all of us. Most importantly, thank you for doing it safely. Thanks for your interest in Nucor. Have a great day.
That does conclude today's conference. Thank you for your participation.