Please stand by. Good day, everyone, and welcome to the Nucor Corporation first quarter of 2017 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 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 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.
These forward-looking statements made in this conference call speak only as of this date. 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. 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, Chief Digital Officer, Joe Stratman, and our other Executive Vice Presidents, Jim Darsey, Ladd Hall, Ray Napolitan, Dave Sumoski, and Chad Utermark. Our leadership team is joining you today from our Washington, D.C. office. I have just returned from a meeting with President Trump and Secretary Ross, where we took another important step in advancing our commitment to work together to level the playing field for American manufacturers. We would like to thank all of our teammates throughout Nucor for their excellent work in the first quarter to build a safer, stronger, and more profitable Nucor. You are the reason our company's best years are still ahead of us. Thank you.
We also want to extend a very warm welcome to the newest members of our Nucor family, the approximately 120 teammates who joined us with the first quarter acquisitions of our bar grating facility in Bourbonnais, Illinois, and our Vulcraft-Omega Joist plant in Alberta, Canada. Nucor is very proud and excited to have you on our team. Our Chief Financial Officer, Jim Frias, will now review Nucor's first quarter performance and financial position. Following those comments, I will update you on the execution of our strategy for long-term profitable growth. Jim?
Thanks, John. Nucor reported first quarter of 2017 earnings of $1.11 per diluted share. These results were in line with our guidance range given in mid-March of $1.10-$1.15 per diluted share. They represent significant improvement compared to the fourth quarter 2016 earnings of $0.50 per diluted share and first quarter of 2016 earnings of $0.27 per diluted share. It is also Nucor's highest quarterly earnings since the third quarter of 2008. Earnings for the most recent quarter were highlighted by significantly improved performance for our steel mills segment, led by our sheet, bar, and plate mills. This segment also benefited from attractive profit contributions from our recent Nucor Tubular Products acquisitions. Our raw material segment also delivered very strong improvement on both a year-over-year and linked quarter basis.
That was despite the burden of a five-week unplanned outage during the quarter at the Louisiana direct reduced iron facility. More than offsetting that drag were performance improvements from our David J. Joseph Company scrap business and our direct reduced iron facility in Trinidad. The David J. Joseph team has done excellent work reducing the cost structure of their operations and working more closely with Nucor Steel Mills to benefit profitability across the enterprise. In addition to their solid profit contribution, the Nu-Iron team at the DRI facility in Trinidad set a production record in the just completed quarter. A quick comment about our tax rate, as it can be confusing due to the impact of profits from non-controlling interests. Excluding profits belonging to our business partners, the effective tax rate was 32.4% for the first quarter. Nucor's financial position remains strong.
With total debt outstanding of $4.4 billion, our gross debt-to-capital ratio was 34% at the end of the first quarter. Cash and short-term investments total approximately $1.7 billion. Nucor's strong liquidity position also includes our $1.5 billion unsecured revolving credit facility, which remains undrawn. The facility does not mature until April of 2021. For 2017, we estimate capital spending of approximately $550 million and depreciation and amortization of about $730 million. While recent trade case decisions have begun to reduce the flood of dumped and subsidized products from foreign producers, imports continue to negatively impact the U.S. steel industry overall. Through the first quarter of this year, imports remain at a stubbornly high 25% share of the U.S. market. Certain countries continue to brazenly break and circumvent our nation's trade laws. While significant progress is being made, there is a tremendous amount of work still to be done.
Nucor will continue to be proactive and aggressive in pursuing effective and timely enforcement of U.S. trade laws. At the same time, we will also work to call attention to the issue of global steel production overcapacity. That overcapacity is the result of the trade-distorting practices of some governments. Earnings in the second quarter of 2017 are expected to increase compared to the first quarter. This further supports our previously expressed view that full-year 2017 profitability could significantly exceed the level achieved for 2016. In the second quarter, our sheet mills should experience further gains in price realizations as a portion of their contract sales are priced on a lagging quarterly basis. We expect our plate mills to benefit from recent trade actions that provide a more level playing field. Our Fabricated Construction Products order books indicate that the non-residential construction markets have regained momentum in 2017.
That, along with seasonal trends, will benefit the second quarter performance of our steel products segment. We are also encouraged by the emergence of improving demand in other end-use markets, including energy and heavy equipment. With stronger demand for iron units, our raw materials business should be solidly profitable over the balance of this year. We also expect intercompany profit eliminations to have a smaller impact on earnings in the second quarter. We are confident that Nucor's significant competitive advantages, highly adaptable business model, and proven strategies will allow our team to continue to deliver profitable long-term growth and attractive returns to Nucor's shareholders. Thank you for your interest in our company. John?
Thanks, Jim. On our January earnings call, I observed that the Nucor team was ready and eager. Ready and eager to realize the significant pent-up earnings power we have built during the steel industry's lengthy downturn. Today, my message is unchanged. Our focus remains on the execution of our disciplined strategy for long-term profitable growth. We are certainly encouraged by our strong first-quarter performance. It provides additional evidence that our strategy is working. But we view the first quarter results as just an early indication of the long-term payoff we expect from the more than $7 billion we have invested since the last cyclical peak. Our objective, and our record over many decades, is to deliver stronger profitability throughout the economic cycle. We describe this work as building higher highs in Nucor's cyclical peak earnings power. The strategy is simple and flexible.
We are leveraging Nucor's five drivers to profitable growth. The five drivers 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, higher margined products; four, expand and leverage our downstream channels to market to increase our steel mills' base load volume for sustained results; and five, achieve commercial excellence to complement our traditional operational strength. I will now update you on the highlights of our team's recent progress implementing our strategy for profitable growth. During the first quarter, we completed the acquisitions of Southland Tube and Republic Conduit. Together, with the late 2016 acquisition of Independence Tube, we have established a new platform for profitable growth, Nucor Tubular Products. This value-added business has annual shipments of approximately 1 million tons.
I am very pleased to report that our Nucor Tubular Products team had an excellent first quarter, with both strong financial performance and achieving synergies with their teammates at Nucor's sheet mills. We are also very encouraged by the reception of our customers to our broader capability to serve construction markets. Our expansion into the hollow structural sections, or HSS, and electrical conduit niches of the pipe and tube market squarely hits the target on all five of Nucor's strategic drivers to profitable growth. We immediately gained market leadership positions in HSS and electrical conduit as the second-largest producer of both products. And like Nucor's other operations, these tubular businesses are built around extremely efficient manufacturing, a highly variable cost structure, and continual improvement. Equally important, their cultures share Nucor's strong emphasis on the value of our team members.
Both the HSS and the electrical conduit products offer significant value-added opportunities regarding quality, reliability, and servicing the short lead times inherent in construction projects. These factors are why import penetration in these products is limited compared to the overall pipe and tube market. Our value-added tubular products provide an attractive channel to market for Nucor's hot-rolled sheet products. Prior to establishing our Nucor Tubular Products growth platform, our channel to market opportunities for our approximately 6 million tons of annual hot band sales volume were very limited compared to our overall steel mill product mix. The addition of HSS and electrical conduit tubing to our portfolio is an important step forward in Nucor's pursuit of commercial excellence as North America's most comprehensive supplier of steel solutions to the construction and infrastructure markets. Without a doubt, Nucor is the strongest name in construction steel and steel products.
Congratulations, and thank you to our Nucor Tubular Products teammates for a great start in building this exciting new platform for Nucor's profitable growth. Please keep it going. Nucor's Fabricated Construction Products group also completed two acquisitions during the first quarter. In February, our Fisher & Ludlow bar grating business acquired a facility in Bourbonnais, Illinois, with expected annual production of 50,000 tons from this facility. This acquisition is an important step in growing our North American market leadership for bar grating products. It almost doubles our market share. In March, our Vulcraft joist and deck business acquired a facility in Alberta, Canada. This acquisition complements our current start-up of Vulcraft's new joist and deck plant in Ontario, Canada. Nucor's plate mill group has rapidly and very effectively leveraged its broader product offering provided by the August 2016 acquisition of our Nucor Steel Longview, Texas, specialty plate mill.
Nucor Steel Longview produces specialty plate products ranging from 1- 12 inches thick and up to 138 inches wide. This is a significant expansion of Nucor's plate portfolio, as the capabilities of our North Carolina and Alabama plate mills reach up to 3 inches thick and 120 inches wide. The addition of Nucor Steel Longview's capabilities positions Nucor's plate mill group to expand our overall share in a number of attractive segments that include bridges, military armor, and tool steels. Giving Nucor full access to the bridge market, Nucor Steel Longview recently developed a difficult-to-make grade of bridge steel in a 4-inch thickness. Nucor Steel Longview also began first-time production of military armor for tank and submarine applications. Tool steels are another new growth opportunity for our Nucor Steel Longview team, and they are already pursuing it.
These examples are just the beginning of how our new one-stop shopping capability will allow Nucor to profitably grow our plate business. The long-term strategic and commercial value of our Nucor Steel Longview acquisition is clearly very significant. At the same time, I want to recognize and thank our Nucor Steel Longview teammates for all that they have accomplished in the short time that they have been part of the Nucor family. It is worth noting that they continue to set production and shipping records. Thank you, and please keep it going. Nucor's profitable growth strategy is always anchored by our team's continual drive to enhance our position as a low-cost producer and market leader in all of our businesses. That focus is the bedrock foundation for delivering sustainable long-term growth in our profitability that rewards our shareholders with attractive returns on their valuable capital.
Nucor Steel Marion recently announced a rolling mill modernization that is a perfect example of this work. Our Marion, Ohio, bar mill announced in March an $85 million investment to upgrade its rolling mill and other related equipment. Nucor Steel Marion is Ohio's largest producer of rebar and signpost, with annual capacity of more than 400,000 tons. The mill is strategically located in a prime market for rebar consumption and one with aging infrastructure.
Our Marion team recently celebrated the mill's 100th year of steelmaking. With this project, we are investing in the next 100 years of profitable growth for Nucor Steel Marion. These are just some of the exciting initiatives we are implementing to drive profitable growth. We continue to make excellent progress on a number of other projects. Equipment contract negotiations were completed for our Arkansas sheet mill's specialty cold mill, with startup expected in late 2018.
Groundbreaking is set for later this quarter at our 50/50 joint venture with JFE Steel of Japan to build and operate a facility to produce galvanized sheet steel, serving the growing Mexican automotive market in central Mexico. Nucor achieved strong first-quarter growth in the automotive market as our sheet and engineered bar teams expanded both customer base and penetration of product platforms, and momentum continues to build with the rollout of Nucor-Yamato's major new structural steel product introductions. After reviewing our first-quarter financial results and progress implementing our profitable growth strategy, one key point stands out to me. Nucor's success is the result of our focus on continual improvement and increasing the value we deliver to our customers. That's why Nucor always thrives in a marketplace of free and fair competition, where winners are determined by real economic advantage.
For a company such as Nucor, with its unique position of strength and proven ability to execute its strategy for profitable growth, this is a time of great opportunity. Our team is both ready and eager to demonstrate the pent-up earnings power that we have built into our company during the industry downturn. I am absolutely confident that Nucor's best years are still ahead of us. We appreciate your interest in Nucor and would now be happy to answer your questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are joining us today using a speakerphone, please make sure your mute button is turned off to allow your signal through to our equipment. Again, that is star one for questions, and we'll pause for a moment to assemble the queue. We'll go first to Curt Woodworth from Credit Suisse. Sir, your line is open. Please go ahead.
Hey, good afternoon, John, everyone.
Good afternoon, Curt.
I was wondering if you could just talk a little bit more, John, about some of the interaction you've had with the Trump administration, and then specifically the Section 232 investigation launched today. I think that was pretty unexpected by the industry. Can you just comment on how you see sort of the particulars of that investigation, specifically with respect to how imports could be affecting U.S. national security, and any insight into how you think that process will unfold?
Well, I have to tell you, we were a little bit surprised by it also. It came up very quickly, although President Trump mentioned during his press comments today that he and Secretary Ross have been working on this for several months. So it was unexpected to us, but they had been planning this for a while. I have to tell you, we welcome the investigation into the impact of imported steel upon our national security, particularly given that many of these steels are imported illegally, violating our trade laws. We're happy to see this. I think it was a bold move by the President. He clearly set a timeframe that's aggressive, and it's a good thing for the industry. You asked about, in particular, how does this really impact national security? When you talk about steel, and clearly steel plays a major role in national security.
Case in point, look at the armor plate grades that we've been developing at Nucor. I mean, submarine applications, tank applications. There's numerous applications for steel in military use, and it is critical to our national security. As the President said earlier today, we really don't want to be dependent upon a foreign country to provide the steel we need to defend the citizens of the U.S. So I'm very excited about it. I can tell you that Secretary Ross is engaged. During the meeting this morning, the signing ceremony this morning, President Trump was engaged with the industry, spoke to several of us, and asked very good, pointed questions about trade and what we were specifically looking for, and we were quick to point out that all we were really looking for was a level playing field.
Given that, we expressed our confidence that we could compete successfully against any country or company if we had that level playing field. So good news for the industry. We're excited about it. We've all committed to work with the President to help him understand the nuances of steel and its application in national security.
Okay, thanks for that. Then just a quick follow-up regarding the HSS and electrical conduit market. The 1 million tons of, I guess, capacity or volume, what percent of that is being supplied internally by you right now? And where do you think that figure could get to, say, over the next 6-12 months?
Right now we're supplying about 75%-80% of that product. And we've been working over, frankly, the last couple of months to work with them so that we can get up to these levels of 80% and 90%. And I think that that's probably where we'll peak out, somewhere at about 90%. But there's many other things that come along with this. Just to maybe mention a few of them that I'm sure you're aware of, but just to highlight. When you look at Nucor and you look at our sheet business, without a doubt we are hot band-centric. And yet when you look at the amount of our product in hot band that went downstream compared to our other steel products, we were somewhat underweighted.
This really came at a good time for us and also with the addition of Gallatin to the Nucor family, but also provides a great downstream outlet for one of our larger sheet segments. Of course, this is a value-added play. It is one of the key drivers of profitable growth. One other point that I would mention, since we were just talking about imports, and you raised that question earlier. Because of its application to the construction industry with the short lead times that go along with construction, the product tends to be somewhat import-resistant. We see that as a plus also.
Great. Thanks very much.
Next, we will go to Jorge Beristain with Deutsche Bank. Please go ahead.
Hi, good afternoon, guys, and congrats on the strong quarter. My question is about service center inventories, which remain quite low, and I am just wondering what you have heard is the explanation for that. Do you think that the industry itself could get caught unawares in terms of having to do a rapid restock in the second half?
Well, without a doubt, the inventory levels, as you mentioned, are extremely low. Sheet products are about 1.8 months on hand. Frankly, I cannot remember the last time they were that low. Plate inventories are somewhere around 2.3 months on hand, also well under the normal run rate. In terms of the impact of what we are hearing as to why that has been happening, I guess part of it has been that the service center industries have been waiting to make sure that what they are seeing today in the balance between supply and demand and its impact on pricing is longer term. They wanted to make sure that this was not one of those short pops. I think that they have began to accept the fact that the strength in the market is longer term, and we will begin to see them rebuilding those inventories.
Now, also bear in mind that at the end of the year, you have always service centers work hard to manage their working capital, and that happens at the end of each year. Typically, as you go into the first quarter, you did not have as much of a demand as you have seen going into this first quarter. I think it was harder for them to rebuild their inventories as rapidly as they have done in the past. If you look at their shipments out of the service centers, you will see they were also very high during the first quarter. So that made it more difficult for them to rebuild those inventories. We expect them to, over time, continue the order entry rate to rebuild those inventories to a more normal level. We are awaiting their orders.
Okay. Then on the scrap price outlook, it has, again, been really volatile, but coming off recently and people are pointing towards lower iron ore prices, particularly in the seaborne market. What is your view on scrap in the second half? Is it going to track a little bit of the raw materials like iron ore, or is it more related to pig iron? Do you see the U.S. market kind of being stable, I guess, for scrap pricing going forward?
As we see it going forward, we see it more or less stable. Now, of course, there is always going to be small moves up and down. But given the situation with iron ore, we do not see any major moves up. In fact, we see some downward pressure. How far is up is anybody's guess, but we think we will see it go down. Frankly, you mentioned pig iron. I can tell you that our last pig iron buy was down from the previous buy, and the negotiations for future pig iron is even lower. So we see pig iron peaking. You see iron ore going down. All of that bodes for scrap to be steady or to down slightly.
Perfect. Thank you.
Okay, we'll go next to Seth Rosenfeld with Jefferies. Please go ahead.
Good afternoon. I have a question on the plate market in the U.S. right now. You flagged that in the release as being one area that drove the strength in your steel mill segment. Could you just talk a little about where you see the current supply-demand balance? Clearly, you had a bit of a benefit as one of your major peers had an extended outage over the past month and a half or so. As they come back into the market, are you at all concerned that some of the recent price momentum could begin to fade? Do you think the underlying demand has recovered such that ultimately this recent price strength could be more sustainable into the back half of the year? Thank you.
Well, I'd say it's a combination of a couple things. The demand is better. Certainly, the fact that we had a competitor that was out for a while, that impacted the supply side of it. Relative to Nucor itself, when we look at what we've done with our latest acquisition of Longview and how that has really expanded and broadened our supply and our ability to feed the market, particularly when it comes to bridge and other applications, we think that for us, the plate market will continue fairly strong into the second quarter. Bear in mind that we also had a very successful trade case. It wasn't exactly everything we wanted, but for the most part, it was very favorable. In the places we didn't get as favorable as a response as we would like, we will watch those countries carefully.
If we see an influx of steel from them, illegally, unfairly traded steel, we will be quick to take action again. So a combination of demand getting better, combination of the trade cases that we successfully prosecuted last year. And again, I really want to stress the additional fact that what we've been able to do with our plate supply and the markets that we've been able to attack that we couldn't attack in the past as a result of bringing Nucor Steel Longview into the Nucor family, for all reasons, that we're pretty optimistic about our plate business going into the second quarter.
Great. Thank you very much.
As a reminder, ladies and gentlemen, it is star one for questions. And we'll go next to Timna Tanners from Bank of America Merrill Lynch. Your line is open, ma'am. Please go ahead.
Hey, good afternoon, gentlemen.
Good afternoon, Timna.
You are now reporting tubular products, and more information is always appreciated. We have had two quarters now, and I just wanted to probe and understand that segment a little bit better. First question on that is, first quarter run rate for volumes, is that a good run rate going forward? Is there any seasonality there? The second one is, pricing quarter-over-quarter went up a lot. How do we think about what drives prices for that segment and costs? Do they line up with the prices or how do we think about those inputs?
Well, let me start with your first question about demand and how we see that going forward. We think demand has been pretty solid. There is a lot of tie-ins to the construction industry, obviously with this product. As we have mentioned several times, we have seen the construction industry slowly improving. We think this year we will see an improvement in construction somewhere in the neighborhood of 5%-6%. Frankly, that is the Dodge Report number, and it is also supported by the backlogs that we see in our downstream businesses, which are, for us, frankly, a better leading indicator than the Dodge numbers. We see a continued improvement in construction. That will bode well for our HSS businesses.
I would also comment that, working together with the conduit business, this really gives Nucor and obviously our structural products, our Vulcraft products, it really enhances our business to our ability to supply a wide range of commercial solutions in the construction industry for steel and steel products. We think that is going to give those businesses a boost also. Frankly, in terms of how we see them contributing to Nucor, they are two great companies that have come together. There are all kinds of synergies that we are just learning about relative to how they interact with our steel mills, how they interact with each other. A simple example would be how you can increase the length of runs on various sizes now that you have more than one facility producing them.
And of course, you've got all the logistical considerations as to how you best each customer's now that we have five different facilities producing that product. Based on all of that, we think that this was a great move. Our business development team did a great job in making it happen very quickly, and the teams are working extremely well with our sheet mills. We're very excited about this new growth platform for our company.
Okay. I can follow up with you later. I was just trying to understand, in particular, the pricing moves there. Since it's a new segment, we have for the first time ever two quarters to compare, and we're seeing tubular up quarter-over-quarter over what, $200 and almost $220 a ton, whereas the sheet price, for reasons that you've partly explained on the lag effect, only up $60 a ton. Does tubular tend to move with hot rolled? Does the cost tend to move with hot rolled, or is it just supply and demand negotiated?
Well-
Or how do we think about that?
It's both, okay? Obviously, it does move somewhat with hot band. But at the end of the day, I've said this in the past, and I truly believe it to be the case. At the end of the day, pricing is a function of supply and demand.
When we see the demand going up and if the supply becomes tight, prices go up. As I've mentioned, right now, we see the construction business looking pretty good in the first quarter. There's been a demand for our HSS product has been very strong. With that strong demand, pricing has moved up. Certainly, it's tied somewhat to our hot band. I would discourage you getting too hung up on that and recognizing that pricing, it's economics 101. Pricing is a function of supply and demand.
Got it. Can I slip one in for Jim then on the dividend, please?
Jim's waiting with bated breath.
Hi, Jim. In the past, you've said that when Nucor achieves over $1 of earnings per share, that would be when you'd start to think about factoring in a special dividend. Nucor's dividend has been rising every year, but by pretty small increments. I'm just wondering if you had any thoughts about how you'd recommend to the board to proceed on the dividend or any thoughts that they've had on that.
That's a good question, Timna. We think about the dividend not on a quarterly basis, but an annual basis. So let's see how the rest of 2017 plays out, and we'll think more about whether it's appropriate to increase the dividend or do something with other dividends or do other things to return cash to shareholders by the end of the year.
Okay, fair enough. Thank you.
Thank you.
We'll go next to Phil Gibbs from KeyBanc Capital Markets. Sir, your line is open. Please go ahead.
Hey, good afternoon.
Good afternoon, Phil. How are you?
Doing well. How are you?
Very well, thanks.
Had a question on the DRI business. More so, been reading in the press that the Louisiana operations have been up and then down and then up and then down and then up again. Just wanted a status update there. Also, how should we be thinking about the profitability momentum overall, given the fact that there is a very favorable spread between pig iron and iron ore right now?
Well, I will start with your first question. There have been challenges at Louisiana. There is no doubt about that. That is not untypical of a startup, especially one that is a complicated technology. We had similar issues when we first started our plant in Trinidad. I will point out that we still have a great deal of confidence in the technology and point out that the challenges that we have had have not been with the technology or with the furnace itself. It has been auxiliary equipment. We have struggled with the process gas heater. We have done a redesign of the top half of that, which failed a couple of years ago with a major failure. We are working on a redesign on the bottom half that just gave us some problems a couple of weeks ago. Fortunately, not nearly as severe of a failure.
As we got that back online and started up, we had a problem with a belt. One of our conveyor belt lines failed. Yes, we have had our challenges. We are working our way through them. Again, I really want to stress that the issues are not with the technology, not with the furnace. I will point out that in terms of technology, our Trinidad plant, as we mentioned in the script, just set a record for production in the quarter, and both plants are producing DRI in terms of production efficiencies and yields and quality are working at world-class levels. At the end of the day, it is about our long-term strategy in raw materials, and we are confident that it is to our benefit to gain control over the largest single cost of our steelmaking operation.
Particularly, scrap iron units in one form or another account for about 60% of the cost of steel. We feel, particularly as we continue to move up the value chain, which is one of our stated goals. We continue to move up the value chain. We are going to have a greater demand for virgin, low residual iron units, and we see that becoming more challenged as we go into the future because less manufacturing and integration, segregation of the existing prime scrap in the U.S.
No, I'm with you, John. I was more curious just in terms of if you've got it to a level where you think you could have some reliability and then thinking more about the economic opportunity because the spreads
Yeah. With every
favor the product right now.
With every failure, we go back in and we re-engineer it. We don't just patch it. We do it right. I'm confident, and if you look at the timelines between the failures, they are extending. We're confident that we'll work our way through these issues. In terms of the profitability, you're spot on. We expect it to be very good for the rest of the year as the spreads continue to grow. Personally, as I've said, from a strategic perspective, I believe that's a long-term benefit to our company. We'll see that getting better and better as the years go by.
Perfect. Jim, can you give us just a sense, you mentioned in the release on the contract lags on the flat-rolled side. Can you give us any sense in how should we be thinking about some of that in terms of magnitude as we look forward here in this quarter and just trying to handicap that.
It's not a tremendous amount. We're pricing in March. But if you think about it, we started the quarter, meaning the first quarter in January, with much lower pricing than we finished the quarter. So on average, we think the pricing will be higher. We don't think it's raising dynamically from where it was at the end of March. We think it's more of the average across the quarter will be better in the second quarter.
Okay, perfect. Last one, just on the inventory positioning. I know sometimes you have work-in-process inventory benefits and headwinds that get captured in the conversion cost. I was wondering if there was a reversal of the headwinds that you had seen in Q4, and did you see a bit of a benefit from inventory lag in Q1? Thanks.
Well, Phil, of course, when we're in an inflationary period with pricing or with raw materials, which we certainly saw from the beginning of the first quarter to the end of the first quarter. We are benefited in our cost side as we start the quarter with lower cost inventories. But by the end of the quarter, we were using much more expensive scrap and had our highest costs of the quarter. Our highest profits were in March of the three months in the quarter. So pricing moved up more than cost moved up. Although we will start the second quarter with higher costs, we're going to start the second quarter with higher prices as well by a larger amount. Again, that's why we have comfort in the guidance that we expect improvement compared to the first quarter overall.
It is going to be a little different by product, but overall, that is our perspective.
Thank you very much.
We will go next to Novid Rassouli from Cowen and Company. Sir, your line is open. Please go ahead.
Good afternoon, guys. Thanks for taking my question. You highlighted the renewed growth in demand on the energy side, and I was wondering if you could provide details with respect to which products are seeing the greatest demand, and maybe which specific sub-sectors within energy that are driving this demand. Thank you.
Well, if you take a look at the U.S. rig count, it is up quite a bit. It is currently running at about 850 rigs. That is up from a low in the middle of last year of about 400. The number of rigs have doubled, and as importantly, the amount of steel consumed per rig has doubled since about 2013. When you have a situation where you are doubling the number of rigs and the amount of steel consumed has doubled, that is a good situation for us. As I mentioned, we tend to be heavy on hot band, particularly at our Gallatin facility, and Gallatin has always been a big feeder to the OCTG. We stand ready to supply this increased demand. Having said that, we still have to keep an eye on imports, particularly when it comes to OCTG.
We see a lot of pressure from Korea in that product, and we are taking a look at that. There has been some increased duties, but we are continuing to study that situation. To answer your question directly, rig counts are up just about double. Steel consumed per rig, up just about double. That bodes well for steel consumption in that market.
John, you mentioned hot band, but of course, it also benefits our bar business as well with the seamless business.
Absolutely. Good point. Thanks.
Thanks, guys. One quick follow-up. The trajectory that we've seen for rigs has been pretty aggressive. Based on, I guess, your order book and quotes and what you're seeing, is there any indication that that could be slowing, or is the momentum still fairly strong on that front? That's it for me. Thanks.
Currently, we see the momentum still strong. I know OPEC is meeting, I think it's today or met yesterday. From what I understand, the decision was made to continue curtailing production. That bodes well for that business. Based on everything we're seeing and everything that we're hearing, we expect the momentum to continue. Next question.
Thank you. We'll go last to Alessandro Abate from Berenberg. Your line is open. Please go ahead.
Good afternoon, gentlemen. It's Alessandro Abate from Berenberg. I just have two questions, John. You've been quite explicit about the development of the steel industry in the U.S. because connecting the dots seems to be a very positive spending momentum well beyond Q2. You said that inventory of sheet is 1.8 months in hands. Rigs count that is absolutely going straight upward.
There is a recovery more than anything else of segment which were lagging heavily behind demand of sheets in 2016, energy and apparently a demand for mining equipment. With China, South Korea out of the equation of import, even though there is a massive correction of the Chinese steel prices at the moment. But the average price of imported steel should be definitely higher because of the lack of South Korea and Chinese competition. It really seems that momentum's earnings is going to go well beyond Q2.
Also related to the demand of the question of one of my peers, is that related to possible scrap decline. Clearly, there is the possibility, but from what you're basically depicting at the moment with all the set of data, it really seems that if anything, the scrap is going to come down with strong supply and demand more favorable to demand this time. It seems that if anything, a small correction of steel price in the U.S. might actually be definitely lower than any potential downside to raw material cost. Am I correct in this assumption without going to the smaller details?
Well, there's a lot of assumptions there. Okay.
Yeah. Just basically reflecting what you've been saying. Yeah.
Yes. In general, I would have to agree with what you were saying. I will say, though, one point that I need to correct, and you talked about basically the steel being cut off from China and Korea and Turkey, some other problem areas. I need to point out that that is a battle that we are still fighting. If you look at the import percentage today, we're probably still having 20%- 25% of the market share supplied by imported products, many of which are dumped products. So we continue that battle. But in general, we take a look at things and we say, "Okay, where does the steel demand come from?" At the end of the day, when you look at the United States, construction accounts for the vast majority of steel consumed in the United States, followed by automotive, followed by energy.
Let's take a look at them. We see construction has been increasing. At the end of the day, automotive, although it is high and we might see it coming down a little bit, it has been strong. Although the automotive market might decrease a little bit, I will point out that Nucor continues to increase our market share of the automotive market. We were at 1.4 million tons last year.
We are at 1.5 million tons this year. I am fully expecting that we will be at 2 million tons by the end of 2018. For us, automotive continues to go strong. As we just discussed, energy is strong. When you look at the three major consumers of steel, it is all looking pretty positive. How long does that last? Certainly, we think through the second quarter, that is why we are giving the guidance that we are giving.
There are other things that we might be seeing coming down the road. We talked about the investigation that was launched today. That might have an impact, a positive impact for the rest of the year. Certainly, President Trump has talked about infrastructure, and certainly we support that. The infrastructure in this country is crumbling. It is an embarrassment. When you look at not only the impact that that has on the economy and on manufacturing, let us remember why we built the infrastructure in this country in the first place after World War II. We recognized from a position of national security, we needed to have a strong infrastructure system, which today is falling apart. All of the things that you have mentioned are certainly looking good for the rest of the year. I have added a couple more things that we see as positives.
I want to stress again what we have been doing, and we talk about our pent-up earnings power. We have invested $7 billion during this present downturn. We are just ready, willing, eager for this demand to come back and for the upswing to occur as we see it starting to release this pent-up earnings power that we have been building for several years and investing $7 billion in. We do feel good about the future. We typically only talk about one quarter at a time, and that is why we gave our guidance only for the second quarter.
Thanks, John. If I may, just a second question related to Mexico. The venture that you have with JFE for the construction of the 400,000 tons of galvanizing steel. Is there any development there? If we take a look at the currency, which is the lead indicator about potential deterioration of trade relationship between U.S. and Mexico. The appreciation of Mexican peso, which reflects a little bit softening stance of President Trump, seems to be a little bit more favorable to your decision to go ahead with the investment, correct?
We fully plan to go ahead with the investment. We are planning a groundbreaking somewhat later this month or early next month. We are comfortable with what we are doing there, being able to supply the automotive market, which is certainly growing in Mexico, and our new plant is going right in the middle of the growth. We feel very good about the project. We are very pleased with our partners. We have been working with a great company, JFE of Japan. Over the last year that we have been working with them, we find them to be very similar to Nucor in their aggressiveness, in their timelines, and we continue to grow our ability to produce the automotive-grade steels. We are excited about it. We certainly are encouraged by what is happening in Mexico, and we plan to go ahead.
You see the demand in Mexico at the moment and also for the next, let us say, six to nine months, extremely strong?
We do.
Thank you.
It's hard to know what's going on from quarter to quarter. But bear in mind that when we make these investments, we don't do them relative to a quarter at a time. We make investments, whether it be DRI or the JFE venture or our plate mill investments that we've made. We make them for the long term. So we don't worry about what's going to happen next quarter, third quarter, fourth quarter. We just make sure that we make investments that are going to return to our shareholders the value that we should be returning to them for their investment of their valuable capital. And we're confident that that's what we're doing.
Thank you very much, and congratulations.
Thank you.
And we'll take our last question from Phil Gibbs from KeyBanc Capital Markets.
Thanks again. I just had a quick one on the energy markets. John, can you remind us where and kind of how you participate in that market? I would think on the hot band side, it is in substrate. Maybe give us some view on how you may participate on the bar side as well or any other markets. Appreciate it.
Well, we do supply high-quality billets out of our Memphis mill that go into the seamless OCTG, and that is a good business for us, and that has been a growing business for us. So you have nailed it. The substrate into OCTG, our Memphis facility with SBQ going into OCTG also. Do you want to make a comment about cold finish?
Yeah, we also supply cold finish to a lot of energy applications as well.
Good point. Yeah. Energy in general, yes.
Yeah, plate as well.
Frankly, if you want to expand this into energy in very general terms, we could go back and talk about, okay, we talked about substrate, and we talked about billets. We talked about cold finish into it, and let's not forget plate while we're at it. Okay. So plate also goes into the energy market. So we're very involved in the energy markets. That speaks to the diversity of our company and one of the great strengths of our company.
Thank you very much.
Thanks, Phil.
And that concludes our question and answer session for today. I'd like to turn it back over to you, Mr. Ferriola, for any additional or closing remarks.
Let me just close by saying thank you to all of my Nucor family, our customers, our shareholders, and of course, our teammates. Our success is due to your support, commitment, and hard work. Let's continue to work together, and most importantly, let's work together safely. Thanks for your interest in Nucor. Have a great day.
Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect.