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Nucor (NYSE:NUE)
Q2 2018 Earnings Conference Call
Jul. 19, 2018 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Nucor Corporation second-quarter of 2018 earnings call. As a reminder, today's call is being recorded. [Operator instructions] 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 related 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.

John Ferriola -- Chairman, Chief Executive Officer, and President

Thank you for joining us for our second-quarter earnings call and your interest in Nucor. Other members of Nucor's executive team are also with me today. Joining us for the first time is our new executive vice president of raw materials, Craig Feldman. Craig is taking over for Jim Dawson, who retired last month.

Craig is a proven leader with 33 years of experience at the David J. Joseph Company, or DJJ, which Nucor acquired in 2008. He has served as president of DJJ within Nucor since 2013. His knowledge of the raw materials market and our business is a great asset to our team.

Welcome, Craig. We also have Jim Frias, our chief financial officer; Ladd Hall, responsible for sheet and tubular products; Ray Napolitan, responsible for engineered bar products; Dave Sumoski, responsible for merchant bar and rebar products; Leon Topalian, responsible for beam and plate products; Chad Utermark, responsible for fabricated construction products; and Joe Stratman, our chief digital officer. I will begin by sharing the highlights of our strong second quarter. Jim Frias will then provide more details about our financial performance. We are pleased to report another strong quarter with net earnings of $2.13 per diluted share, a record for the second quarter.

It is also the second strongest quarter in Nucor's history. Our steel mill capacity utilization in the second quarter of 2018 was an impressive 95% and improved year over year across all steel mill product groups. We achieved these results through continued disciplined execution of our five drivers to profitable growth and against the backdrop of a favorable economy and regulatory environment. As we've stated in the past, our five drivers to build long-term sustainable growth are: 1) being a low-cost producer; 2) being a leader in the markets in which we compete; 3) moving up the value chain to expand our capabilities for our value-appreciative customers; 4) expanding our channels to market; and 5) achieving commercial excellence to complement our operational strength.

The strength of the U.S. economy was a major driver of our continued financial and operational success. Economic fundamentals began improving in the middle of 2017 and that trend has continued into this year. The economy is being energized by tax and regulatory reform and by strength in the global energy markets, where the U.S. has become a major producer and exporter. These combined factors, a competitive U.S. corporate tax rate, favorable regulatory environment and strong U.S. energy production, are the keys to the current strong business environment for Nucor.

With U.S. economic strength driving domestic steel demand, 22 of the 24 markets we serve are seeing increased or stable demand. The U.S. steel market is also benefiting from a reduction in unfairly traded imports entering our country as a result of years of successful trade cases and the broad-based tariffs imposed under Section 232.

Imports are down more than 7% through the first half of 2018. With all tariffs going into effect in June, we expect this trend to continue. The tariffs send a clear message that the U.S. is done asking nicely for compliance with the rules of trade and is serious about demanding changes in the trade practices of other countries.

The reduction in dumped and illegally subsidized steel should allow steel prices to return to their fair levels that are based upon market forces of supply and demand. Importantly, however, I want to note that Nucor's strong performance is not solely due to pricing environment. Increased capacity utilization also acted as a driver of our earnings strength this quarter. Higher utilization rates are essential for the long-term sustainability of the American steel industry.

As you are aware, Nucor has spent years positioning itself to take advantage of an upturn in the steel market. We have increased our workforce by 18% and invested $8 billion since the last cyclical peak in 2008. By investing in our people and our operations, we have made Nucor an even stronger business. We are now capitalizing on those investments to move up the value chain and profitably grow the company.

Our financial performance last year and during the first half of this year are proof that our long-term strategy of pursuing our five drivers to profitable growth is working. In this strong market, Nucor remains focused on continuing to successfully execute this disciplined strategy. We are currently implementing eight exciting growth initiatives totaling more than $1.5 billion. Four of those investments are in the long products and total about $750 million.

The projects include the rolling mill modernization at our Ohio rebar mill, MVQ expansion at our Illinois mill, and two rebar micro mills in Missouri and Florida. Slight preparation is underway for the micro mill in Missouri, and we have already begun to hire teammates. The other four projects are in our Sheet Mill Group and total approximately $780 million. These projects include new galvanizing line at Gallatin, the specialty cold rolling mill and additional galvanizing line in Arkansas, and our joint venture with JFV Steel to build a galvanizing line in Mexico, which will serve the automotive market in that country.

Completion dates for these eight projects range from 2019 through 2021. We are clearly not finished growing Nucor's long-term earnings power and we look forward to extending the company's long track record of sustainable shareholder value creation through these high-return organic investments. Jim Frias will now provide more specific detail about our second-quarter performance and financial position. Jim?

James Frias -- Chief Financial Officer

Thanks, John, and good afternoon. Our second-quarter 2018 earnings represent a substantial increase over our first-quarter earnings of $1.10 per diluted share. As John noted, our improved earnings were the result of much stronger market conditions and our team's ability to deliver attractive returns on significant investments Nucor made during the industry downturn. All three of our segments increased to profitability compared to the first quarter and last year's second quarter.

Our Steel Mills segment achieved strong earnings growth across all mill product groups: sheet, plate, rebar, merchant bar, engineered bars, and beams. Profit growth at our downstream steel product segment was highlighted by the performance of our recently acquired tubular operations, serving the hollow structural sections and electrical conduit markets. Our raw materials segment realized attractive profit contributions from our DJJ scrap business as well as both of our DRI facilities. Nucor is continuing to aggressively invest in long-term, job-creating, profitable growth.

Full-year 2018 capital spending is estimated to be approximately $1 billion. This is a significant increase from 2017 capital spending of $450 million. Approximately two-thirds of our planned 2018 capital expenditures are for expansion, product improvement, and cost-savings projects, with the remaining one-third for maintenance purposes. As we invest in our multiple growth platforms, Nucor is also rewarding shareholders with meaningful returns of capital.

In the first half of 2018, the company returned more than $400 million to shareholders via cash dividends of about $240 million and share repurchases of about $170 million. Capital returns in the first half of 2018 are consistent with our target to return to shareholders a minimum of 40% of our through-the-cycle earnings. Two noteworthy facts provide evidence of Nucor's long-term record as an effective steward of our shareholders' valuable capital. First, 2018 marks Nucor's 45th consecutive year of increased regular or base dividends.

Second, the average cost of Nucor's nearly 89 million shares of treasury stock repurchased life to date is less than $29 per share. That includes the just under 2.7 million shares repurchased in the first half of 2018. In April, Nucor issued $500 million of 10-year notes at an interest rate of 3.95% and $500 million of 30-year notes at an interest rate of 4.4%, combined with the December 2017 maturity of $600 million of 5.75% notes, and the June 2018 maturity of $500 million of 5.85% notes. We lowered the weighted average fixed coupon rate of our long-term debt to 4.74% and lengthened the weighted average maturity to just over 15 years.

Nucor's financial position and cash generation remains strong. With total debt outstanding of $4.3 billion, our gross debt-to-capital ratio was 31% at the end of the second quarter of 2018. Nucor's strong liquidity position includes our cash holdings of $1.5 billion and our $1.5 billion unsecured revolving credit facility, which remains undrawn. The facility's maturity was extended in the second quarter to April of 2023.

First half of 2018 cash provided by operating activities was very robust at approximately $870 million. Nucor's strong cash generation was achieved while, at the same time, funding the increased working capital requirements of a cyclical upturn. Based on strong market fundamentals and discussions with our customers, we believe there is sustainable strength in steel end-use markets. Our steel mill and steel product backlogs are robust and have trended upward since the beginning of the year.

Earnings in the third quarter of 2018 are expected to further improve compared to the second quarter of 2018. The performance of the steel mills segment is expected to remain strong in the third quarter of 2018, with margin expansion expected primarily at our sheet and plate mills. We expect the third-quarter performance of our steel products segment to be similar to the second quarter of 2018. The performance of our raw materials segment is expected to decrease in third quarter of 2018 due to margin compression.

Nucor's focus remains on delivering higher returns on our invested capital by taking care of our customers. Thank you for your interest in our company. John?

John Ferriola -- Chairman, Chief Executive Officer, and President

Thanks, Jim. I'd like to conclude with a brief comment on international trade. It is our view that the subject needs to be considered with a long-term perspective. What will happen to our great country if we continue to operate with a massive trade imbalance that is over $560 billion and growing? We agree with the administration's efforts to address this issue.

We believe these efforts will lead to a freer, fairer trade that will benefit manufacturers, our customers, and American workers by creating a stronger domestic economy. I want to thank all of our 25,000 teammates across Nucor for seizing the opportunities the strong market is providing. The leadership team in Charlotte appreciates the hard work you do every day to build a safer and more profitable Nucor. We would now be happy to answer your questions.

Questions and Answers:

Operator

[Operator instructions] We'll go first to Chris Terry with Deutsche Bank.

Chris Terry -- Deutsche Bank -- Analyst

Good afternoon, guys. My first question is just around the capital returns, the minimum 40% of the net income. Can you just comment a little on buybacks versus supplementary dividends that are possible into the end of the year and maybe into 2019?

James Frias -- Chief Financial Officer

Yes. Thanks. This is Jim Frias. I'll answer that question.

We worked very closely with our board of directors to develop a structure about how we think about returns to shareholders. And you noted one of the items we use, which is an income statement trigger, we want to return a minimum of 40% of earnings to shareholders. But we also use the balance sheet as a guideline because we're very committed to a strong investment-grade credit rating. So we look at the-- we have a range, we have a published debt-to-cap, but it should be obvious, based on the idea that we maintain a strong investment-grade rating.

If we look at our net debt-to-cap position, and if our net debt-to-cap gets too low, we would probably do more return to shareholders. If it got too high, we might throttle things back. But right now, we're in a place where we can easily return the full 40% to shareholders. Secondly, when we choose between dividends and share repurchases, we use an intrinsic value model that, again, we show the board on a regular basis.

We project what the value of the company is based on our forecasted earnings. And when the stock is attractive, we prefer to buy back the stock versus dividends. If we think the stock is at a pricey level, we might do more supplemental dividends.

John Ferriola -- Chairman, Chief Executive Officer, and President

And the only-this is John. The only thing I would add to that is, of course, our first priority always remains investing for profitable growth of our company.

Chris Terry -- Deutsche Bank -- Analyst

OK. OK. Thanks for the color. And then, just on your commentary around the sheets and plates market and that helping the steel mills segment, can you just talk specifically about the long products? If you look at the year to date, long product imports down about 20% versus the 5% decline in sheets.

How do you think about performance of the bar and structural mills going forward?

John Ferriola -- Chairman, Chief Executive Officer, and President

Well, long products has been strong in the second quarter, as we mentioned in the script. Frankly, plates and sheet were doing better, but we certainly were pleased with our long-products performance during the quarter. We did see imports down a little bit, but we also see construction going up a little bit, and that served us well in our long products, particularly in the rebar markets.

Chris Terry -- Deutsche Bank -- Analyst

OK. And the last one for me, just on the raw materials segment, can you just talk through the progress at the Louisiana DRI plant? And what impact from the DRI outage is considered within the guidance that you've mentioned coming out for the 3Q?

John Ferriola -- Chairman, Chief Executive Officer, and President

We have the outage baked into our guidance. And I'll give you just a quick update on the shutdown. As I mentioned on the last call, this was a planned shutdown to perform preventive and predictive maintenance on the facility, scheduled to be down for about 30 days, and we are scheduled to produce time DRI sometime tomorrow. We are-- that was heated, it's loaded and we're building pressure in it now.

So as of right now, it looks pretty good for a start-up-- successful start-up of producing prime DRI tomorrow, sometime during the day.

Chris Terry -- Deutsche Bank -- Analyst

Great. Thanks. Thanks for the answers.

Thank you, Chris.

Operator

We'll hear next from Matthew Korn with Goldman Sachs.

Matthew Korn -- Goldman Sachs -- Analyst

Hi. Good afternoon, everybody.

John Ferriola -- Chairman, Chief Executive Officer, and President

Good afternoon, Matt.

Matthew Korn -- Goldman Sachs -- Analyst

So I had a couple of questions on the product side. We're coming up on about two years since you assembled the tubular division. You're now running at above 1.1 million annual run rate. How does that division in particular perform relative to your expectations, financial, operational efficiency, overall cost effect across the whole Nucor platform? Then where can it go from here? Can you get to 1.2 million, 1.3 million tons or higher? And then, finally, how much-- do you see any cannibalization from your other products? As HSS demand grows, does that have any effect on what you're selling or how you're selling structural beams or elsewhere?

John Ferriola -- Chairman, Chief Executive Officer, and President

OK. Great, great, great, yes and no. OK. Let me elaborate just a little bit on that.

The performance of the tubular group has been outstanding. Frankly, it did surpass our expectations. We know it would be a good acquisition. We knew, based on their culture, they would fit well into the organization.

We knew that there would be value in the synergies that were going across our sheet group. We knew that it would be profitable standing on its own. And all of those things are-- came to fruition. The impact on our sheet business has been great.

And I'd add this, one of the concerns we had as we entered into this was that we might lose some of business from competitors to our existing tubular groups, some other tubular products that we-- excuse me, customers that we currently sell to. What's actually happened is our business with the competitors has actually increased. And I think it's a function of by working with our sheet group and our tubular group, we've been able to fine-tune and tweak the chemistries that we produced in our steel, we've learned how to produce steel that more efficiently and effectively in the tubular business. So in all of those fronts, I mean, it's been a home run.

We've been really, really pleased with it. We are on track this year. We think that we'll do a little bit more than last year, and last year was somewhere around 900,000 tons. Our forecast for this year is about 1.1 million, 1.2 million tons.

And we really haven't seen a negative impact on any of our other construction or structurally related products. If anything, with the latest mill that we're putting into our tubular division that will be working more closely with us skyline division, we expect that to be another synergy that will bring value to both tubular and to our skyline business.

Matthew Korn -- Goldman Sachs -- Analyst

Got it. Thanks, John. I appreciate the elaboration. Following up from that, what does that opportunity set for any acquisition look like for you today as you're thinking about capital allocation? And after putting together tubular, your focus has been on investment, as you elaborated earlier in the call, in Arkansas and micro mills, you think are those assets taken out [Inaudible].

Is there anything out there that's really interesting in steelmaking? Is there another Gallatin out there that we're overlooking?

John Ferriola -- Chairman, Chief Executive Officer, and President

We don't look at just steelmaking. As you know, we look at all of our product groups across all of our businesses. And there's nothing specific that I want to speak to, but we are keeping our eye on all opportunities and we'll respond when the appropriate opportunity comes available at the appropriate price that fits well into our organization.

Matthew Korn -- Goldman Sachs -- Analyst

I appreciate it.

Operator

We'll hear next from Seth Rosenfeld with Jefferies.

John Ferriola -- Chairman, Chief Executive Officer, and President

Hey, Seth. How are you?

Seth Rosenfeld -- Jefferies -- Analyst

Doing well. Thank you very much. Couple of quick questions today. First, on intersegment elimination, you saw a very significant increase quarter over quarter.

I believe that in the last part, you've guided sort of effective decrease in Q2. Can you just help us explain-- help us better understand the drivers of that increase in pricing guidance, how is the trend moving forward? I'll start there, please.

James Frias -- Chief Financial Officer

This is Jim Frias. I'll answer that. Elims went up by roughly $133 million in the second quarter compared to the first quarter. And there's four major things that make that up.

One is the actual intercompany inventory revaluation process, and I'll save that for last because that's probably the most significant piece. And then, there's this compensation piece that's related to stock, restricted stock units and options. There's a June 1 grant date for those that our board authorizes, and so, therefore, there's a spike in the second quarter every year. So in the first quarter, those expenses were about $9 million.

In the second quarter, they were closer to $37 million. So that increased by about $28 million quarter over quarter. It will go back to a more normal run rate for the balance of the year. So this is an event that happens every second quarter, we get a spike related to that stock compensation.

And then, profit sharing, we take 10% of our pre-tax profits and set aside for teammates. That expense increased, it basically doubled from $47 million to $48 million, almost $49 million in the second quarter. Interest expense is another piece. Interest expense is actually down.

It went from just under $36 million down to $28 million, so we saved about $7 million there. But then, the inventory valuation piece increased by $63 million, went from $49 million to more than $112 million. And as we look at that, the things that affected are the volume of inventory and the margin per ton of inventory. So the volume, we thought, was going to stay flat, it went up by roughly 9%.

We've got just over 7.6 million tons of inventory in the company. And that includes DRI, scrap, and steel, and we track the DRI not just to the steel mills but all the way to the finished products that have the DRI and scrap embedded in them. So there's an increase in volume of 9% that happened. And then, secondly, margins improved by about 28% in the second quarter.

So going forward, the question is, will volumes change? We would think volumes will stay relatively flat in the third quarter. We think that they've reached a fairly close to run rate level. And margins might go up a little bit but not nearly at the same pace, so we wouldn't expect to see the same kind of a number. So we would expect that intercompany-- or that inventory elims piece to be lower in Q3 than Q2.

We're not going to give an absolute number because it really depends on some variables that are hard to predict. But our gut feel is this is going to be lower because of those factors. Does that help?

Seth Rosenfeld -- Jefferies -- Analyst

Yes, that helps. Thank you. And one further question, please, on the plate market. Can you just give us a bit more color on how you characterize current demand and pricing trend looking ahead in the second half of the year? Plate perhaps stands out as one of the products where there's not significant capacity growth [Inaudible] out by yourself or any of your peers in the U.S. What do you think it would take to make plate an attractive area to allocate capital?

John Ferriola -- Chairman, Chief Executive Officer, and President

Well, our plate business in the second quarter was very strong. Frankly, second only to our sheet business. We were-- some of our volumes were off a little bit in the second quarter, it was basically because of some operational issues that we had at our Hertford and at Tuscaloosa mill. There were operational issues that we took care of and we're back into-- back going steady now.

In terms of capital, moving forward, we would see plate as one of the areas, like I said earlier, that we would consider. Certainly, it's been a good business for us. It's a cyclical business, probably one of our more cyclical businesses. And over the long-term, it's been good for us.

If the right opportunities came along, we would certainly be willing to invest in growing plate. One of the things that we hold out a lot of hope for on both our structural and our plate business is the infrastructure that we need to see some form of an infrastructure bill. But we're pretty confident we won't see it this year. We do hope that next year we'll find Washington working together on a way that can bring a much-needed infrastructure bill and it's going to have to be pretty significant to deal with the crumbling infrastructure that we have today.

So we think that as infrastructure continues to -- beyond on the horizon, construction continues to improve, plate and structural see better demand.

Seth Rosenfeld -- Jefferies -- Analyst

Great. Thank you very much.

Operator

We'll hear now from Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Yes. Hey, good afternoon, everyone.

John Ferriola -- Chairman, Chief Executive Officer, and President

Good afternoon.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

I want to, I guess, beat this dead horse on capital allocation because as you point out, it's your second best quarter ever, you expect very strong demand, continuing second-highest steel prices in U.S. history, at least for some products. So I understand you want to stay investment-grade, but if you continue on this track of generating the amount of free cash flow you did, you'd be at well over $2 billion annually, right, just to extrapolate. And so I just want to understand, if you look historically at your pattern in very strong earnings environment, you did buy back a lot of shares, if we look back at like 2007.

Is that a good playbook for how you're thinking about allocating capital? I mean, is it possible that you'd do something similar to what you did then? Are you still contemplating special dividends as a tactic as you did then? If you could just elaborate a little more.

John Ferriola -- Chairman, Chief Executive Officer, and President

I'm going to reiterate what I said a little bit earlier, and that is that, look, our first priority is profitable growth of our company. So we're going to continue to look for opportunities to profitably grow our company. We think that there might be some out there. We're going to continue to look at all of them that come available.

If at the end of the day, we're in a position where we do reach that nice round number of $2 billion that you threw out there and there isn't anything out on the horizon that we think would result in profitable growth of our company and we will do what we always say we will do, we'll return valuable capital to our shareholders. Right now, I think it's a case of we're keeping our powder a little bit dry, still a little early. Remember that one of the great advantages we have in having such a strong balance sheet was the ability to act quickly when opportunities do come up. And I would point to the Tubular acquisition.

We had an opportunity to grow the company profitably with three acquisition in a very short period of time. To do that, we had to have almost $1 billion in cash. And we-- because of our strong position and because of our conservative financial practices, we had that $1 billion. Bear in mind that those three acquisitions were done over a period of about six or eight weeks.

So for us to be very quick, obviously, the sellers like it when they deal with us and they know that we have the cash to provide and we could tell them it's a cash deal. So we want to keep a strong balance sheet so that when those opportunities come up, we can act quickly and decisively. Now if they don't come up, we fall back on returning it to our shareholders. And then, as Jim mentioned earlier, we'll do an evaluation.

If it makes more sense to do it through dividends, we'll do it through dividends. If we think the stock price is at a value where it creates more value by repurchasing shares, then we'll repurchase shares. I don't know how much more we can go into helping you beat that dead horse, but really, that's our view.

Timna Tanners -- Jefferies -- Analyst

I thought I would try. Fair enough. And the other question I wanted to ask is...

John Ferriola -- Chairman, Chief Executive Officer, and President

We appreciate you trying.

James Frias -- Chief Financial Officer

We like that. We like it, yes.

Timna Tanners -- Jefferies -- Analyst

Got to be tenacious, right? You're close to the White House and your talks with them, there's been a bit more coming out, not just Section 232 but antidumping case of steel content. Can you give us your latest case of the further types of cases that we might see? Do you think that there are going to be more such cases with steel content, finished steel products coming into the U.S. that would be targeted by these types of cases?

John Ferriola -- Chairman, Chief Executive Officer, and President

We're always out looking at that and we're not going to stop prosecuting cases because of 232 or any other form of comprehensive trade action. We recognize that when you have a trade case that we are successful in prosecuting, that's a minimum of five years with the ability to do a sunset review to extend it to maybe another five years. So that's a very long-term success. So we're going to continue looking at them.

There are a couple. I'm not going to get into specifics, but I will tell you, there are a couple of products that we are looking at right now. We believe they are good, solid cases that if we prosecute them, we will be successful in those cases. I'll point out that we've got a great track record on -- and I mean the industry, I'm not speaking exclusively of Nucor, but the industry has got an incredible track record.

If I have the numbers right, I think it's about 16 cases we prosecuted since around 2014, and we haven't lost one. I mean, there might have been a couple of countries that was in the cases that got away. But as a general statement, we've been extremely successful in prosecuting the cases that points to two things: it points to, No. 1, the egregious nature of the violations that have been, and in some cases, still are occurring; and it points to the growing understanding by the ITC of the games that are being played as these violating countries continue to play the whack-a-mole game.

So we're going to continue to do that. I will say, on the 232, we continue to be strong advocates of the 232. You heard me speak about whack a mole quite a bit, and 232 provides a comprehensive trade remedy that eliminates that ability to go around with the country and product substitution that drive us crazy, it's taken two years to prosecute. So all in all, we're very happy with tariffs with the 232 action.

We believe that the 232 is justified. We believe that the incredibly massive trade deficit needs to be addressed and we think that trade-- 232 and tariffs will help trading partners come back to the table, come back and reach a more reasonable balanced trade agreement, which I think is good for the steel industry, it's good for our customers, and it's good for the American workers.

Timna Tanners -- Jefferies -- Analyst

OK. Thank you.

Operator

We'll hear next from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hello, John.

John Ferriola -- Chairman, Chief Executive Officer, and President

Hey, how are you?

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Good. How are you doing?

John Ferriola -- Chairman, Chief Executive Officer, and President

Doing well.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

I wanted to drill down a little bit into the raw materials division. The stated profits were better than what you did in all of 2017 in total. So I think it was odd considering that you had the DRI outage and there was-- ferrous prices started to level out on the scrap side. Should we think at all that the high eliminations, corporate eliminations that you had offset some of this optical surge in profits? It was really, really strange to see that type of number in my model and so I'm just trying to think through it.

John Ferriola -- Chairman, Chief Executive Officer, and President

Well, let me help you with that a little bit. There was a little bit of effect on what you've mentioned. But frankly, though, the largest effect would be our Louisiana facility. It's been running very stable.

It's going well for the last four, five, six months. That's been a big plus. I also have to give a kudos and a call out and thanks to our DJ Joseph team. They have continued to improve the efficiency of their processing operations, they've reduced their cost and continue to do so over the last year, and particularly over the last six months.

They've done a fantastic job of becoming more efficient. We've also mentioned on the call a few times an initiative that we call the mill alignment program, and that has not only brought extra value to our steel mills but have helped the efficiency of our DJ Joseph operations. And finally, our team in Trinidad, once again, every time we say they can't push that any further and become any more profitable and effective and efficient, they seem to find a way to do that. And once again, over the last quarter, they've been a stellar performer and that has contributed to the [Inaudible]

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. And John, as you're looking at the third quarter, I think you did mention some gross margin pressures coming in that division. And as we look at it, we've seen nonferrous prices decline, particularly for copper, and we're starting to see some pretty staggering declines in shutter byproduct pricing, particularly in the China. Are those things the biggest driver to some of the margin weakness relative to Q2 you're talking about?

John Ferriola -- Chairman, Chief Executive Officer, and President

I would say that they're the biggest factor. Craig, do you want to add anything to that?

Craig Feldman -- Executive Vice President, Raw Materials

Yes, I would say that's probably the only headwind we see right now is China, and pretty well-publicized. They've made a statement that they're going to eliminate the purchase of a lot of scrap come 2020, which we've been working on that for quite some time. So it was not a surprise to us. We've been accelerating our attempt to go to furnace-ready aluminum products and nonferrous products, I would say.

John Ferriola -- Chairman, Chief Executive Officer, and President

OK?

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

From Morgan Stanley, we'll move next to Piyush Sood.

Piyush Sood -- Morgan Stanley -- Analyst

Hi, guys. Good afternoon. A couple of questions from me. We heard some comments in the AMM conference on a second DRI plant at Louisiana and I think a flat roll mill on the West Coast.

Could you talk a little bit more about them?

John Ferriola -- Chairman, Chief Executive Officer, and President

That was me, and I was responding to a question about whether we would have any interest in being on the West Coast and whether or not I thought that DRI was a long-term sustainable and valuable asset. So yes, I do think that-- I'll start with DRI. I do believe, as I've said many times, I think, as time goes on, because of the things that's talked about many times, recycling a prime scrap, the reduction of manufacturing in the United States, that prime scrap is going to continue to come under pressure and become less available. And we, Nucor, we are going to need more of it as we continue to move up the value chain and grow our presence in ultra-high-strength steels and automotive steels.

So yes, we're going to continue with the prime virgin iron units for some time. I've also talked in the past and will reiterate concerns about getting our pig iron from geopolitically unstable region such as Brazil can be challenged but certainly Russia and the Ukraine. HBI coming out of Venezuela is not the most stable country in the world. So we see a need to make sure that we can take care of our needs for virgin iron units so that we can continue to move up the value chain.

So at some point, we'll make an evaluation on a second DRI plant. If we feel that, that's necessary, I've mentioned in the past that we have all of the infrastructure in place to expand to a second facility and we'll consider that at the right time. As far as the West Coast goes, the question really surrounding it was surrounding cash and we're talking about cash at the time and in relevance-- relevant to the West Coast, I mentioned that that would be a good location for our cash if we ever did want to get out to the West Coast because of the limited market and the limited production from the cash to facility. At this time, there are no plans or anything moving out to the West Coast.

Piyush Sood -- Morgan Stanley -- Analyst

That's helpful. And second question, as the U.S. has put Section 232 tariffs, some other countries have retaliated with their own tariffs, so how you're thinking about your exports in the coming months? Do you see any concern anywhere?

John Ferriola -- Chairman, Chief Executive Officer, and President

Well, we've done analysis on that and there'll be some impact, but it won't be a major. One of the things that you have to recall is that particularly if you look at our rebar business, it will be limited to us what we can send out into Canada, which as you're shipping into Canada. But remember, we will not be coming into the country from other countries also. So we actually see it as a net zero situation.

In fact, for us, we'll be able to serve regional markets a little bit better with scrap with we bought out something out of the country. And remember, too, that we have micro mills that will be coming up over the next year or two that will help [Inaudible] what we believe will be an increased demand locally-domestically for rebar. So no, we don't see a major impact at our plant and galv line in Mexico. I hope you get a question about that, but that will be serving the automotive market in Mexico, if we don't see a negative impact on that.

So overall, we'll have some impact. It won't be major. We believe that at the end of the day, there'll be a net gain for the steel industry in general and frankly to the United States economy and to our company as a result of what's happening with trade.

Piyush Sood -- Morgan Stanley -- Analyst

Thanks for the color, guys.

Operator

We'll hear now from Alex Hacking with Citi.

Alex Hacking -- Citi -- Analyst

So you had a very good strong quarter on volumes. Are you sensing any increase in inventory levels at your customers? Or is this simply a reflection of strong underlying demand and lower imports?

John Ferriola -- Chairman, Chief Executive Officer, and President

No. Actually, I just was looking at service center inventories this morning, and frankly, they're all running extremely low, somewhere in the neighborhood of 2.2, 2.3, and that's a relatively low number. We've seen a small uptick in some of the merchant products, but that's been very small. And you also have to look at their shipments, and the service center shipments have been up pretty significantly over the quarter also.

That helps with the inventory situation. And talking to our customers, I would say that there certainly is an abundance of inventory on our customers' sites. OEMs, they're running pretty lean, but we are fulfilling our commitments and making sure that they get the steel that they need to produce their products and keep their customers happy.

Alex Hacking -- Citi -- Analyst

Thanks for the color. And I'm assuming that with the changes on imports and Section 232, that you're having some people knocking on your door that were new or haven't knocked on your door for a while looking for steel. I guess, can you -- are you seeing a lot of new customers coming through? Is it a trickle or is it more of a flood in terms of people that are looking for steel from you that haven't come around in a while?

John Ferriola -- Chairman, Chief Executive Officer, and President

I guess, I'd say somewhere between a trickle and a flood, OK? Obviously, we are taking care of our long-term loyal customers and that's happening. They've been -- we've seen a notable increase in their request for steel and we've been able to meet those requests. We have had some new customers come to the door. When possible, we take care of those customers.

One of the things that we look for when we consider allocating some of our tons to those new customers is just how strategic those customers are. What products are they in. Do they support our desire and strategic plan to move into the higher value products. So we take a look at a lot of factors, but I would say, a, first, we take care of our long-term loyal customers.

Secondly, we have been helping out customers who are new to us whenever we can and particularly when they've been strategic to our long-term marketing strategy.

Alex Hacking -- Citi -- Analyst

Thanks, John. I appreciate the color.

John Ferriola -- Chairman, Chief Executive Officer, and President

Thank you.

Operator

And at this time, for closing remarks, I'd like to turn things back to John Ferriola.

John Ferriola -- Chairman, Chief Executive Officer, and President

Well, let me close by saying thanks to our customers. We appreciate the opportunity to partner with you and to run new business every day. And Nucor is always ready to join with you to seize new opportunities. And thank you to our shareholders.

We appreciate your long-term and ongoing confidence in our team. And finally, to my new core teammates, let's keep winning together. Thank you for what you do for Nucor every day. And most importantly, thank you for doing it safely.

Thank you all for your interest in Nucor. Have a good day.

Operator

[Operator signoff]

Duration: 46 minutes

Call Participants:

John Ferriola -- Chairman, Chief Executive Officer, and President

Jim Frias -- Chief Financial Officer

Chris Terry -- Deutsche Bank -- Analyst

Matthew Korn -- Goldman Sachs -- Analyst

Seth Rosenfeld -- Jefferies -- Analyst

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Craig Feldman -- Executive Vice President, Raw Materials

Piyush Sood -- Morgan Stanley -- Analyst

Alex Hacking -- Citi -- Analyst

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