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Nucor Corp  (NYSE:NUE)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Nucor Corporation Third Quarter of 2018 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 considered 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 these 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 the 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 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 & President of Nucor Corporation. Please go ahead.

John Ferriola -- Chairman, Chief Executive Officer and President

Good afternoon, and thank you for joining us for our third quarter earnings call and for your interest in Nucor.

Other members of Nucor's executive team are also on the call today, including Jim Frias, our Chief Financial Officer; Joe Stratman, our Chief Digital Officer; Craig Feldman, responsible for Raw Materials; 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; and Chad Utermark, responsible for Fabricated Construction Products.

I will begin today's call by sharing with you the highlights from our third quarter. Jim Frias will then provide you more details about our financial performance.

Nucor's strong financial performance continued into the third quarter, with net earnings of $2.13 per diluted share and first nine months earnings of $5.35 per diluted share. We are on pace in 2018 to have a record year for earnings. Our financial results are evidence that Nucor was primed and ready for this long-awaited upturn in the steel market.

Our strategic initiatives including capital projects, acquisitions and enhanced customer engagement, as well as our active participation in industry trade actions, have solidified our market leading performance. Our extensive investments have grown our peak earnings power and enhanced our many competitive strengths.

Our growth in earnings capacity has been achieved in all three of our business segments: steel, downstream products and raw materials. These diverse earning streams power our long-term industry-leading returns on capital. The continued strength of the US economy is the primary catalyst for our earnings growth. Tax and regulatory reform along with a robust domestic energy sector are driving this economy. 23 of the 24 end use markets we monitor are experiencing stable to increasing demand.

During the fourth quarter, we continue to see evidence of sustained strength in steel end use markets. Our industry is also benefiting from the cumulative impact of years of successful trade cases that resulted in anti-dumping and countervailing duties, as well as the very recently imposed Section 232 tariffs. Together, these are removing artificially low cost foreign imports from the market and restoring a level playing field.

Through the first nine months of 2018, finished steel imports are down approximately 11%. Finished steel import market share for this year's first nine months is 24%, down from 28% for the comparable year-ago period. Nucor's earnings growth is supported by our disciplined capital allocation practices.

Our highest priority is to invest in profitable long-term growth. We are currently implementing nine growth initiatives totaling approximately $2.2 billion. Completion dates for these projects range from 2019 through 2021. Four of these projects totaling $750 million are focused on the production of long products. These include the rebar rolling mill modernization in Ohio, the MBQ mill expansion in Illinois, and the construction of two new rebar micro mills, one in Missouri and the other in Florida. Notable third quarter progress on these important growth projects included the successful start-up of the new reheat furnace at the Ohio rolling mill modernization and completion of environmental permitting for the Missouri rebar micro mill.

The remaining five projects totaling $1.4 billion are in our sheet mill group. They include a specialty cold rolling mill and additional galvanizing line in Arkansas, a galvanizing line in Mexico with our joint venture partner, JFE Steel, and a new galvanizing line and expanded hot band production capacity in Kentucky.

Two of the projects are approaching completion in the first half of 2019, the Kentucky mill's new galvanizing line and the Arkansas mill's specialty cold mill. The Gallatin, Kentucky project will position Nucor with the widest hot-rolled galvanizing line in North America and significantly boost our growth in automotive markets. The Hickman, Arkansas project expands our capability to produce advanced high-strength -- high-strength low alloy and motor lamination products.

Let me share further details regarding our recently announced expansion of hot band production capacity and Nucor Steel Gallatin. The mill's current capacity is 1.6 million tons annually, which we are expanding to 3 million tons. The cost of the project is about $650 million. When completed, Gallatin will have the capability to produce thicker slabs casting up to 5 inches and a maximum coil width of up to 73 inches. The project advances all move up the value chain by giving Nucor Steel Gallatin access to approximately 6 million tons of higher value-added applications in the energy pipe and tube, heavy equipment and automotive markets.

It is very important to understand that we do not add capacity simply to ship more tons. Our investments are targeted to capitalize on opportunities to move up the value chain and expand our product offerings, and to leverage our cost advantages in logistics and technology. Profitable growth is always Nucor's objective.

Nucor team's focus is on delivering higher returns on our invested capital by taking care of our customers with unrivaled value proposition among steel producers.

Now, I will update you on our progress at our Louisiana DRI facility. In early 2018, the team at our Nucor Steel Louisiana facility began implementation of a three-pronged strategy to increase the plant's reliability and uptime. The plant focuses on achieving improvements in people, process and equipment. The work in the areas of people and process have yielded great results. Production for the first nine months of 2018 by Nucor Steel Louisiana of approximately 1.3 million metric tons is more than 50% ahead of the prior year's first nine months, and actually exceeds full year of 2017 output.

Equipment improvements are the next critical step in achieving sustained reliability at the plant. Our capital plan will invest approximately $200 million in equipment and process improvements, including the process gas heater and a new raw materials storage yard. A bulk of the work is expected to be completed by the fourth quarter of 2019. With Louisiana's DRI product quality, already at world-class levels, we look forward to achieving world-class reliability at Louisiana comparable to that achieved by Nucor's DRI facility in Trinidad.

Earlier this year, our new iron team in Trinidad established a record of 137 days of continuous operation, a feat no other Midrex megamodule plant in the world has achieved. We recognize that as the landscape in the steel industry continues to change, we must continue to be responsive to our customers' needs, and provide them with the very best commercial experience. That is why we are excited about the progress of our new digitalization initiative which is a critical component of our drive to achieve commercial excellence.

We are currently deploying two new digital tools, Nucor now, a new customer web portal, as well as an enhanced EDI system to enable improved direct digital connections with our customers. These new digital tools will bring together consistent information from all of our steel making divisions into one virtual location, making it easier for our customers to do business with us versus going to multiple mills and multiple websites.

We would like to thank many of our customers who have given us the input and have allowed us to work with them in furthering this effort. As with all things Nucor does, we will continue to improve and refine them, so that they meet our customers' evolving needs. We believe this is a big step forward for us to modernize our direct digital connections with our customer base.

Now Jim will provide more specific detail about our third quarter performance and financial position. Jim?

James Frias -- Chief Financial Officer and Executive Vice President

Thanks, John. Nucor reported third quarter of 2018 earnings of $2.13 per diluted share. Our results included a non-cash impairment charge of $0.26 per diluted share after tax related to Nucor's investment and proved producing natural gas well assets. Excluding this charge, third quarter 2018 earnings were at the high end of our guidance range of $2.35 to $2.40 per diluted share, which did not include any estimate for the impairment as noted in Nucor September 14 news release.

Impressive earnings growth through the first nine months of 2018 has been achieved across our broad portfolio, including engineered bar, merchant bar and rebar, plate steel, structural steel, flat rolled, tubular products, joist and deck, metal buildings, cold finished bars and our raw materials businesses.

Teammates throughout your company have worked hard to position Nucor for the strong conditions we are experiencing. We are encouraged by results so far in 2018 and our focus remains on continuing to deliver the substantial payout we expect from wisely investing our shareholders' valuable capital.

Our 2018 earnings are also benefiting from the tax reform legislation that became effective this year. Excluding earnings attributable to non-controlling interests, Nucor's effective tax rate was 24.2% for the third quarter and 23.4% for the first nine months of 2018. All of this has translated into exceptionally strong cash flow. Through just the first nine months of this year, your company generated approximately $1.9 billion of cash from operating activities, or almost $6 per diluted share. As a result, Nucor's financial position remains strong.

With total debt outstanding of approximately $4.3 billion, our gross debt to capital ratio was 29.6% at the end of the third quarter of 2018. Nucor's robust liquidity includes cash holdings of $1.9 billion at the close of the third quarter as well as a $1.5 billion unsecured revolving credit facility, which remains undrawn and does not mature until April of 2023.

For 2018, we continue to estimate capital expenditures of approximately $1 billion. Approximately two-thirds of planned 2018 capital spending is for expansion, product improvement and cost savings projects, with remaining one-third for maintenance purposes.

Depreciation and amortization for 2018 is estimated to be approximately $730 million. Based on currently approved projects, we would expect 2019 capital expenditures to be higher than in 2018. We are not in a position to provide a dollar estimate for that today.

In addition to investing for profitable long-term growth, Nucor continues to deliver attractive cash returns to our shareholders. In the first nine months of 2018, Nucor turn $716 million to shareholders with cash dividends of $365 million and share repurchases of $351 million. The share repurchases totaled approximately 5.4 million shares at an average cost of about $65 per share. The year-to-date 2018 capital returns are consistent with our target to return 40% of through the cycle earnings to shareholders.

For the fourth quarter of 2018, we continue to see sustainable strength in steel end use markets, albeit with normal year end seasonal influences that typically impact fourth quarter performance. With our first nine months of 2018 net income of $1.7 billion, Nucor is poised to set a new annual earnings record for eclipsing the 2008 record earnings of $1.8 billion.

Thank you for your interest in our company. John?

John Ferriola -- Chairman, Chief Executive Officer and President

Thanks, Jim. I would like to conclude by saying a bit more about trade. As I mentioned earlier, the tariffs are having their intended impact by curbing unfairly traded imports. They are sending the message that the United States government is serious about achieving compliance with the rules of trade, but they are also having an important long-term impact. The tariffs are providing leverage to get other countries to the table to negotiate fairer trade agreements for the US.

We see both of the recently concluded trade agreements with South Korea and the new US, Mexico, Canada agreement, as clear indications that the Trump administration's approach is working. We believe this new agreement with Mexico and Canada is good for the United States steel makers and US manufacturing as a whole, and has important provisions that can be a model for the future trade agreements with other countries. Our government has a unique opportunity at this moment to improve our trading relationships. We hope the administration continues to make the most of it, particularly in its ongoing negotiations with China.

We would now be happy to answer your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And we will take our first question from Matthew Korn of Goldman Sachs. Please go ahead.

Matthew Korn -- Goldman Sachs -- Analyst

Good afternoon, everyone. Thanks for taking my questions.

John Ferriola -- Chairman, Chief Executive Officer and President

Hello, Matthew. How are you?

Matthew Korn -- Goldman Sachs -- Analyst

I'm quite well, John, thanks. I hope you as well. A question on the DRI plant. If you could help us understand a little bit, why the original plan was not working to the extent that you needed, but now you're going to be putting in this new equipment and with this capital. And then, what caused the unplanned outage over this quarter, and whatever it was, is that related to the weakness in the system that these equipment upgrades are aimed at fixing?

John Ferriola -- Chairman, Chief Executive Officer and President

Okay, Matthew, good question. I'm glad you pointed out. When you look at the money that we're going to be investing, it's about $200 million. And it could be split up just about equally between material handling and our process gas heater.

Let's start with the material handling. Basically, we had a value in the dome sets from various quarter we've discussed it often. And it has taken some time for us to go back and reengineer the material handling without the domes to be more efficient. That's what we're going to be doing is modeling at very much after our Trinidad operation, which has been working extremely well for us. So, about $90 million of the $200 million will be spent in the area of material handling.

About another $85 million will be spent on the process gas heaters. And as we've talked about many times, that's a separate piece of equipment. I often refer to it as a heating unit, an oven that's been separate from us. We bought it off the shelf from an outside company. And just frankly it was not a well engineered products and we bought..

We've had many problems, it wasn't engineered well, because of the way the tubes land through the oven, through the heating unit. So, we're taking the time in next year, of course, about $85 million to do this, to go in there and we've passed some refractory that has been damaged as a result of the failures in the past. And to reengineer, we designed the tools in a way that we believe will be more reliable going into the future, more similar to what we use in heating units, process gas heaters and other parts of the chemical industry. Basically the -- I would say, 90% of the package that we've had over the years, result of either material handling failure with the domes or in the process gas heater.

Now you asked specifically about the failure that we had in the last quarter, that was an unusual failure. It was frankly a human error. One of our team mates just made a mistake, while he was doing the preventive maintenance function, those things where we're going in and hooking up replacing an electronic component as part of a preventive maintenance programs, and during the process, mistake was made that caused the trip that shut down the unit.

And in DRI operations, whenever you shut it down, it's just a long time to put it back up, no matter how simple the repair is in this particular case, because you have to cool it down and then reheat it in a very, very specific way to avoid doing more damage to the unit.

Does that answer your question, Matthew?

Matthew Korn -- Goldman Sachs -- Analyst

Yes, that does. Thanks. That's actually great detail.

John Ferriola -- Chairman, Chief Executive Officer and President

I think, let me add one more point, Matthew, if I may, and that is this. As we look forward, we think that the changes that we're making will greatly improve the reliability of this unit. So, we feel very confident about what we're doing. One of the highlights, the things that we feel positive about is, we had concerns early on when we had many values that there was something in the technology itself. That was not good, that was not going to work well, that was not going to be reliable. And as we've delved into this and we've focused, as we've talked about in the past, people, process and equipment, we discovered that the technology itself internal to the furnace is better than we had anticipated at the beginning. So, we feel positive about that.

Matthew Korn -- Goldman Sachs -- Analyst

Thanks, and that's very helpful. Let me then follow up this slightly different. You mentioned in the remarks that you've been very pleased so far with the execution of the 232 tariffs and with the government's approach overall on trade. The government has started to open up a bit the process by which the manufacturers can request exclusions to the 232 tariffs and to the quotes placed on certain countries. And there are some reports coming through, I think even today on anticipation that we'll see some adjustments made on Canada and Mexico, and how the tariffs will play there? Is there any concern that you have that this could be weakening or be poised to weaken the 232 effect that you've been benefiting from so far this year?

James Frias -- Chief Financial Officer and Executive Vice President

Well, as I mentioned many times in the past, we consider 232 a tailwind to our performance this year, but we really believe that has been driving our performance this year with more tax reform, regulatory reform. The trade cases that we have successfully prosecuted over the last two to three years, which of course will not be affected by any changes in 232, and the investments that we've made in our company knowing the horsepower of our company.

So, as we see changes coming down the pike, we don't believe that they will have a major impact on our business now. It's more specifically to what we think might be happening, particularly within NAFTA. You've heard me say many times that we were ahead of NAFTA. NAFTA has been good, but the US economy has been good for the US steel industry. We did believe that there were some improvements needed to be made to 20 something, 23-year-old agreement and those adjustments we will make.

At the end of the day, we think that there will and could very well be some changes to tariffs versus quotes not only within NAFTA but other countries. But, what we believe is that the tariffs are achieving their primary objective, which has been to bring other countries including NAFTA countries, but external to NAFTA well also, bringing in countries to the negotiating table, to reexamine the way that we do train and result in a more balanced trade policies and a more level playing field on which we compete.

From day one we have said, the objective that we are hoping to achieve with 232 was the result long-term in a more level playing field on which we can compete, because we believe Nucor will do very well when we compete on a level playing field. And we think we see that happening. Now, how it's exactly ships -- ships around going forward to get to that endpoint with tariffs or with quotas, I'm not in a position to say. But, what I can tell you is that we continue to work with the administration to make sure that at the end of the day, we end up with an administration that supports free and fair trade as we go forward. We think long-term, if we establish trade relationships that are built upon a level playing field, you have a much longer-term positive effect and any short-term borders for tariffs.

Matthew Korn -- Goldman Sachs -- Analyst

Great. And I appreciate it. And then congratulations on the progress made so far this year.

John Ferriola -- Chairman, Chief Executive Officer and President

Thank you.

Operator

And we will take our next question from Seth Rosenfeld from Jefferies. Please go ahead.

Seth Rosenfeld -- Jefferies -- Analyst

Good afternoon. Thanks for taking my questions today. Couple of questions on the outlook for near-term steel demand, I guess, advocation for pricing in the US, given the recent volatility we've seen in the flat market. One of your peers relatively noted they've seen essentially a hiatus in demand for flat products during Q3, but their order intake has meaningfully increased in recent weeks. Just provide us a bit of color on what you've recently seen for buyer appetite and perhaps what they can tell us about the reception to your most recent price hike for flat steels? Start there, please. Thank you.

John Ferriola -- Chairman, Chief Executive Officer and President

What we saw in the end of the third quarter is pretty historical to what we see year after year. We always see sometime around that period of dip in order entry bias take a little bit of a time out and see what's going on. So, we assessed their inventory levels at the end of the year. And as we have seen in past years, it tends to be short-term with order entry picking back up very quickly, that's what we've seen this year also. So, we also saw a dip in our order entry rate.

We also have seen now a pickup or resurgence in order entry rate on our flat products, both in sheet hot band cold and galvanized. Frankly, in our plate business, we are pretty solid all quarter. We did not see a historical dip that tends to occur. So, I guess, at the end of the day, what I would say is that we still see strong demand. There is strength in the marketplace. We see pricing has come down a little bit of price increase that we put in, I guess it was about a week ago, it was followed and seems to be sticking. So, we feel good about that.

So, as I mentioned in the script, when we go out and look at our end markets, the 24 end-markets that we serve, 23 of them are either stable or on the uptick, and many of those that are on the uptick are just at the very beginning of the up cycle, which gives us confidence going into 2019 that we'll see the continued strength in both sheet and plate products.

Seth Rosenfeld -- Jefferies -- Analyst

Thank you. Just a follow-up, given that you brought up plate as well. Can you just give us a bit more color on how you view the supply demand dynamics in that product. Plate certainly seems to spread out positively versus other flat products in the recent months. Do they have to do with import penetration, domestic demand or just the behavior of your local peers in the US?

John Ferriola -- Chairman, Chief Executive Officer and President

I would say more the first two than the third. Demand has been strong. Those markets that we sell into have been very strong. And energy, I can't say enough about energy. I was talking about earlier with the first question, the things that are driving our business I negated to mention energy being so strong, but that drives our business in the sheet products, obviously, in oil country tubular goods, but it also has a major impact on our plate business. So, with energy being so strong, we see demand in plate being very strong, and frankly, imports are down.

So, the imports are down significantly in plate. That's further supporting via the strength in our business. You mentioned, you've touched a little bit up on our competitors. Some of our competitors have had outages during the third quarter and that of course also helps the supply demand equation. So, yes, it's been strong. We see continued strength there. We see energy being strong going into 2019, and therefore, we see our plate business as well as the component of sheet that goes into energy being strong into 2019.

Seth Rosenfeld -- Jefferies -- Analyst

Okay. Thank you very much.

Operator

And our next question comes from Timna Tanners from Bank of America. Please go ahead.

Timna Tanners -- Bank of America -- Analyst

Yeah. Hey, good afternoon, everyone. How are you?

John Ferriola -- Chairman, Chief Executive Officer and President

Good. Thank you. How are you?

Timna Tanners -- Bank of America -- Analyst

Hanging in. Thanks. So wanted to talk a little bit more about your very high quality problem of what to do with all this cash that you're generating. I know you've attributed -- you've alluded to it quite a bit. You announced a $2 billion buyback. But if we just look at your free cash flow generation, you could use all that authorization up within a year without much problem if you use a lot of it in one year.

Just wanted to get a little bit more flavor of how you're thinking about the world right now with vis-a-vis M&A buybacks, and of course, you do have your own organic growth projects. Listening to you talk about DRI and of course, natural gas, it couldn't have anticipated, but certainly there has been some pitfalls with some big investments in the past. I'm wondering, like how are you thinking right now vis-a-vis buying other assets further organic growth and deploying this in buyback program?

John Ferriola -- Chairman, Chief Executive Officer and President

Well, I'm going to kick it off and talk a little bit about the first point of the cash that we're generating. I'll turn it over to Jim and ask him to turn it back to me, and I'll address the last part of your question about how we are viewing organic growth and acquisitions in this part of the business cycle. But listen, you've heard us say this many times, our first priority with our cash is to invest it in profitable long-term growth and that will be continued -- that will continue to be our first primary objective. Beyond that, if we don't have those opportunities, either through mergers or acquisitions or organic growth to invest profitably, then we will return it to our shareholders.

Jim, do you want to kind of add some color to that?

James Frias -- Chief Financial Officer and Executive Vice President

Yeah, I would just say, Timna, you know John talked about the significant number of capital projects that are organic in our pipeline. And typically organic investment projects have the most predictable and reliable returns as a side comment. But next year's CapEx will be dramatically higher than this year. So when we look at our cash position and our forecasts of free cash flow, it's not just based on what it is today, but what it is going to be over the next 12 months to 18 months.

We would expect to continue to return 40% of our earnings to shareholders through a combination of dividends and share repurchases, and we meet with the Board quarterly, and show them what our total liquidity profile is both in the short-term and in -- as well as what our outlook is for those things. And we have a good debate and discussion about whether it's appropriate to do something additionally for shareholders beyond just the 40% and that process will continue. John?

John Ferriola -- Chairman, Chief Executive Officer and President

I'd like to address your last comment or question about organic growth and what else we might be doing with our cash in addition to returning some of it to our shareholders as Jim has mentioned. And as you know, it would not be appropriate and I will not make any specific comments to any specific acquisition opportunities. But I'd like to make just some general comments, and we've said this consistently before that we are always on the lookout for opportunities to strategically grow our business. We look for opportunities that fit well with our five drivers to profitable growth and we look to be opportunistic when it comes to valuing and acquiring those assets.

And when we look at investing in long-term profitable growth, you got to consider different times of the business cycle which presents different opportunities. And we weigh those opportunities to invest capital in our existing facilities, since that's what we've announced at Gallatin against opportunities to add new greenfield operations, such as our micro mills that we've announced and against opportunities to acquired existing businesses from others. And you know this should come as no surprise, but in strong markets, sellers are proud of their assets and they value them accordingly. That's why when you look at our history, we historically grow organically during the stronger markets. Now that said, we are always on the look out for opportunistic buys and we will continue to do that.

In the end, Timna, the way I would like to say it is this, we deploy capital at whatever point we are in the business cycle in a way that creates the greatest long-term value to our shareholders, and that was a very vague and kind of long answer to the question, but we've been getting that question a lot lately, so I wanted to take the time to kind of talk about that in relation to your question about what do we do with our cash.

Timna Tanners -- Bank of America -- Analyst

Okay, I appreciate. It's a little bit of all of the above, and I think that with the amount that you're generating, you have a lot of options, and I like your point about in strong markets, organically, you have ground more in the past than acquisitions. That's interesting. Can I -- this is my second question, if I could drill down a little bit more and try to understand how to think about the raw materials segment, and I know that you just finished telling us about some of the projects that need to be completed at DRI Louisiana. But it's been years of different projects and I'm just struggling to think about the longer term when do we consider that you get to the -- when will these projects finally get us to a good run rate, and how do we think about that run rate? Was the first half of the year EBIT, a good run rate until the recent hiccups? At your current capabilities, is there upside to recent numbers? And when do we expect, we get to that more normal operating environment?

John Ferriola -- Chairman, Chief Executive Officer and President

That's a good question, Timna. Glad you asked them. When I was talking about the DRI, I should have been gone a little further into the projects, the restructuring of the raw materials side, and of the process gas heater to point out the timing of this events. And it will take most of this year of -- excuse me, 2019 to get ready with the engineering and the equipment. We're working on it now. Engineering is done, the equipment is being built. We will be taking a 60-day downturn, sometime toward the end of the third quarter or the beginning of the fourth quarter of 2019. We will complete the work on the material handling side, we will complete the work in the process gas heater.

Our objective, our intention is to come up. After that, we think we will be much more reliable. Our target is to achieve 8,000 hours, which would rival our performance in our Trinidad operation. I like to say that when you look at the quality of the product coming out of Louisiana, it rivals the quality of the product coming out of Trinidad. So we're there in terms of product quality, we need to get there in terms of reliability. We believe that these two projects will get us there. We've actually named this endeavor project 8,000 to keep people's minds focused on the fact that we need to get to 8,000 consistently, an 8,000 hours consistent run rate.

And I want to take this moment to just give a shout out. It's not exactly to your question, but I got to give a shout out to our team in Trinidad. They operated 137-days in a row, which is a record for Midrex operation, and frankly, the only thing that stopped them from going further, Timna, was an earthquake. The earthquake shut them down, and then they turned right around and the recovery they made after that earthquake was just nothing short of amazing and got back up and operating much quicker than I anticipated. And just well done team Trinidad and thank you for doing such a great job and doing it safely. Do you want to add something?

James Frias -- Chief Financial Officer and Executive Vice President

No, you did it well, John. Thank you.

John Ferriola -- Chairman, Chief Executive Officer and President

Okay. Timna, thank you.

Timna Tanners -- Bank of America -- Analyst

2020, is that what you're thinking?

John Ferriola -- Chairman, Chief Executive Officer and President

Yeah. At the end of, yes, 2020. At the end of 2019, we will come back online with what we believe will be a very reliable DRI operation in Louisiana.

Timna Tanners -- Bank of America -- Analyst

Okay. Thanks, again.

Operator

And our next question comes from Alex Hacking with Citi. Please go ahead. And Alex, your line is open.

Alex Hacking -- Citi -- Analyst

Good afternoon, John. Thanks for the question. I just wanted to follow up on the Louisiana DRI again. You mentioned that some of the equipment is going to be modeled on Trinidad. If I remember correctly, Trinidad was built on Midrex technology, and I don't know if Louisiana was built on Midrex technology. I don't think so. Are you involved now with Midrex at Louisiana? Are they part of the solution there? Thanks.

John Ferriola -- Chairman, Chief Executive Officer and President

Hey, Alex. Let me clarify a point you might have misheard or I misspoke. When I was referring to that what we're modeling at our Trinidad operation is simply the material handling and we originally had domes to store and had a conveyor system to move our material handling in Louisiana. When the domes collapse, we went to a more modular system and that's what we have been using for the last couple of years while we've been in the process of deciding which is the best method to use to handle material. That is not a Midrex design, that is not a HYL design. That's a Nucor design that will be used in Trinidad for around 10, 15 years or something like that.

So, at the end of all of the study, and we decided that the way that we handle a material in Trinidad has been very effective, and we've decided to model Louisiana's material handling after Trinidad's material handling. Nothing to do with Midrex or HYL technology.

Alex Hacking -- Citi -- Analyst

Okay, thanks. And then the second question, how concerned are you about -- a macro question, how concerned are you about the amount of flat rolled capacity that's coming into the US market over the next three to four years? It's one of the biggest questions that we got from investors between your plants and your competitors' plants and a couple of restarts. There is a lot of capacity arriving and people are concerned that there might not be sufficient demand. Maybe you could comment. Thanks.

John Ferriola -- Chairman, Chief Executive Officer and President

Well, you know, it's interesting that you say you get that question a lot from investors. So, do we. We keep hearing that. In terms of what other people are doing, and also frankly, in terms of what we are doing. So, let me start by talking a little bit about what some of the things that we're doing and be very specific in saying, look, we are not adding capacity. We said this in the script. We don't add capacity simply to add capacity. We're investing in our company to better serve our customers, to strengthen our competitive position, and then frankly to reinvest and position our divisions for the next decade. So, all of our expansion plans are being made with very, very specific strategic objectives.

So, let me start with that point now. I'm going to spend a little bit of time on this because we do get it so often, we hear from many of our investors. So, let me just talk a little bit about some of the things that we're doing, why we're doing, and what we are looking to accomplish. I hear a lot about our long products plans in rebar and merchant, and are we concerned about that we're adding 700,000 tons of rebar to the market and 400,000 tons of merchant to the market.

We look at that and say, well, we're adding 1.1 million tons of long products into the market. But the reality is, that we are realigning our position in long products and reassigning some divisions into new products, into new areas. So, when you look at how we're shifting things around, and we are moving 400 tons of the rebar, of our current rebar into rod and SBQ into new divisions, into new products and new divisions.

At the end of the day, when you look at how we have restructured our long products in rebar and merchant bar, what we're actually adding is about 500,000 tons, OK. And actually shifting about 70% of the added milled capacity will be directed into newer higher valued enterprise, specifically rod and SBQ. So, when you look at what our long-product strategy is, not just simply adding into the -- additional tons into the market. We are realigning our production to better meet our customer demand in the markets.

And I can't give you a better example of that than Sedalia. So, let me just talk about Sedalia for a minute, OK. Sedalia is located in the middle of 900,000 ton rebound market -- 900,000 tons. Of that 900,000 tons, 700,000 of that 900,000 tons in that market. So, there you will have between 350 mile and 400 mile freight advantage and shipping to their customers. That is not insignificant when you look at costs.

And when you add to that fact that we are surrounding Sedalia with David J. Joseph's scrap operations that are literally within 50 miles?

75 miles to 80 miles. Yeah.

75 miles to 80 miles of that operation, and I think we have about eight to 10 processing plants within --

James Frias -- Chief Financial Officer and Executive Vice President

11.

John Ferriola -- Chairman, Chief Executive Officer and President

What?

James Frias -- Chief Financial Officer and Executive Vice President

11.

John Ferriola -- Chairman, Chief Executive Officer and President

11 to be exact, OK, within 70 miles or 80 miles, look at the advantage that we're having from a cost perspective. And I bring this up because when we talk about overcapacity, the way they survive in an overcapacity market, if there is one, is to be the low cost producer. So, the investments that we're making on the long products side will lower our costs, bring us closer to the customers, OK, and that's a very strategic objective that we have on long products.

So, I mean, I'm going to just be very brief and quick. I got my CFO who's shaking his head at the length of my answer, but this overcapacity issue comes up over and over again. So, I want to make sure that people understand. When we talk about adding capacity at Gallatin and hot band, it's a very specific type of hot band that we're adding, OK. It's more -- we're starting out with a thicker tested slab going into it. Why is that important? So that gives us different physical properties, and very specifically, it allows us to move into X, what we call the X grades, OK, which gets us into the pipe market. So, the investments that we're making in Gallatin gets us into a new market, OK.

The galvanizing line that we're putting in Gallatin, it's going to be the widest hot band galvanizing line in North America. That opens up a world of new markets for us. So, I'm not going to go through every one of them, or I think my CFO will hit me over the head. But if you look at every specific organic growth investment that we're making in this company, is being done with a very specific strategic objective either lowering the cost, moving us up the value chain or getting us into new markets, and that's a very important difference to the investments that we're making in some of the other ones that I hear around the country.

Now, I would just back all of that up with. When you look at -- we've had -- we do market studies all the time, and we look particularly at sheet, we think that there is a consistent growth of about 2% in hot band, cold rolled and galvanized over the next four to five years. So, when you look at the overcapacity or the new capacity that you are referring to us overcapacity, there is room for it to grow. You will add into that the work that's being done and we will continue to do in lowering the imports.

All right, now, if you look at last year imports accounted for 27% of the market. We've got that down now to 24%. Historically, import should be somewhere in the neighborhood 15% to 20%. And also don't know if I have the numbers exactly right, but when you lower that import from 27%, 28% down to someone in the neighborhood of 15%, you are basically eliminating 12 million tons or 13 million tons then gives you that amount of room to grow with the product that's produced domestically.

So, between the normal year-over-year growth, a reduction in imports, there is room to grow our domestic supply. In addition to that, when you look at our projects, they're very targeted to various specific strategic objectives. Long answer, I apologize, but I wanted to address this overcapacity issue, because I think it is being pulled along.

Alex Hacking -- Citi -- Analyst

Okay, thanks. Thanks, John.

John Ferriola -- Chairman, Chief Executive Officer and President

You're welcome.

Operator

And then we will take our next question from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, good afternoon.

John Ferriola -- Chairman, Chief Executive Officer and President

Good afternoon, Phil.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

I have a question on DRI just from a slightly different angle. So, this $200 million that you're spending relative to today, what type of return are you expecting to get with that capital? And then sub-question, what would it take for you to consider a second module in Louisiana?

John Ferriola -- Chairman, Chief Executive Officer and President

Jim, do you want to take a shot on that.

James Frias -- Chief Financial Officer and Executive Vice President

Well, Phil, the return metrics are really about getting the plant to be stable and predictable and operated at 8,000 ton rate. So if we compare operating it at an 8,000 ton rates to where they've been the last two or three years, the return is tremendous. It's extremely high.

John Ferriola -- Chairman, Chief Executive Officer and President

And can I add to that, Jim?

James Frias -- Chief Financial Officer and Executive Vice President

8,000 hours per year. I'm sorry. Thank you. My mistake. I misspoke.

John Ferriola -- Chairman, Chief Executive Officer and President

But Jim makes a very good point. In addition to that, as we have more reliability in our DRI, it allows us to more strategically approach how we buy obsolete and prime scrap both, OK. So the value everyone tends to look at what's the return on the DRI plant itself. And that's, honest, this is going to be a good return. But more -- I believe more importantly, it's the value that it's bringing to the rest of the 18 million tons of scrap that we buy, somewhere in our neighborhood this year, 18 million tons.

James Frias -- Chief Financial Officer and Executive Vice President

So it's actually a bit more than that. The total metallics are probably closer to $20 million.

John Ferriola -- Chairman, Chief Executive Officer and President

More and when you look at the pig iron, OK, that we buy, that's another 3 million, 4 million tons. It allows us to strategically place our buys with the greater deal of reliability and that's where you get a real value out of a more reliable DRI plant in Louisiana.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Yes, about our Phase 2 john.

John Ferriola -- Chairman, Chief Executive Officer and President

Phase 2, we've continued to look at that. We have the infrastructure in Louisiana. At this time, we have no plans to put a second unit in. But as you've heard me say in the past, I personally believe that there is going to be more of a need for alternative iron units as we continue to move up the value chain and also as the existing prime scrap continues to degrade as it continuously recycle through the process. As I've mentioned many times before you cannot get copper out and the amount of copper that is grown in prime scrap is, so it's up like 300% since we began tracking it in 1990, somewhere in the 1990s.

So between the fact that it's degrading, between you add the fact that manufacturing is leaving the United States, this is where we get most of our prime scrap. And then with the computerization of nesting, you get less scrap even in the manufactured products within the United States. For all of those reasons, I think prime scrap is going to continue to be challenged and pricing will continue to increase and the value of DRI will increase also.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks, John. And Jim, would it be crazy to think that the span could be two to three year payback given that dramatically increased uptime potential?

James Frias -- Chief Financial Officer and Executive Vice President

Yeah, I think it's probably closer to two years. They routinely in recent days pig iron pricing market. When that plant runs well, they had real strong contributions per month which makes me feel like that could be a two-year payback versus when they have problems.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

That's perfect. And just have another, I have kind of a somewhat of a modeling question and then a strategic question. On the modeling, should we expect any further cost pressures on refractories or electrodes moving forward or has the bulk of that been felt or at least the majority of that been felt already.

John Ferriola -- Chairman, Chief Executive Officer and President

I think the majority of it has been felt already, particularly when we talk about electrodes. In fact, I think as maybe not so much in 2019, but beyond 2019 as the needle coke situation has been resolved, production starts to come back up, I think you'll see a gradual weakening in that and the pricing of electrodes, refractories, we've seen some increase in pricing. That's been relatively stable over the last four , five months.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

And then my last question, John, is just on the strength of the cycle, right now. I think you said 23 of 24 markets flat or increasing. What's the one right now that's been lagging out of the pocket?

John Ferriola -- Chairman, Chief Executive Officer and President

Marine transportation products, for us specifically barges. We do sell some of our plate and some structural into the barge market and that has been weak. Marine transportation is the one general market that we feel is weak.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

And our next question comes from Derek Hernandez of Seaport Global Securities. Please go ahead.

Derek Hernandez -- Seaport Global Securities -- Analyst

Hi, good afternoon, and thanks for taking my question. I just wanted to ask on your forward view into the end of the year in 2019 on scrap pricing for prime and obsolete?

John Ferriola -- Chairman, Chief Executive Officer and President

You mean 2018?

Derek Hernandez -- Seaport Global Securities -- Analyst

Yeah. Wells, through the end of 2018 and possibly how it may evolve...

John Ferriola -- Chairman, Chief Executive Officer and President

I would say that as is typical, toward the end of the year, you see moderate increasing in scrap pricing as seasonal issues come up. And depending on the weather will determine just how severe it is. So I would say we'd see a general increase in scrap pricing over the next several months, through the first part of 2019, and then typically as we see in this plan, it begins to moderate. I don't see anything radical or any unusual events in the world. I don't see a major change, maybe in the neighborhood of $20, $25 on the upside over the next several months.

Derek Hernandez -- Seaport Global Securities -- Analyst

Thank you. And if I could follow up quickly on your customers' inventories, now that you've spoken about people coming back to market following the pricing increase last week. Is there any additional detail you could give there? Thank you.

John Ferriola -- Chairman, Chief Executive Officer and President

When we look at the way, I typically, answer that is to refer to the months on hand with our service side customers, and when you look at months on hand in virtually every one of our products, they are low, not critically low, but they are lower than -- they are low. And then frankly, over the last four or five months, they have been decreasing, which is not unusual. So we feel pretty good about where our customers' inventories are at this point, we don't see a year end oversupply in their inventories that are going to cause any problems on order entry.

Derek Hernandez -- Seaport Global Securities -- Analyst

Excellent. Thank you very much.

Operator

And we will take our final question from Curt Woodworth from Credit Suisse. Please go ahead.

Curt Woodworth -- Credit Suisse -- Analyst

Yes, good afternoon. Just wondering if you could just expand a little bit more on some of the CapEx moving pieces next year. You had a comment that you think CapEx will be dramatically higher. So could you just frame some of the buckets and would you think the bulk of the DRI spend is completed next year? In an order of magnitude, are we thinking up 40% to 50% year-on-year, just help us frame the moving parts? Thanks.

John Ferriola -- Chairman, Chief Executive Officer and President

We're not -- we don't have a breakdown CapEx in terms of by project. We've told you what the overall -- each project individual is going to be when we announce them, but I would just say that next year's CapEx is probably more than 40% higher than this year's.

Curt Woodworth -- Credit Suisse -- Analyst

Okay, thanks very much.

John Ferriola -- Chairman, Chief Executive Officer and President

We've done a lot of projects coming on -- we are entering into the phase of the project, where a lot of course will incur the equipment purchasing and so forth.

Curt Woodworth -- Credit Suisse -- Analyst

Yeah, thanks.

Operator

And with no further questions, I would like to turn the call back to Mr. John Ferriola for any additional or closing remarks.

John Ferriola -- Chairman, Chief Executive Officer and President

Okay, thank you. And to our customers, I'd like to say that we appreciate the trust that you place in Nucor, and we will continue to earn it with every order. To our shareholders, thank you for your continued confidence and support. And to my 25,000 teammates, I'd like to thank you for another solid quarter. The team in Charlotte appreciates the hard work you do every day to build a safer and more profitable Nucor. Thank you all for your interest in Nucor. Have a great day.

Operator

And this concludes today's conference. Thank you for your participation and you may now disconnect.

Duration: 59 minutes

Call participants:

John Ferriola -- Chairman, Chief Executive Officer and President

James Frias -- Chief Financial Officer and Executive Vice President

Matthew Korn -- Goldman Sachs -- Analyst

Seth Rosenfeld -- Jefferies -- Analyst

Timna Tanners -- Bank of America -- Analyst

Alex Hacking -- Citi -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Derek Hernandez -- Seaport Global Securities -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

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