PITTSBURGH Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of United States Steel Corp earnings conference call or presentation Wednesday, November 4, 2015 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dan Lesnak United States Steel Corporation - General Manager of IR * Dave Burritt United States Steel Corporation - EVP and CFO * Mario Longhi United States Steel Corporation - President and CEO ================================================================================ Conference Call Participants ================================================================================ * Tony Rizzuto Cowen and Company - Analyst * Matt Murphy UBS - Analyst * Gordon Johnson Axiom Capital Management - Analyst * Michael Gambardella JPMorgan - Analyst * Matthew Fields BofA Merrill Lynch - Analyst * Justine Fisher Goldman Sachs - Analyst * Phil Gibbs KeyBanc Capital Markets - Analyst * Nick Germosic Stifel Nicolaus - Analyst * David Gagliano BMO Capital Markets - Analyst * Garrett Nelson BB&T Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, good morning. Thank you for standing by and welcome to the United States Steel Corporation 2015 third-quarter earnings call and webcast. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, General Manager of Investor Relations, Mr. Dan Lesnak. Please go ahead. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [2] -------------------------------------------------------------------------------- Thank you, Tom. Good morning and thank you, everybody, for participating in the United States Steel Corporation's third-quarter 2015 earnings conference call and webcast. For those of you participating by phone the slides included on the webcast are also available under the investor section of our website at www.USsteel.com. There's also a question-and-answers document addressing frequently asked questions on our website for your reference. On the call with me today will be US Steel President and CEO, Mario Longhi, and Executive Vice President and CFO, Dave Burritt. Following the prepared remarks, we would happy to take your questions. Before we begin, I must caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements and projections made on today's call. For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release in the slide deck posted on our website and are included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provision. Now to start the call, I will turn it over to our CFO, Dave Burritt. -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [3] -------------------------------------------------------------------------------- Thank you, Dan. Good morning, everyone, and thank you for joining us. Turning to slide 3, we reported an operating loss in the third quarter of $40 million at the segment level and adjusted EBITDA was $85 million for the third quarter. We continued to face extremely difficult conditions in the third quarter, with high levels of imports and supply chain inventories and decreasing spot prices and rig counts. While our revenues decreased by $70 million, our segment results improved by $65 million, primarily due to our cost-reduction efforts and increasing Carnegie Way benefits. In spite of the drop in revenues, EBITDA margins improved in each of our segments in the third quarter. Turning to cash and liquidity on slide 4. We generated $93 million in cash from operations in the third quarter, and just over $300 million over the first nine months of the year. We finished the third quarter with $1.2 billion in cash, and $2.9 billion in total liquidity. We remain focused on cash management and continued to build on the working capital gains we made last year. We currently expect our cash from operations, including improvements in working capital, to exceed our planned capital spending in the fourth quarter. We understand the importance of having a strong cash and liquidity position during difficult market conditions. We are focused on every potential source of cash and are being very disciplined in our capital allocation strategies and decisions. We will continue to make the investments that support our long-term strategy, but we will do so in a manner and at a pace that is appropriate on our ability to generate cash. We will also continue to invest in high return projects, including projects that we refer to as quick wins, which are smaller in size, are less risky, and have very short implementation periods. A strong cash and liquidity position can be a competitive differentiator when market and industry conditions are the most challenging, and we are fully committed to finding sources of cash to maintain our strong position. Dan will now provide additional details about our segment results. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [4] -------------------------------------------------------------------------------- Thank you, Dave. Third-quarter results for our flat-rolled segment improved as compared to second quarter, as our EBITDA per ton more than doubled and was $30 per ton in the third quarter. Our actions to reduce operating costs, combined with increasing Carnegie Way benefits, enabled us to offset the effect of lower average realized prices. Imported flat-rolled products, much of which we believe are dumped and/or subsidized, remained excessively high in the third quarter, causing further damage to the domestic market and placing downward pressure on both our spot and contract prices. Turning to slide 6, third-quarter results for our tubular segment improved as compared to the second quarter, largely as a result of continued focus on reducing operating costs. While we did have an increase in shipments in the third quarter, shipments remained well below historical levels. The OCTG market continues to adversely impacted reduced by drilling activity caused by low industry prices and the high levels of tubular imports, much of which we believe are unfairly traded. For our European segment, we continued to provide positive results that were comparable with the second quarter. A slight decrease in shipments at average realized euro-based price resulting from increased imports were offset by lower spending and increasing benefits from our Carnegie Way efforts. EBITDA margins for our European segment have been relatively stable since the beginning of 2014, despite real average realized selling prices falling by almost $200 per ton during that period. Turning to slide 8, as we continue to make excellent progress on our Carnegie Way transformation efforts, and particularly at this stage of transformation on cost improvements, we can see the favorable effects on our quarter-to-quarter performance through our ability to partially mitigate through a combination of our [prudent] operating adjustments and increasing Carnegie Way benefits, the price and volume effects of the extremely difficult market conditions we are facing. We also [maintaining] progress by comparing our current period results to the we results we achieved in the past, while market conditions were also very challenging, which most recently was in 2009. Using our North American flat-rolled segment as an example, excluding a favorable change around [fuel's] costs and decreasing pension costs, the improvement in our costs in the third quarter of 2015 as compared to third quarter of 2009 is over $100 million, or almost $40 per ton. Concerning the normal cost inflation that has occurred sine 2009, we have offset all of that inflation plus an additional $40 per ton. The benefits we are accruing through our Carnegie Way efforts are substantial and are reflected in our results, even during very challenging market conditions. Now I will turn the call back to Dave for some additional comments on our Carnegie Way transformation and the favorable impacts that continues to grow. -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [5] -------------------------------------------------------------------------------- Thank you, Dan. Turning to slide 9, including the benefits from projects we implemented during the third quarter, our new total for Carnegie Way benefits for 2015 is $715 million, as compared to 2014 as the base year. The steady increase in 2015 Carnegie Way benefits is the result of the completion of almost 750 projects in the third quarter, raising our total number of projects completed this year to almost 2,000. We continue to increase our capabilities and training, and are training more of our employees and our Carnegie Way methodologies to support our growing pipeline of projects and improve the pace of project completion. This process remains a powerful driver of new Carnegie Way projects, as our employees gain better insight into the potential sources of new opportunities. The number of active projects increased by almost 500 in the third quarter, and we currently have thousands of active projects that will produce benefits, moving us toward a cost structure that will position us to be profitable through the business cycle and create value for our stockholders. Our pace of progress on the Carnegie Way transformation continues to exceed our expectations, and the continuing benefits will improve our capability to earn the right to grow and then drive sustainable profitable growth over the long term as we deal with the profound cyclicality and volatility of the global steel industry. As evidenced by a strong and still growing pipeline of projects, we have many opportunities ahead of us. Now turn to slide 10 for an update on our Carnegie Way transformation process. The formation of our commercial entities was announced in October 2014 and implemented this year. The North American flat-rolled commercial entities were created to specifically address the following markets: automotive, consumer, industrial, service centers, and mining. The commercial entities are working to create differentiated steel solutions that will better meet the needs of our existing customers and provide increased opportunities to establish new customer relationships. These efforts are still in the early stages, but ultimately, should improve our position in the markets we serve by creating value for both our customers and stockholders. As our commercial entities continue to mature, we have gained better insight into the level of support that they require from our functional support teams, and we have recently taken actions to streamline our support functions at both our headquarters and at our plants, reducing headcount and our SG&A spending. The ongoing cost benefits from these reductions will be included in the Carnegie Way benefits update we will give next quarter. Our operating facilities are starting to realize the benefits of our reliability-centered maintenance initiatives, as the implementation progresses across more of our facilities. Improved liability, longer equipment life, and fewer unplanned outages will reduce the cost of maintaining our facilities over time and will provide a strong foundation to take our quality and delivery performance to higher levels. We are focused on providing value-added solutions for our automotive customers. We have increased our capabilities in people and equipment at our primary research and technology center and at our automotive technical center to facilitate the continuing development of advanced high-strength steels, particularly those grades commonly referred to as generation one plus and generation three. These grades possess unique properties in terms of strength, formability, and toughness for light-weighting and crash worthiness. We are working closely with customers on specific applications for their use that will allow us to continue to provide our automotive customers with a steel-intensive total vehicle solution that will enable them to meet the increasing CAFE and safety standards for future vehicles at a very attractive and competitive value proposition compared with potential alternative materials. We've also made changes to our main defined-benefit pension plan that, when combined with the effects of the shutdown of the flat-rolled facilities at Fairfield, and a change in the discount rate, reduces our benefit obligations by approximately $300 million. And we will -- and will result in a decrease of over $100 million in our 2016 pension expense. We have some additional detail on these changes in the Q&A document we posted to our website this morning, and that will be in our 10-Q that we expect to file later today. We will perform the annual re-measurement of our pension plan at the end of the year and will provide guidance on the annual cost and cash requirements on our January earnings call that will include the effects of the changes we made to the plan, as well as the effects of any changes in the discount rate and the performance of the investment portfolio. Value is not created or destroyed in any one quarter; it is created through sustainable improvements in our business model. But with the high level of volatility in the steel industry, it does take time. We are confident that our strategy and the process we have developed to implement that strategy will create value for our stockholders, customers, employees, and other stakeholders. And now I will turn the call over to Mario to cover several important areas. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [6] -------------------------------------------------------------------------------- Thank you, Dave. Good morning, everyone. We continued to use Carnegie Way methods to get our operating costs aligned with our lower utilization rates. We are attacking every aspect of our cost structure and exercising every opportunity that we have to eliminate, reduce, and defer costs. Last quarter, we reported that we had taken aggressive short-term actions to reduce costs. We realized approximately $125 million in cost reductions from these actions in the third quarter, and we expect to realize approximately $125 million more in the fourth quarter. I would like to emphasize that these are the result of temporary market-based adjustments to our operations. We will certainly try to make many of these reductions permanent, but many will revert as we eventually return to normal operating levels and bring our people back to work. The cost reductions are in addition to sustainable improvements to our business model, resulting from our Carnegie Way transformation that Dave discussed just a few minutes ago. Now turning to our operations. We continue to operate our facilities in line with our order book and are well-positioned to respond to our customers' requirements. We announced on August 17 the planned shutdown of the blast furnace and associated steel-making operations, along with most of the flat-rolled finishing operations at Fairfield Works. The blast furnace is offline, and all finishing facilities are being idled, with the exception of the number five coating line. On October 6, we announced the possibility of a temporarily idling our Granite City Works steel-making operations and most of its finishing operations. This potential idling is part of our ongoing adjustment of steel-making operations throughout North America to match customer demand. Market conditions will determine when and which facilities will idle. We're working closely with our flat-rolled customers at Fairfield and Granite City as we make adjustments to our operating configuration. We'll continue to operate our coating lines at Fairfield and Granite City, as well as maintain our Double G joint venture. We have the necessary product capabilities and capacity across our other flat-rolled facilities to meet our customer's needs and will continue to provide them with the high quality products, technical support, and other services, as we always have. While energy markets remain challenging, we are operating our tubular facilities in a manner to ensure we meet the customers' needs. While we continue to make operating adjustments to stay aligned with current market conditions, we also continue to pursue the long-term strategic initiatives that are critical to the ultimate success of our tubular segment, particularly the excellent progress we are making on developing premium connections to provide our customers with a complete solution to their drilling needs and capture our share of this higher-margin business. Extremely high levels of imports, much of which we believe are unfairly traded, continue to negatively impact order rates for domestic steel producers. For generations, we have been the industry leader in confronting unfair trade practices in this market. Whether advancing legislative change, or seeking revisions to policies and practicing of the governing authorities, or filing trade cases, we remain vigilant in our efforts to ensure there is a level playing field for American industry in this market. Yesterday, the Department of Commerce issued its Preliminary Countervailing Duty, or CVD, margins for the corrosion-resistant products case that was filed on June 3 against the foreign countries that we allege support their steel producers through illegal subsidies, distorting our market and causing material injury to American steel producers. This is a good first step. The identification, review, and valuation of subsidies is a complex and difficult process. As this CVD process unfolds, along with the anti-dumping petitions filed on corrosion resistant products, we remain hopeful that our government will continue to probe and carefully review these foreign subsidies that distort our market and ultimately injure American companies and American workers. We await the preliminary anti-dumping margins that will be issued on December 21, encouraged that our federal agencies tasked with this critical oversight and enforcement of our trade laws will halt these harmful, illegal, and unfair practices. For the cold-rolled case that was filed on July 28, preliminary CVD margins will be issued on December 15, and preliminary anti-dumping margins on January 4. For the hot-rolled case that was filed on August 11, preliminary CVD margins will be issued on January 8, and preliminary anti-dumping margins on January 19. Competition from imports will continue to influence the market. In an effort to mitigate the negative impact of unfairly traded foreign imports on our business, we have initiated discussions to change the anti-dumping and CVD system through regulatory practices and procedures, commenced substantive work with regional trade partners and organizations, outlined a robust engagement with the Obama administration to tackle global overcapacity, and commenced discussions with other industries and stakeholders to launch a public education campaign. We continually have felt the impact of impacts from foreign countries in our business and continue to execute a broad global strategy to enhance the means and manner in which we compete in the US market and internationally. We are leveraging our unique experience, knowledge, and reputation to forge alliances and partnerships to advance innovative structural changes to commercial and legal regimes to better position and support the US steel industry in the 21st century and beyond. Now I would like to give a brief summary of what we are seeing in our markets and our guidance for 2015. The automotive market continues to be a very good market for us, and we expect it to remain strong throughout the year. We also expect growth and demand in the appliance and construction markets, as compared to last year. The industrial equipment market is in a mixed condition, with a slight improvement in demand for construction equipment, steady demand in the rail car markets, and weakness in mining equipment. Service center buying continues to be below where it was at this time last year, as they continue to rebalance inventories to meet forward demand expectations. In the energy markets, low rig counts and high levels of import tons, coupled with supply chain inventories, will continue to be strong headwinds against an improvement in domestic order rates. We continue to expect slight growth in steel consumption in Europe as compared to last year, with better growth rates in the central European region. Now turning to our outlook on slide 13. Markets have clearly not followed the trends we were observing in the late second- and early third-quarter timeframe. Spot prices reversed direction and have reached new lows for the year. Import levels have remained high, and the OCTG market continues to deteriorate. As a result, the pace of the rebalance of supply chain inventories in both our flat-rolled and tubular markets has slowed, resulting in lower customer order rates than we had projected. The lack of an order-rate recovery has actually had a larger impact on our results than the falling spot prices. In spite of that, our efforts to reduce operating costs to align them with our utilization levels, and our increasing Carnegie Way benefits exceeded our expectations. However, we could only mitigate a portion of the commercial headwinds, and we currently expect to generate full-year adjusted EBITDA of approximately $225 million. I would like to conclude my remarks with a brief recap of some of the major initiatives that are establishing the foundation that we are building from to achieve the ultimate objectives of the Carnegie Way transformation: generating economic profit across the business cycle; remaining profitable at the troughs; and creating real value for stockholders, employees, and all of our other stakeholders. We have been working very hard on several key projects. And with each passing day, we mitigate more of the structural issues that are within our control. While excess capacity and a stronger US dollar continues to embolden [unfairly] traded imports, we have made very good progress on our key initiatives. The US Steel Canada was responsible for just 10% of our sales since 2009, and yet, 50% of our losses came from Canada, with a cash burn since its acquisition of about $4 billion. We deconsolidated Canada last year, removing $1 billion of liabilities from our balance sheet, and expect to finalize our claims in due course. CCAA is not something we wanted to pursue, but we will make the very hard decisions when required. We have continued our aggressive efforts to mitigate the impact of illegally imported, dumped, and subsidized steel in the United States. While extensions of time have been granted to foreign respondents in this process, which delayed the final results, our expectation is that penalties will help to correct the damaging market distortions created by these illegal imports. The process is progressing, and we expect decisions to begin being made before year end. We are in ongoing negotiations with United Steel Workers for successor collective bargaining agreements, and we remain hopeful that we will get a fair agreement without a work stoppage that recognizes the structural challenges in our industry and strengthens our Company, compared with foreign and domestic competitors. We have structural issues in this industry that are not temporary but enduring, and that means we must work better, smarter, and more effectively than our competition, and a competitive labor agreement can help preserve our employees' jobs. Finally, cash is our lifeblood and everyone knows that, and our commitment to managing cash is showing. We have managed liquidity well and compared with many competitors, our $1.2 billion of cash on the balance sheet and $2.9 billion in untapped liquidity positions us well to confront challenging business conditions and emerge stronger than before. We are conserving cash, making intelligent choices, especially where we can be competitive and exiting business where we can't. Closing facilities that are not competitive is troubling, but if we can't be competitive in such a difficult environment and also deal with unfair foreign competition for whatever reasons, additional plant closures may be necessary. US Steel has weathered storms like this before over many decades. The leaders and employees of the past kept us going and we intend to do the same. During the great recession of 2009, we saw similarly challenging circumstances, but in brief, we are stronger now than we were then, and the process improvements and the structural changes we are making now will be recognized when business conditions improve and should show our stronger earnings power. The strength of the Carnegie Way has momentum and much of the commercial headwinds are being offset. These are long and tough days, but we will keep doing what is required. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [7] -------------------------------------------------------------------------------- Thank you, Mario. Tom, can you please queue the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Tony Rizzuto, Cowen and Company. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [2] -------------------------------------------------------------------------------- I've got several questions here. First, in your commercial mix of contract bus in flat-rolled, of your roughly 50% that is either firm or market-based quarterly, approximately what percentage has a January 1 rollover? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [3] -------------------------------------------------------------------------------- Probably somewhere in the two-thirds to 75% range. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [4] -------------------------------------------------------------------------------- Okay. All right. And then also a question for strategically for both Mario and David. I really applaud the fact that you guys are, along with the team, trying to fundamentally change the performance of the Company. There's just so many moving parts, obviously, and I know that it's a great challenge. Some of the Carnegie Way benefits are being overwhelmed by deteriorating price, mix volumes, all that type of stuff. And you mentioned the $40 per ton number, in which you've meaningfully changed or structurally changed the cost position of the Company. Is that a similar way that we should think about that in terms of lowering the breakeven level for the Company? Would that be similar to looking at it on that basis? I mention that because in the third quarter, hot-rolled averaged, according to [plats] for $65 and the spot now is a $395. Just trying to think about that in a way that we can better track your performance as we go forward. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [5] -------------------------------------------------------------------------------- Yes. That's the right way to do it, Tony. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [6] -------------------------------------------------------------------------------- Okay. All right. So effectively, that's been the change in your fundamental, your structural costs, taking out, removing that other items that you talked about. Okay. And then the final question I have right now and then I'll get back in the queue is, is that the CapEx embedded, you mentioned, David, that cash flow from ops was expected to exceed planned CapEx in Q4. What is the CapEx number embedded in that forecast? -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [7] -------------------------------------------------------------------------------- Our number four 2015 is right at $500 million, and we've had $409 million so far year to date. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [8] -------------------------------------------------------------------------------- Okay. Any thoughts or guidance that you could provide us at this early juncture for 2016? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [9] -------------------------------------------------------------------------------- Not yet, Tony. We're in a process of grafting the plans for next year, and as you know, volatility now more than ever probably plays a big role in that. So we will be bringing that up -- bring you up to speed on that on the next call. -------------------------------------------------------------------------------- Tony Rizzuto, Cowen and Company - Analyst [10] -------------------------------------------------------------------------------- Okay, you do have the $235 million. I think on Fairfield, and I think you've spent what, maybe about one-half or will have by year-end? -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [11] -------------------------------------------------------------------------------- A little less than one half. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Matt Murphy, UBS. -------------------------------------------------------------------------------- Matt Murphy, UBS - Analyst [13] -------------------------------------------------------------------------------- You mentioned specifically in the earnings report savings on mining. I'm just wondering if you can quantify what percent you've taken down your delivered pellet cost with low oil and some of your operating changes? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [14] -------------------------------------------------------------------------------- No. We wouldn't go into that level detail, but just like all other activities with our Carnegie Way benefits, they are a full participant to mining operations as all the other facilities. They're doing a good job, but I don't think we would get into the detail of quantifying that. -------------------------------------------------------------------------------- Matt Murphy, UBS - Analyst [15] -------------------------------------------------------------------------------- Okay, and then I'm just wondering as this bear market continues, I'm just wondering to what extent your Carnegie cost savings, your decisions on which projects to implement, to what extent they create challenges to revenue, in particular? If I imagine a healthier US steel market next year, are some of these decisions reversible so you can take advantage of what is currently insufficient margin becomes sufficient? So yes, just color around how you're thinking about driving further savings in a real bear market but not cutting off your options to a healthier market. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [16] -------------------------------------------------------------------------------- There are no Carnegie Way projects that limit our upside or our access to markets. These are all really fundamental structural improvements in the cost structure. So there's nothing that we're doing that limits in any way our ability to respond to better market conditions. -------------------------------------------------------------------------------- Matt Murphy, UBS - Analyst [17] -------------------------------------------------------------------------------- Okay. And then just the last one, working capital. You've had a pretty good run on cash from working capital. Just wondering how much farther you think that can go. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [18] -------------------------------------------------------------------------------- Same thing, I think we're focused on working capital management. We are doing better, we did a lot better. We still see some opportunities for us, whether it's getting our terms totally in sync with the rest of the world or just creating a more efficient supply chain, there's opportunities out there. We're not done yet, and Dave -- -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [19] -------------------------------------------------------------------------------- We're going to be increasing focus on our inventory management, and certainly, we've made some good progress, particularly related to payables. But there's a lot of work to be done with sales and operations planning. And we're going to be focused, very focused, as we said on the call here earlier, on cash management and making sure we have strong liquidity moving forward. We're very pleased with the progress on working capital, but we're still in the early phases of the improvements that we'll be making using Carnegie Way in that space. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [20] -------------------------------------------------------------------------------- I would just add to you've heard of our reliability center maintenance focus, which is a process that takes a little bit of time to fully materialize. But as we make progress in that, that should yield a more robust ability to address our customers' needs with a lesser need for larger inventories. And I think as we go forward and create the proper reliability, any operation, that should continue to contribute to an improved inventory level. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Gordon Johnson, Axiom Capital Management. -------------------------------------------------------------------------------- Gordon Johnson, Axiom Capital Management - Analyst [22] -------------------------------------------------------------------------------- Can you guys comment on first, the trade case outcome? You guys mentioned it in the prepared remarks, but just your thoughts on the tariffs or duties rather, preliminary duties on China and the other countries? And then I have a follow-up. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [23] -------------------------------------------------------------------------------- Well, as I said, Gordon, this is a good start. This is a very complex process. You realize we started back last year preparing for it; it takes a long time for us to put the case together, and we filed in the middle of the year, for the most part. And the Department of Commerce is really working very hard, and they have an enormous amount of their investigators tied with these cases. And you have to realize that what we're fighting here is a very well structured approach that over decades has been improved on the part of the foreign imports and importers into the US, and so it's nothing simple. So I am encouraged by the early results. The process continues, and I think so far, we've only seen the first leg of countervailing duties preliminary fines. The anti-dumping situation is going to be more revealed as we go into the near future. And the combination of the two will determine, in the end, what really are the margins that are going to be imposed. So we're encouraged by it, and I think that we're going to see more of this coming. And that will certainly be not only helpful but necessarily -- necessary for the proper conditions to exist in a fair environment. And we will certainly be able to compete a lot better under those conditions. -------------------------------------------------------------------------------- Gordon Johnson, Axiom Capital Management - Analyst [24] -------------------------------------------------------------------------------- That's extremely helpful. And then clearly, even as recently as year ago, if you would have put a hot-rolled coil price that we're seeing today in front of a lot of, I think, analysts, they would've thought that your EBITDA would be much lower. So clearly, you guys have done an excellent job on Carnegie Way at lowering your costs. But one question I have is we're clearly in a bad environment, but if the environment persists and HRC prices are flat from here, is it plausible that EBITDA for you guys could turn negative? Or do you think that the cost saves and the incremental cost saves you plan to execute on will allow your EBITDA to stay positive? Thank you for the questions, and Mario, I look forward to seeing you later this month. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [25] -------------------------------------------------------------------------------- It will be my pleasure. If you recall, when we started the journey roughly over a year ago, we always said that we didn't expect the markets to be the source of our success. We knew that this is a highly cyclical industry, and therefore, we decided that we're going to focus on what we control with everything we've got, and that's what we've been doing. So this is a journey. It's a battle that it's very challenging, but I think we're showing the power that this organization has and its capability to keep driving improvements in the pursuit of being profitable even in the trough. We're not there yet, but the focus is for us to continue to pursue improvement levels that eventually will make us profitable in the trough. And therefore, if you look at the earnings power that will come when the markets turn to a better moment it's going to be quite significant. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [27] -------------------------------------------------------------------------------- I have a question on the labor contract negotiations. Could you talk about what are the key points that you hope to achieve in this process? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [28] -------------------------------------------------------------------------------- Well in general, it's a - - we have some conditions that are not being balanced with what the competition has, and then you add the dimension of having to go through these surges of imports that come in. We need a little more flexibility, and we have major challenges around not just the base cost structure but some of the other conditions that exist. And we need to be able to face the challenge of imports, as well as the conditions that other domestic competitors have that gives them a little bit of an improvement over us. All that we want is a fair contract in line with the world that we live in today and that can help us position the Company to deal with what are structural changes that have occurred in the industry and in a globalized environment over the past couple of decades. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [29] -------------------------------------------------------------------------------- And then on the pension and healthcare front, can you give us an idea of when you look at your retiree population, how much of that's shrinking due to mortality rated at this point? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [30] -------------------------------------------------------------------------------- Mike, I think the trend in the back of our 10-K, if you factor taking [it out] when we had acquisitions or not, our (Inaudible) dropping by about $4,000 a year over the last few years. So we had a high retiree account really driven by a lot of the downsizing in the 1980s and early 1990s, and that's starting to run itself off and it's getting to be a more normal headcount you'd expect for a company our size. So we're making progress. The natural maturization of plans is continuing. -------------------------------------------------------------------------------- Michael Gambardella, JPMorgan - Analyst [31] -------------------------------------------------------------------------------- And how much of a cushion do you have in terms of the cash funding on the pension, based on your scheduled program with the PBGC? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [32] -------------------------------------------------------------------------------- Right now we had no mandatory contributions into our defined benefit plan. Some of the changes we made that Dave mentioned earlier will help that. As always, each year we evaluate whether we should make some voluntary, and we'll continue to do that. But right now, we have no mandatory and haven't had for quite some time. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Matthew Fields, Bank of America. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [34] -------------------------------------------------------------------------------- Just wanted to ask about some of the closure costs. I think we added back $90 million of Fairfield closure costs in the quarter. How much of those are one-time versus recurring idle costs? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [35] -------------------------------------------------------------------------------- Fairfield is shut down, those are -- that's a permanent shutdown. Those were costs associated with the shutdown. It's not like an idle where you have fixed costs that remain in your base. Those are written off and taken out. You do have some transition to get all your variable costs totally out of the mix. But as a shutdown, that's much different and much more final than you'd talk about if you had an idling. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [36] -------------------------------------------------------------------------------- So we won't feel any more Fairfield-related costs in 4Q? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [37] -------------------------------------------------------------------------------- As far as the shutdown of the flat-rolled operations, we should not. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [38] -------------------------------------------------------------------------------- All right, and then if you do decide to go ahead with the idling at Granite City, just a couple questions there. Is it a similar amount of idle closure costs that we could see in 4Q? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [39] -------------------------------------------------------------------------------- No. An idling is different than a permanent shutdown. When we idle a facility, there are no significant new costs that arise. The impact is that the fixed costs now have to be absorbed by your other operations, and some of your variable costs don't go away immediately. So you have a variable cost absorption issue, but idling a facility doesn't really produce new unique costs; it's just a matter of cost absorption of fixed and some variable you can't get rid of right away. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [40] -------------------------------------------------------------------------------- Okay. Then just related to the EAF at Fairfield. Given the current environment and, I think, previously you'd said that that facility was mainly going to produce rounds for the energy business. Has that thinking shifted? Has the construction plan or place in the overall footprint for that facility changed? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [41] -------------------------------------------------------------------------------- No. As of now, everything at the project is continuing as expected. We always look at everything all the time, but as of now, the projects continue. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [42] -------------------------------------------------------------------------------- Okay. And then just last question on the balance sheet. Can you just talk about your desire to maintain liquidity, as opposed to extending runways and potentially turning out near-term maturities. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [43] -------------------------------------------------------------------------------- The next maturity [being sized] is mid-2017. We still have some time to make our decisions on that. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Justine Fisher, Goldman Sachs. -------------------------------------------------------------------------------- Justine Fisher, Goldman Sachs - Analyst [45] -------------------------------------------------------------------------------- The first question I have is on SG&A. It was down a lot this quarter, and I know you had mentioned in the prepared remarks that some of the costs that you had cut were obviously permanent and related to the Carnegie Way and then others were more temporary that my need to come back when the market improves. And so I was wondering how much of this SG&A reduction is permanent Carnegie Way cuts versus expenses that might need to come back in future quarters. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [46] -------------------------------------------------------------------------------- The expenses that might need to come back are really related to more plant-level activity, so that would be in cost of goods sold. So as far as the SG&A, there shouldn't be much in the SG&A that would come back. The stuff that could back is call employees back to work. That's [close] in cost of goods sold, not SG&A, when you talk about plant employs. -------------------------------------------------------------------------------- Justine Fisher, Goldman Sachs - Analyst [47] -------------------------------------------------------------------------------- Okay, and then just a question again on some balance sheet items. So I know that the convertible bonds are potable to the Company and I know you guys have said that you would pay them in cash. Have you been approached by convert holders to refinance them? Has anyone put them to you? Are there discussions going on at all or is everyone just sitting in their corners and just waiting -- you wait till you hear from them and they maybe wait until there's some more equity upside there on the converts? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [48] -------------------------------------------------------------------------------- We'll have to hear from them. It's in their hands. -------------------------------------------------------------------------------- Justine Fisher, Goldman Sachs - Analyst [49] -------------------------------------------------------------------------------- Okay. And then finally, on the 2017s, you just mentioned that you have time to consider it. Would the Company consider secured debt to refinance those if steel market conditions and high-yield market conditions persist? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [50] -------------------------------------------------------------------------------- We generally look at every option we have, but like I said, at this point, it's probably premature to make those decisions. -------------------------------------------------------------------------------- Justine Fisher, Goldman Sachs - Analyst [51] -------------------------------------------------------------------------------- Okay. Great. Thank you very much. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Phil Gibbs, KeyBanc. -------------------------------------------------------------------------------- Phil Gibbs, KeyBanc Capital Markets - Analyst [53] -------------------------------------------------------------------------------- Just had a question on the inventory build, in 3Q you built a bit. Should we expect that to unwind aggressively in the fourth quarter? And then also, are you anticipating that your fourth-quarter flat-rolled shipments will be down meaningfully relative to 3Q, in terms of how we get to the guidance? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [54] -------------------------------------------------------------------------------- I wouldn't say meaningfully, but there's some seasonality that goes on. The OEMs take down [time] late in the year. So I think we're not -- I don't think we're seeing anything beyond much more than normal seasonal impact on all three segments -------------------------------------------------------------------------------- Phil Gibbs, KeyBanc Capital Markets - Analyst [55] -------------------------------------------------------------------------------- And the inventory side? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [56] -------------------------------------------------------------------------------- You build some inventory in position for the winter, you build some inventory in position of any of your planned outages, and certainly, our decision on Granite City gives us some ability to flex that decision. So I don't think there was an unusual amount of inventory build for this time of year. -------------------------------------------------------------------------------- Phil Gibbs, KeyBanc Capital Markets - Analyst [57] -------------------------------------------------------------------------------- Okay. And then, Mario, what does your current visibility offer you? On the OTCG markets, I saw that pricing stepped down pretty meaningfully. I would assume that a lot of that has to do with mix, and your volumes are bouncing around here. Are you anticipating that your volumes will remain at these levels? And at this point in time, are you expecting your volumes to be up next year if things continue the way they are? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [58] -------------------------------------------------------------------------------- Well, we hope that the volumes will be up next year, to what degree I can't precisely tell you. But if you look at what happened just a few months ago when the price of oil went through the threshold at $50, and everything began to have a different color to it. We're still very low on rigs though, and their productivity continues to surprise everyone in oil production. So I think we have to keep watching it and remain flexible, which we are. If for whatever reason there is a change in direction, we'll be ready to respond. Right now, we are really hunkering down and making sure that we keep accommodating our cost base to the current level of business, and that's the first order of business. -------------------------------------------------------------------------------- Phil Gibbs, KeyBanc Capital Markets - Analyst [59] -------------------------------------------------------------------------------- Great. And just quickly, and then I'll jump right off, I appreciate it. In your tubular business, can you remind us how much of your capacity right now is idled or off-line at the present time? How much you have outstanding and then how much of that is idled or down? Thank you so much. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [60] -------------------------------------------------------------------------------- Actually, Phil, we're running all the facilities at the level we need to, to support the [cost first]. So it's not really a matter of they're idled as opposed to are they running shorter crews, shorter hours, lower crews, but by the nature of the facilities all making different products, we're running them at whatever level we need to, to support our customers. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Nick Germosic, Stifel. -------------------------------------------------------------------------------- Nick Germosic, Stifel Nicolaus - Analyst [62] -------------------------------------------------------------------------------- I was hoping you could discuss the impact on the mix between contract and spot and value add commodity-grade steel upon the idling of Granite City. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [63] -------------------------------------------------------------------------------- There shouldn't be a change in mix because we will take care of our customers, use from other facilities. We'll just -- we're going to load those tons on our other facilities which we think is a more efficient manner. But we are not, that's all were doing. We're moving tons, so we're not changing our mix or changing what we're doing with customers; we're just going to produce their products and other locations. -------------------------------------------------------------------------------- Nick Germosic, Stifel Nicolaus - Analyst [64] -------------------------------------------------------------------------------- And then what's the minimum liquidity that you guys target to run the business? -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [65] -------------------------------------------------------------------------------- Well in this environment, we'd say much higher than it would be in a more stable environment. Certainly $2.9 billion is very strong. I don't think we see anything in the near term that would take us anywhere near a level we're uncomfortable with. -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [66] -------------------------------------------------------------------------------- We have a very exceptionally strong liquidity position now, and it's going to definitely [color it] well into 2017, no matter what economics circumstance we face this year, and we feel really good about our cash management and our cash position through 2016. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- David Gagliano, BMO. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [68] -------------------------------------------------------------------------------- I just have a follow-up on a question that was asked previously regarding the 2016 contracts. Given the changes in mix, et cetera, I'm wondering if you could just tell us the volume, the actual volumes that actually roll off beginning January 1, 2016? That's my first question. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [69] -------------------------------------------------------------------------------- Dave, I don't have that level of detail, and that's probably too much detail for us to give out competitively. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [70] -------------------------------------------------------------------------------- Okay. Let me ask this question then. Can you just talk a little bit about the tone and the approach to the negotiations for those lines that are rolling off? Is there a sense of urgency? Is there more willingness to delay a bit, in terms of the timing of the field? -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [71] -------------------------------------------------------------------------------- The tone is professional, and I think it's essential that that's the tone for you to be able to deal appropriately with the topics that are being discussed. And so were going to keep at it, and hopefully we get to a fair conclusion sooner rather than later. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [72] -------------------------------------------------------------------------------- Okay, and perhaps I could just ask one more. Rather than the tone, he question is the strategy on your side. Have you changed your strategy in terms of locking in those volumes in terms of timing, et cetera, given the current underlying environment? -------------------------------------------------------------------------------- Dave Burritt, United States Steel Corporation - EVP and CFO [73] -------------------------------------------------------------------------------- No, we have not. -------------------------------------------------------------------------------- David Gagliano, BMO Capital Markets - Analyst [74] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [76] -------------------------------------------------------------------------------- I wanted to ask about the iron ore operations. Some of the Keetac and I believe Minntac operations have been idled in recent months. Do you have some spare production capacity up there in the iron range? Can you considered or would you consider becoming more of a merchant pellet supplier? If that might be a positive margin opportunity, would that make some sense strategically? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [77] -------------------------------------------------------------------------------- We have already done that in the past, so this is nothing new that we are not prepared to do. Sure, if there is any business case that benefits the Company, we would consider. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [78] -------------------------------------------------------------------------------- Okay, great. Thank you. And then I also wanted to ask about possible asset sale opportunities. I recognize that you have a very strong cash and liquidity position today. But I also realize that cash is king in this environment. Are there any assets your portfolio you're considering divesting or perhaps some assets on the balance sheet, such as marketable securities or so forth, that you could potentially monetize? -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [79] -------------------------------------------------------------------------------- A lot of the non-core assets we've really monetized over the last several decades. There is not a -- you wouldn't say there's a [screaming] amount of non-core assets left out there. As we look at all of our businesses, I think we'd evaluate on what are our opportunities and where they are, but I don't think we've singled anything out right now. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [80] -------------------------------------------------------------------------------- All right. Thank you very much. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [81] -------------------------------------------------------------------------------- Thank you, Garrett. Mario, some final comments for us. -------------------------------------------------------------------------------- Mario Longhi, United States Steel Corporation - President and CEO [82] -------------------------------------------------------------------------------- Before I sign off, I would like to acknowledge the hard and high-quality work of our employees and their extraordinary accomplishment to improve our Company while remaining fully committed to our core values. We know some of the actions we take impact our team, but these actions are necessary to help us get through these challenging times and create a stronger Company. Slowly but surely all of the initiatives being pursued will make us stronger and better positioned to serve our customers and will result in a better and safer workplace for all of our employees. Thank you again. -------------------------------------------------------------------------------- Dan Lesnak, United States Steel Corporation - General Manager of IR [83] -------------------------------------------------------------------------------- Thank you, Mario, and thank you, everyone, for joining us and we will talk to again in January. Thank you. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Ladies and gentlemen, this conference will be available for replay starting at 10:30 AM this morning and running through November 11th at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 370319. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701, international participants dial 320-365-3844. Please enter the access code of 370319. And that does conclude our conference for today. We thank you for your participation and using the AT&T executive teleconference. You may now disconnect.
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