美國鋼鐵 (X) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the US Steel second-quarter 2013 earnings conference call.

For the conference, all the participants are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded.

With that being said, I will turn the conference over to the Manager, Investor Relations, Mr. Dan Lesnak.

Please go ahead, sir.

Thank you, John.

Good afternoon, and thank you for participating in United States Steel Corporations' second-quarter 2013 earnings conference call webcast.

For those of you participating by phone, the slides are included on the webcast, are also available under the Investor Relations section of our website at www.ussteel.com.

We will start the call with introductory remarks from US Steel Chairman and CEO, John Surma covering our second-quarter results.

President and COO, Mario Longhi will provide an update on various projects and initiatives we are pursuing.

I will provide some additional details for second-quarter.

And then Gretchen Haggerty, US Steel Executive Vice President and CFO will comment on a few financial matters, and our outlook for the third--quarter of 2013.

Following our prepared remarks, we will 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 or 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, are included in our most recent annual report on Form 10-K, and updated in our quarter reports on Form 10-Q in accordance with the Safe Harbor provisions.

Now to begin the call is US Steel Chairman and CEO, John Surma.

Thanks, Dan, and good afternoon, everyone.

Thanks for taking time to join us.

Earlier today, we reported a second-quarter net loss of $78 million or $0.54 per share on net sales of $4.4 billion, and shipments of 5.2 million tons.

Although our segment operating income decreased from the first quarter, due to lower results for our Flat-rolled, Tubular and European segments, it was our 6th consecutive quarter of profitability at the segment level.

And before I go into more detail on our segment operating results, I will comment briefly on safety.

We continue to make significant improvements in safety performance, both in the reduction of injuries, and the elimination of workplace hazards.

This progress has been achieved through the combined efforts of our management team, and our production and maintenance employees, and it highlights what can be accomplished through the cooperative efforts of our entire workforce.

We are working to utilize that same cooperative approach to maximize the results from the major profitability and value enhancement initiative that our President and Chief Operating Officer, Mario Longhi is leading.

You will hear from him a bit later.

Now turning to our Flat-rolled operations, we reported a loss from operations of $51 million in the second-quarter, as compared to a loss of $13 million in the first quarter.

The favorable effects from increased average realized prices and lower raw materials costs were more than offset by lower shipments due to planned blast furnace maintenance outages, and the ongoing lockout at Lake Erie Works, and increased repair and maintenance costs.

As we noted in our release, repair and maintenance costs were approximately $30 million higher as compared to the first quarter.

This increase is considerably lower than we had anticipated, primarily due to the outstanding efforts of our operators and engineers to complete projects under budget, and control spending in all areas at our facilities.

Although our shipments decreased, as we continue to deal with the lockout at Lake Erie Works and our planned maintenance outages, demand has been relatively stable, and many of the value-added markets we serve continue to improve.

While the recovery in the automotive markets has clearly led the way, other markets such as appliance, agricultural equipment and residential construction are also making progress.

The combination of improving demand, and generally lean supply chain inventory levels has provided support for the improving pricing environments of late.

Our Tubular segment, income from operations was $45 million in the second-quarter, lower than income in the first quarter, as increased shipments which reached levels comparable to 2011 and 2012 on an annualized basis were offset by average realized prices that have receded to their lowest level since the first quarter of 2011.

The market fundamentals for the Tubular products continue to be sound, but our margins continue to decrease as a result of the ongoing decline of prices resulting from high import levels, including large imported volumes of unfairly-traded OCTG products.

As we have discussed with you in the past, we have been working hard to be a supplier of choice to the energy industry.

And since 2010, we have made significant investments in this segment of our business to meet our customers' needs.

We have added important capabilities at our Tubular facilities, and recently announced another investment in our Lorain Tubular Operations which will expand the size and range capabilities of our small diameter seamless pipe mill.

And we continue to invest resources into the development of new steel grades and products, such as proprietary premium and semi-premium tubular connections designed for the specific and exacting needs of today's energy industry end users.

However, we have not realized the full benefits of our efforts and investments due to the recent surge of unfairly traded imported Tubular products.

On July 2, we filed a trade case with the ITC, along with eight other domestic Tubular producers, against producers from nine countries seeking enforcement of the trade remedies available under the US Trade laws, for the illegal dumping of Tubular products from these countries, as well as countervailing duties for government subsidies in two of the subject countries.

This case is in the early stages of a very complex process, with the next critical milestone being a vote by the International Trade Commission on August 16 that would allow this case to proceed, and a full investigation to be completed.

While this particular case is in the spotlight right now, this is not a situation that is unique to the energy Tubular markets, as unfairly traded imports affect the entire steel industry, and many other industries in the US, as well.

As steel producers around the world scramble to fill their mills, the pressure on US market has intensified.

From 2010 to 2012, US imports of Flat-rolled steel increased by approximately 42%, and imports of oil country Tubular goods rose by 52% over the same period.

This despite the fact that new market-driven Flat-rolled and Tubular capacity has been added in the US, capacity that would be expected to compete successfully with fairly-traded imports.

That is why it is so important that policy makers deal urgently with foreign market-distorting practices, and the need to strongly enforce fair trade rules.

Recognition of the need for a more level playing field, whether in terms of the behavior of state-owned enterprises, currency manipulation, enforcement of basic regulatory standards, and many other issues seems to be on the rise among the public and the policy makers.

We need to leverage this growing recognition with real steps to address market distortions.

We need to maintain strong trade laws, and strictly enforce them.

We need to ensure that industries do not have to wait years and suffer extensive injury, which can cause a loss of jobs, and negatively impact decisions to invest capital and grow businesses in the US, before measures can be taken to address proven unfair trade.

And we need to do a better job of enforcing the trade orders we have on the books, addressing attempts by foreign producers to circumvent trade relief.

We must also pursue an affirmative agenda to better incentivize market-based outcomes and a level playing field, including passing legislation that recognizes and treats currency manipulation as the unfair subsidy that it is.

If American policy makers are vigilant, I believe we can work through the current era of global excess capacity, and move toward a new era in which success in the steel industry will be driven solely by hard work, innovation and real competitiveness.

We are already seeing glimpses of what that could be, thanks to some of the investments we have made in our Tubular Operations that I mentioned earlier.

And we will continue to do our part to advance our industry even further, by using our ingenuity and determination to discover new process efficiencies and create breakthrough technologies.

Now turning to our second-quarter results for Europe.

We reported an operating profit of $10 million in the second-quarter.

The lower results, as compared to the first quarter were primarily due to higher iron ore costs, and decreasing spot market prices as the inventory restocking cycle that occurred in the first quarter concluded.

Increased shipments in several of our other markets offset a decrease in shipments to service centers, and our volumes remain strong and at levels we have not achieved since early 2010.

European market conditions continue to be challenging.

Demand is not recovered, as it has in our North American markets.

While in general, it appears that there has been some progress year-over-year, the supply and demand balance remains a significant issue, and the pace of any substantial recovery in demand remains uncertain.

So, I will now turn the call over to Mario, to discuss our progress on several important projects we have been pursuing, and to provide some insight into the profitability and value enhancement initiative he is leading.

Mario?

Thank you, John.

We are not content to wait for further global economic recovery to improve our results.

We are deepening the focus on areas that we can control, with the objective to position our Company to deliver the best results possible, regardless of market conditions.

In pursuit of that objective, and beyond the already completed strategic projects, we are evaluating future opportunities, all intended to improve our cost structure, operating efficiency, reliability and financial performance, and to support our customers' continually evolving needs for more highly engineered and advanced steel products.

Last quarter, John discussed our North American Flat-rolled projects relating to our carbon strategy.

Specifically, the ramp-up of our new coke battery at our Clairton plant, and the first of our two Carbonyx modules at Gary Works, our efforts to enhance our yields at our Minntac iron ore operations, and the potential for the production of DRI grade pellets, and the successful start-up and commissioning of our state-of-the-art Continuous Annealing Line at our Pro-Tec automotive joint venture.

In our Tubular segment, in addition to continuing our premium connection and development efforts, we are pursuing the project to expand the capabilities of our small diameter seamless mill at our Lorain facility that John mentioned earlier in today's call.

Also, the potential for a joint venture DRI project with Republic Steel at Lorain.

Our operators and engineers continue to advance these projects as planned, and we are confident that the anticipated benefits from these projects will be more fully realized as they are completed.

Last quarter, John also gave a brief introduction to a major strategic initiative that I have been charged with leading.

And I would like to discuss this initiative, and how we intend to reach our objectives in a bit more detail today.

We are referring to this as a profitability and value enhancement initiative, as it is much more than just a cost-cutting exercise.

As we have indicated, we are approaching this with the same type of total organizational effort that we have used to produce our outstanding achievement in our safety performance.

But in this case, our time frame for achieving meaningful results has to be much shorter.

Our people are referring to this initiative as Project Carnegie, reflecting the business spirit in which the Company was originally created.

And the fact, that we will not compromise our core values in pursuit of this initiative.

This project is designed to critically evaluate what we do, and how we do it.

The goal is to leverage small projects and ideas across the operating locations, while hunting for larger, transformational changes.

Sustainability is the key.

The changes are expected to be a new way of operating and doing business, and not short-term measures that revert back over time.

The goal is to be able to sustain these improvements, on an ongoing basis and under all market conditions.

Improvements are expected from both the cost and the revenue side of the equation.

We are focusing on four key pillars of potential opportunity.

Raw materials, which make up about two-thirds of our product cost structure, conversion costs across all facilities, fixed costs including SG&A, and revenue, enhancement by re-evaluating market strategies.

This is a major undertaking, and we have established a detailed and structured process to provide a disciplined and focus required for a successful outcome.

We have formed teams of functional experts whose mission is to develop and execute on ideas within their areas of expertise.

We have also formed teams at each operating location, whose responsibility is to develop and implement site-specific ideas, or ideas that can benefit multiple operations as well as to execute project ideas from the functional teams.

By having leadership, both vertically and horizontally through the corporation and matrix, we will better ensure collaboration and facilitate execution.

By requiring that our teams identify, commit to, and track specifically defined projects, we will help ensure greater focus and ultimate success.

That our challenges with this initiative, it is not a short-term cost-cutting exercise.

It requires everyone to think different, think big, and accept change.

We do not want to limit the thinking and creativity of our teams, by discussing specific targets at this time.

Our costs and revenues are in the billions of dollars annually, and a small percentage change on either side would be very meaningful to our results.

We understand that we must not only deliver results, but also communicate our achievements to the markets, in order to have them translate into real value for our stakeholders.

And we will provide updates, as projects are completed, and our achievements are firm.

Now let me turn it over to Dan for some additional details on the first quarter.

Thank you, Mario.

Capital spending totaled $105 million in the second-quarter, and we currently estimate that full year capital spending will be approximately $710 million.

Depreciation, depletion and amortization totaled $170 million in the second-quarter, and we currently expect it to be approximately $685 million for the year.

Pension and other benefit costs for the quarter totaled $110 million, and we made cash payments for pension and other benefits of $88 million.

We expect pension and other benefits costs to be approximately $440 million in 2013, and we expect cash payments for pensions and other benefits to be approximately $550 million for the year, excluding any voluntary pension contributions.

Net interest and other financial costs were $65 million for the quarter, excluding a $3 million unfavorable foreign currency effect from the re-measurement of US dollar-denominated intercompany loans.

We expect net interest on the financial costs to be similar in the third--quarter, excluding any foreign currency remeasurement gains or losses.

Now Gretchen will cover some additional financial items, and our outlook for the third--quarter.

Okay.

Thank you, Dan.

In the second-quarter, our cash flow from operations was $151 million.

After deducting our cash used in investing and dividends, we had free cash flow of $32 million.

Looking at the last 12 months, we have remained disciplined in our spending, managing our capital programs in line with our ability to generate cash from our operations.

We ended the second-quarter with $767 million in cash, and had total cash and available liquidity of just under $2.5 billion.

Now let me turn to our capital structure.

In July, we extended the maturity dates of two separate liquidity facilities, one secured by domestic accounts receivable, and the other, our unsecured revolving credit facility in Slovakia.

The two facilities provide a combined total $885 million of liquidity for the Corporation.

The principal value of our accounts receivable facility remains at $625 million.

The three year facility which was to expire in July of 2014, is now scheduled to expire in July of 2016.

The USSK facility which was set to expire next month remains at EUR200 million, and will now expire in July of 2016.

With the completion of these extensions, we have Corporate liquidity facilities of over $1.7 billion committed through the middle of 2016.

They are all currently undrawn.

So given our cash and liquidity position, we feel comfortable with our current maturity schedule, with less than $600 million in debt maturing through 2016.

Now let me turn to the outlook for the third--quarter.

Our results for our Flat-rolled and Tubular segments are projected to improve compared to the second-quarter.

However, we expect lower results from our European segment, due to a planned blast furnace outage in the third--quarter.

Operating results for other businesses are expected to decrease, compared to the second-quarter to near breakeven.

Total reportable segment and other businesses results are expected to be comparable to the second-quarter.

Turning to Flat-rolled.

We expect our Flat-rolled segment results from operations to improve based on an increase in average realized prices, lower raw material costs, and lower repair and maintenance costs, partially offset by reduced shipments.

Average realized prices are expected to increase compared to the second-quarter, due to increased spot market prices, as well as a more favorable product mix.

Our shipments are projected to decrease significantly due to a blast furnace outage at our Great Lakes Works, and the Lake Erie Works labor dispute.

The represented employees of Lake Erie Works are scheduled to vote on the Company's contract offer on July 31, 2013.

If the contract is approved, we plan to restart operations as soon as possible.

This outlook does not include any effect of a restart of Lake Erie Works.

Our third--quarter results for our European segment are projected to decrease compared to the second-quarter.

A scheduled blast furnace outage will result in significantly lower shipments, and increased facility and repair maintenance costs.

Average realized Euro-based prices are expected to be lower compared to the second-quarter, as decreases in spot and contract market prices are partially offset by the positive effects of a higher percentage of value-added shipments.

Raw material costs are expected to be lower in the third--quarter, due primarily to the lower iron costs.

And we expect third--quarter results for our Tubular segment to improve, compared to the second-quarter.

Shipments are expected to increase to support anticipated drilling activity, and average realized prices are projected to be comparable.

Our operating costs in Tubular are expected to decrease due to operating efficiencies from higher production volumes.

On July 1, 2013, we entered into a supplier contract dispute settlement agreement.

As a result of the agreement, we do expect to record a pretax gain of $23 million, which we will report as an item not allocated to segments in the third--quarter of 2013.

We expect a minimal tax provision or benefit in the third--quarter, primarily due to the full valuation allowance on deferred tax assets in Canada.

So that is it for the outlook.

I will turn it over to you, Dan.

Thank you, Gretchen.

John, can you please queue the line for questions?

Certainly.

(Operator Instructions)

Go to the line of Michelle Applebaum with Michelle Applebaum Research.

Please go ahead.

Hi.

Hi, Michelle.

A philosophical question.

As you embark on this aptly-named Carnegie Program, I would like, John and Mario both in particular to reflect on, why it is that over my 30 odd years following this industry, I have only got two companies that I have worked with that are in the melting business that did not go through a major reorg.

And usually those were Chapter 11, those were Nucor and US Steel.

I think we all know why Nucor has survived and flourished the last 30 years.

But can you talk to me about what made US Steel different.

And why US Steel is sort of the last living, or last not reorganized integrated steel maker in the US, and what kind of future lessons can we draw from that?

That is quite a philosophical question, Michelle.

I will just give you a couple of thoughts, not sure I will do it justice.

But first and foremost, I think our Company is still here because we have had very, very strong people in the leadership of the Company -- I will omit myself from that.

But I think we have had good people at the leadership of the Company, who thought long, and who were appropriately conservative at appropriate times.

We believed in funding our pension plan.

We believed in investing in our facilities, and that has stood us well over time.

We do have some legacy benefits that we carry, and certainly, our iron ore resource would be among those.

We have some legacy obligations that we carry as well.

But they are things that we have tried to treat seriously, and deal with properly, and do the right thing to ensure our long-term vigor, and long-term prospects for the Company.

So I think I would just summarize it by saying, we have been fortunate to have leaders in the Company that have taken a long-term view, and done the best thing for the Company over the long-term.

And with an expectation that, over the long-term that is going to translate into the right shareholder value.

I can't comment on what everybody else did.

That is not our business, and not our issue.

But from our standpoint, we look at the long-term benefit to the Company of doing the right thing.

And that is the way we have done it for 112 or 113 years now.

And my expectation is, we will do it that way for a long time to come.

Does Mario have a --?

And I couldn't articulate it any better than John just did, Michelle.

And with the intent of creating a successful future for us, is the purpose behind Project Carnegie.

Okay.

Then my next question, can we talk a little bit about the OCTG case?

There seems to be some confusion over critical circumstances and what that means, and the timing of the impact, et cetera, et cetera.

So can you get into some of that?

Sure.

I think just in general, I would point out that the case was filed just recently.

It is a large, complex case.

It is probably going to take a year or more, would be what I think the experts would say.

First important milestone comes up in a couple of weeks, I think as I mentioned in my comments in mid August.

And then there is -- assuming all, that the case proceeds to a full investigation, there is checkpoints along the way where duties would begin to be assessed.

And then sometime a year from now or so, there would be a final determination.

But critical circumstances, and this is fairly arcane trade law, so I will just give you my simple understanding of it.

Critical circumstances can be alleged any time during the pendency of the process.

If we happen to see a surge of imports, we can allege that matter at any time, up to I think 21 days or so before the final determinations.

And if the allegation then would be successful, they would have duties imposed that would go back I think to 90 days, even before the preliminary determinations, which would be quite a ways back.

So we can do that, and we wouldn't hesitate to, if we believe that is appropriate.

But that is the current status of that matter.

It is a trade law matter, but that is my best understanding of it.

Our next question is from Evan Kurtz with Morgan Stanley.

Please go ahead.

Good afternoon, everyone.

Hi, Evan.

Just a less philosophical question maybe, if that is alright?

On July 1, you have this contract coming up for vote at Lake Erie.

What -- maybe some guidance on what that would impact costs, if that were to go through, how quickly could you ramp up there, and what would that mean?

Sure.

I will try.

Mario, you may want to jump on to this.

But if it would be ratified, we would, as we said in our release would plan to get the employees back to work, and get the facility up and running as quickly as we could.

Have a little bit of work to finish off on a project that we were in the middle of, or towards the end of, actually when the lockout occurred.

And then, the normal employee training and other things we have to go through as we restart.

A period of more heating stoves, and getting the furnace ready to go, ladles, all that sort of things.

And getting the hot strip mill up and running, which we probably would get to more quickly.

We do have some slabs I think we would be able to run.

It probably would be a month before we were up and running hard, and therefore would have some -- probably some additional volume.

And perhaps some commercial benefit for a month, I would guess in this quarter.

Could be more, could be less.

And we will have some additional cost to finish the one project, and then normal costs to bring up the facility.

There is a lot of slag and scrap and things that are prepared in the early days.

So I would say, we don't know for sure.

It depends on how it all goes, and when it happens.

But probably wouldn't be a huge financial impact in the third-quarter, one way or the other.

It would be slight positive, slight negative, would be our best guess at this point.

But it would set us up well for the fourth quarter if that was the schedule.

Mario, anything you want to add to that?

Right.

I can't add anything.

That summarizes it all.

Good, thanks.

And maybe just one on pensions.

I know over the past years, you have built up a nice cushion from excess contributions.

I am wondering if you are burning through that at this point, with your -- I guess, the cash contributions are at the $550 million range here.

Is that burning through that cushion?

And is there some possibility out there, a potential that we should be aware of where you could actually see a step-up to a mandatory payment in the next couple of years, assuming things kind of move along at that $550 million level?

Mario -- Mario.

Sorry, Mario.

That's all right.

Evan, we have been making contributions of about $140 million now for some time.

And that is a little bit more than our normal cost, so it is a good amount to be funding.

I think that we have had in our other 10-Qs, a disclosure that because -- as long as we continue at that $140 million rate, we shouldn't see higher required mandatory contributions for a couple of years, even if the low, low rates of today persist.

So we have done some kind of stress testing on that.

And so, I think we have a couple of years of -- if rates remain unchanged at these very low levels, where we would still just be able to make that.

Now if it would ramp up after that, if let's say if rates continue lower for longer, or there is some big disruption in the market and we don't earn our expected rate of return.

But I think our long-term strategy of funding on a regular basis has served us well.

So I think there is others that have a much more immediate effect, than we would.

Our next question is from Sal Tharani with Goldman Sachs.

Please go ahead.

Thank you very much.

Good afternoon.

Hi, Sal.

Hi.

I was wondering, this plant idling cost of $70 million at Hamilton and Lake Erie, can you break it down between the two, how much was Hamilton?

Well, I think we have sort of given those numbers on and off over the years.

I don't have the details right in hand.

Maybe Dan could help with that.

But the -- and the ongoing basis, there is more significant issues involved at Lake Erie.

There -- we have had the Hamilton carry in our results now for some time.

I will have to wait and let Dan get back to you on the numbers, if that is that okay, Dan?

Sure, no problem

Is that okay?

Thanks.

So if we can, going forward, if Lake Erie comes back, we can have an idea of what to model in.

And you mention in your press release about the strategic program on the OCTG side.

Can you just elaborate on that?

Is it a fixed price contract, or how does it work, and or what is the length of these contracts?

I am sorry, Sal, I misunderstood.

(Multiple Speakers).

Sal, I am sorry.

You have this, in the press release, you mention that your volume was higher because of the -- you sold it to your strategic program customers.

Oh, I see.

I see.

What is that program, and what are the prices, and what is the length of these contracts?

Yes, they are not of extraordinarily long duration.

They are usually for a period of year or two or three, and they vary by nature.

And the pricing is normally negotiated on a monthly, quarterly basis, something like that.

And what it really represents, is an agreement, between we and our program customers that we are going to commit capacity to them.

To the extent they have need for that, they will buy up to that volume from us, and that has worked out extremely well.

It represents a significant portion of our volume.

I want to say, on our OCTG volume, it was not quite 60%, but above 50% of total volume last quarter.

So it is not a take or pay or anything like that, and it does have negotiable pricing over time.

It is more of us and them agreeing, that we got capacity, they have needs, and we try to make sure those two things line up.

Our next question is from Dave Katz with JPMorgan.

Please go ahead.

Hi.

I was looking to get a little more color on the liquidity.

It declined quarter-over-quarter.

Yet your cash went up.

And I was just trying to drill down a little more in, and perhaps looking at each of the three components?

So Evan or I am sorry, not Evan.

Dave.

It is Dave.

I am getting my names confused.

You could call me Mario if you want.

Yes, I will call you Mario, Michelle, whatever.

No, I think that probably is -- if you will look in our disclosures, you will see that we actually have a liquidity block.

We do have a fully loaded fixed charge coverage ratio in that -- in the liquidity facilities.

And the effect of it is, is that we have to leave $87.5 million undrawn, if we don't meet that covenant.

And so we reduced our liquidity by that amount.

Okay.

That is really what it reflects.

Okay.

And then on --

Of course, the facilities are undrawn.

So I mean, it's not, it is kind of a theoretical calculation at this point though.

Okay.

And then looking at the CapEx, obviously it's back-end weighted this year.

Next year, do you have any clarity on what the number in total will look like, and the timing of it?

It would be a little early for that.

Yes, not really.

We are just in the conceptual phase, and looking at projects and things that have to be done, some of which are more infrastructure.

Some would be more strategic and opportunistic.

We have had a policy, as I think we have articulated of living within our means.

To some extent that will be what guides us next year, in terms of total value.

We will have a wish list, but what we can actually afford is likely to be something else.

And we have managed to find room for some strategic things that are important to us, Tubular, and carbon strategy, et cetera.

I would say that, if you were going to use a number, maybe the existing outlook we have given, would be a place to start.

And it might vary up or down, depending how the business looks.

And next go to Gordon Johnson with Axiom Capital Management.

Please go ahead.

Thanks for taking the questions.

What seems to be an unprecedented move by AK Steel to announce a price ceiling on the increases they have announced, as well as the pretty big differentials in HRC spot prices, Black Sea $178 above US and China, $94 above US on the spot market, do you see any risk to significant declines in HRC spot prices in the back half of this year?

And secondly, with respect to the trade case, do you see any potential dumping from Korean players and others ahead of a potential decision there, that may be weighing on your Tubular business that was somewhat weak verse what you were guiding?

Thanks a lot.

I will try to catch those.

Let me take the latter one, first on Tubular.

Imports are very, very high.

The trade case was filed just recently.

I don't know that we have any particular evidence, either anecdotal or systemic, that would tell us that there is a surge coming.

But my earlier answer on critical circumstances would apply, that if that would be the case, we know how to deal with that.

And the fact is, we are in a surge already.

That is why we filed the case.

And if there's a change in that, we will deal with that when the time comes.

On the hot-rolled pricing, or on pricing, the steel pricing in general, from a North American reference point, the figures that you have mentioned, Gordon, there is different analyses on those.

But I mean in the ballpark I think you are probably on the right side of things.

Some of the Black Sea countries, we have a suspension agreement.

And then we also have to consider whether products coming from South Asia have VAT on them, whether it's rebate-able, and the currency movements.

But in general the spread has widened out.

There is no doubt about that.

And, of course, the best way to have that stay close, would be to have world prices move up, particularly in Europe.

But whether that happens remains to be seen.

It would be impossible for us to say that there is no risk, because history tells us that there is.

The wider it gets, the more the risk.

But I would also emphasize that the risk gets much higher, when there is not reasonably good domestic availability for our customers, and that is what we hear.

I think our customers are reasonably well-supplied at this point.

And we are doing the best we can, running at very high utilization rates with what we have available.

So while there is some risk, I don't know how high the prices might go.

That is up to the market to decide.

We are going to get whatever the market has to offer.

I think if we do a good job, our Company at least, of supplying our domestic customers and domestic lead times, don't get too far out.

Five or six weeks today, I think is manageable probably, then I think that risk recedes a bit.

But it is a risk, and I am not prepared to give any odds on that.

Mario, do you want to take odds on that one?

No, your guess is as good as mine.

And next go to Timna Tanners with Bank of America.

Please go ahead.

Hi, good afternoon.

Hi, Timna.

So my first question really about this year's CapEx, just because the trend so far is much lower than the run rate that you have reiterated at 7/10.

But can you give us a little bit of color about what is going to be driving the more back-end loaded CapEx, please?

So, yes, I think Timna, it just has to do with the -- how our projects are unfolding.

We are doing some of the detailed engineering work on it.

And we did -- we have been managing our capital pretty closely.

And so that, if you start that early in the year, you can manage it, and you are going to probably end up spending more later in the year than early in the year, when you are doing it.

So I don't think it is really anything more than that.

We had a higher expectation at the beginning of the year for capital budget of what?

(Multiple Speakers).

$800 million?

Okay.

And so we are down to $700 million.

It's really just managing to that level, and we will be spending what we spend, when we spend it so.

Got you.

Okay.

So to follow up on that, then, really does that mean that you could still lower it, and can you remind me of the timing of some of the specific projects.

I know when Mario was going through it, I wasn't clear when we would see some of the benefit, like from the Kobe joint venture rolling mill that is already playing out.

And that the timing is of the Tubular ramp-up of the greater project capability or product capability?

Thanks.

If you want to comment on that, Mario.

I think some of those are already up and running.

And you just have to --

Sure.

The CA line actually is already up and running.

And we have gone through a very, very successful start-up and qualification of products.

We have already received a couple of orders that are beginning to come in.

And I believe it will take the rest of potentially of this year, for us to begin to see a more significant volume going through the facility.

But the progress is really, really good.

The -- in Lorain, our Tubular project, it is still in the engineering phase.

So there is going to be quite a bit of that going on before any actual construction starts.

So it is going to be for next year.

And did you say, if it could be cut further?

Pardon me?

Oh no, that -- he wasn't talking -- he was just talking -- that is one of the projects we are going forward with.

Yes.

I think he was saying it would be -- since that is just under --

Engineering.

Under engineering now, the spending would be more -- there would be more spending next year --

Next year.

On that.

Yes.

And the actual construction, actually I have recently taken a look at where it is going to go, actually going to be installed.

It is a number of things that actually just increase the capability of the mill, in terms of size range and horsepower and all that.

So it is not a new building or anything like that.

And as Mario says, his colleagues are just -- our colleagues are going through the engineering process right now, before they actually get around to doing the real construction project It will be into next year.

So we ballparked that project I think at $100 million plus or minus, more of that probably next year than this year.

But we still look forward to have it up and on schedule, and contributing significantly to our Tubular results we hope next year.

And next go to David Gagliano with Barclays.

Please go ahead.

Hi, I just wanted to focus a little on the value creation effort.

Just a couple quick questions.

When should we expect to hear a more definitive plan about the efforts, about quantifying the potential, the value creation opportunities here?

What kind of time line should we be looking for?

That is my first question.

Well, it just started.

And we are very well-structured as I mentioned before, to engage everybody on the organization, to pursue a more optimal manner in running the business.

And therefore, this is going to be a continuum.

And what we would like to do really is begin to bring to your attention the projects that are concluded, when we see the firmness of the results, and we can explain it to you why it is coming to the bottom line.

Okay.

Does this value creation plan include potentially closing and/or divesting some operations or assets?

We have an effort going on in order to assess the real capabilities available.

Logistics is a big part of that kind of analysis So everything is on the table at this point, and we will assess every one of them.

Okay.

Thanks.

You are welcome.

And we will go to Luke Folta with Jefferies.

Please go ahead.

Hi.

Good afternoon, everybody.

Hi, Luke.

Hi, Luke.

I guess my question, just again on the improvement plan -- have you done anything to kind of I guess, better align the employees' motivation, in terms of coming up with these sort of improvements?

Has there been any changes to kind of the incentive plan, or anything along those lines?

Yes, that is certainly one of the items that is inside of this re-evaluation of our running the business.

There will be a very direct correlation in the way that we will link goals, performance and incentives.

So right now, we have had programs that are tied to our gross [lead] performance.

And that affects all of the -- all of our employees, our management employees.

Is that something you think you could do in -- I guess, in the context of the current labor agreements that are already in place?

Well, I think it is much more difficult in terms -- it is not customary in terms of the bargaining unit agreements to make significant changes like that.

Although, I would say that inside our existing agreements -- (Multiple Speakers).

We are already aligned on that.

(Multiple Speakers).

That we have excellent alignment, and we all look to the same numbers, whether it is profit-sharing, the management plan or the executive plan, we all have the same numbers.

There is no confusion about that.

But I also think that inside the represented units agreements, that we have got sufficient flexibility to continue to improve productivity within the agreements that we have.

And we have had good success with this type of agreement since we first got into it back in 2003.

So I don't know that we see that as a limiting factor in any particular way.

Okay.

And our next question's from Brian Yu with Citi.

Please go ahead.

Thanks, good afternoon.

Hi, Brian.

Hi.

First question, is just with the European market, you mentioned that prices there haven't been so great.

But I think in recent weeks, there have been some price increase announcements.

I was wondering if you could share any thoughts or views on, if much of that is getting traction?

A little early to tell.

You are quite right.

I think there has been some activity including our Company, and we are having those discussions with our customers right now.

A little soon for us to pronounce that one way or the other, I think as always the market is going to decide.

But it would seem that, with the supply demand balance as it is, and getting through the holiday period, and back to what might be a little busier time, that there might be some opportunity.

So we are starting to see what the market will provide, but we are just in the middle of those discussions right now.

Mario, anything you want to add any different than that?

No, actually vacations have still a couple weeks to go, before normal levels of activity pick back up.

I think by another couple of weeks, we will probably have a better idea of what impact of this improved level of activity will mean.

Okay.

And then my second question is, I know Project Carnegie, it sounds like it is going to be more Ops-driven.

I was wondering, maybe more from the finance side, there has been some MLPs out there, who are talking about trying to get into the iron ore or coke business.

And I was wondering if that is something that you have looked into, to try to enhance the value of some of your assets, by either dropping them or selling to MLPs?

Yes, I mean, Luke, we have looked at, what I would call kind of complex tax-oriented structures of that type before.

We, in fact, at one point had a partnership of our coke oven batteries at, three of our coke oven batteries at Clairton Works.

That it was a different structure, but tax-oriented and beneficial at the time.

But the thing that we have to think about, in looking at our coke assets and our iron ore assets is, we basically consume everything that we make there.

And the MLP structures are really designed for kind of growth assets, where you are going to be dropping things in over time.

And they are -- when you have a strategic need for that particular product, I mean, it's part of our raw materials.

It turns the structure into more of a financing for us.

Okay?

And so, while we look at -- we have looked at those things.

And we have certainly done complex transactions in the past, it may not be the best thing for the most cost-effective thing for our Company, just given the strategic nature of those assets.

So we keep looking at those things, and looking for things that will provide more value to our Company.

But we have tried a number of things on that front in the past, and it is hard to escape from needing the material.

If we were long on those assets, we were long product there, we looked at that at one point, many years ago and --

We were long.

When we were long, so --

Yes.

Okay.

Thank you.

Thank you.

Our final question will be from the line of Aldo Mazzaferro with Macquarie.

Please go ahead.

Hi, John, how are you?

Hi, Aldo, how are you?

Good, good.

Say John, as you go forward on these trade cases, even if it gets into hot-rolled, or let's say it just stayed in OTCG.

I know you basically, separate illegally-traded from legally-traded imports, but do you think the action of raising prices like you are doing, the hot-rolled coil price I think has gone up at least (inaudible) a $100 a ton or more, and actually starting to get some success in the market.

Do you think that is in some cases might weaken your arguments on the trade case, or the necessity for the trade case?

No, I mean, I think conceptually no and factually no.

Although I think to the extent that the domestic market with its active competitive position generates a certain level of price, that is all well, and good.

That is the way the system should work.

If there are illegally dumped imports, whether it is when domestic prices are low, which is not unusual or higher, we think that the injury is the same.

I think that we think that our Company and others like us are injured just the same, one way or the other, and we wouldn't see the effect on our Company any different.

It is money that is out of our shareholders' pockets, and into somebody in some foreign place that we can't pronounce.

So we don't think that, that makes a difference.

We think we should pursue a level playing field, and another country should live up to their trade obligations just like we do, regardless of what local market conditions are.

So I think that will be the best answer I could give on that.

That is not to say that higher prices can't encourage fair trade, and that is okay.

We will compete.

We are prepared to compete on a fair trade basis.

That is fine.

We think we have got a pretty competitive position.

Thanks, John.

And as a follow-up, I wonder could you comment on any thoughts you might have, or possibly Mario also on initiatives that possibly into DRI, DAF, whether it is at Lorain or other ideas you might have on that?

Well, we are very active in that arena, Aldo.

We do have already a project in place being analyzed, so that we can evaluate the possibility of making DRI quality pellets, and bring it down eventually.

Move it into an EAF.

And begin to diversify a bit our footprint.

So that is really ongoing.

And we do have the -- Mario mentioned the pellet project, to get our silica levels down to where they need to be, and that is under way.

And we will be hearing more about that later this year we hope.

But then, also we have a joint study project under way now, with our neighbors at Lorain Republic Steel for -- who is building an EF as you know, for a DRI project there, and that combined with our potential Minntac DRI pellet.

That is a pretty powerful and pretty cost-effective combination, that would get us a really, really competitive [round] source into Lorain, and maybe some other places.

So we also I think, have considered internally and had some early discussions with others about DRI elsewhere, whether it is together, joint, separate.

The economics of $3 or $4 gas, or $5 gas and our own DRI grade pellets is really substantial, and we have given some numbers out before on that.

So it is something we find very attractive.

And getting that into our production footprint is something that, I think we all agree on, is something really good for the Company.

So we are hard at it.

We think it is a really good thing.

Okay.

Dan, back to you.

Well, I think we would like to thank everybody for participating.

We appreciate your interest, and we look forward to talking to you again in October.

Thank you.

Thank you.

Thank you all very much.

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