美國鋼鐵 (X) 2013 Q3 法說會逐字稿

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

(Operator Instructions)

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

I would now like to turn the conference over to your host, Mr. Dan Lesnak, Manager of Investor Relations.

Please go ahead, sir.

Thank you, Keily.

Good afternoon and thank you for participating in US Steel's third-quarter 2013 earnings conference call and webcast.

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

On the call with me today will be US Steel President and CEO, Mario Longhi, and Executive Vice President and CFO, Dave Burritt.

Following our prepared remarks we'll be 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 or projections made on today's call.

For your convenience, the forward-looking statements and the risk factors that could affect those statements are referenced at the end of our release, and are included in our most recent annual report on Form 10-K, and updated on our quarterly reports on Form 10-Q, in accordance with the Safe Harbor provisions.

Now to begin the call is US Steel Executive Vice President and CFO, Dave Burritt.

Thank you, Dan.

Good afternoon, everyone, and thank you for joining us.

We reported income from operations for our reportable segments and other businesses of $113 million, an improvement from the second quarter, and our seventh consecutive quarter that we have been profitable at the segment level.

As a result of our annual goodwill impairment testing, we told you October 18 we expected to record a non-cash charge of about $1.8 billion, representing the full amount of the goodwill on our balance sheet from our 2007 acquisitions of Stelco and Lone Star Technologies.

Excluding this charge, our net loss for the third quarter was $20 million, or a loss of $0.14 per share.

The third quarter is US Steel's sixth out of the last eight quarters of losses per share.

We all know we must do better, and I can assure you the entire leadership team feels the same way.

Before Mario shares the progress on Project Carnegie, Dan will provide additional details about our third-quarter segment results.

Thank you, Dave.

Our flat-rolled segment results from operations improved versus the second quarter due to an increase in average realized prices and lower repairs and maintenance costs, partially offset by reduced shipments.

Average realized prices increased compared to the second quarter due to higher spot market prices.

Shipments decreased by 300,000 tons due to a planned blast furnace outage at our Great Lakes Works and the Lake Erie Works labor dispute which idled that facility for the entire quarter.

A successor labor agreement was reached in August, with blast furnace production at Lake Erie Works resuming in October.

Third-quarter results for our Tubular segment were comparable to the second quarter.

Shipments and average realized prices increased slightly primarily due to a higher percentage of alloy and seamless shipments.

Operating costs increased due to higher repairs and maintenance costs from plant outages at several of our tubular facilities.

Third-quarter results for our European segment decreased compared to the second quarter, as a scheduled blast furnace outage resulted in significantly lower shipments and increased facility repairs and maintenance costs.

And average realized Euro-based prices were comparable to the second quarter.

Turning to cash flow.

We generated $177 million in cash from operations, excluding the $140 million voluntary contribution we made to our main defined benefit pension plan in the third quarter.

Our capital spending remained at a level consistent with the first half of the year as we continued to manage capital spending in line with our internal cash generation, resulting in free cash flow of $264 million in the last 12 months.

We currently expect our capital spending will be approximately $530 million for the full year.

We ended the third quarter with total liquidity of just over $2.4 billion, which includes $697 million of cash on our balance sheet.

Now I would like to turn the call over to US Steel President and CEO, Mario Longhi to discuss the strategic initiatives and projects that we are pursuing.

Thanks, Dan.

Good afternoon, everyone.

As most of you are aware, this is our first quarterly earnings call with the current management team.

And I am encouraged by the potential of combining some new perspectives and ideas with the outstanding level of knowledge and experience that exists throughout our organization.

And I believe we can fully leverage all of this talent to achieve the results we need to create real and lasting value for all of our stakeholders.

As I have described it previously, Project Carnegie is a value-enhancement initiative that will create sustainable improvements on both the cost and revenue sides of the business.

And, therefore, position us to be profitable regardless of market conditions.

This is a very disciplined and complex process, and the key is sustainability.

While some of our opportunities can be realized quickly, others will take longer to identify and implement.

We are focused on the creation of long-term value.

We have initiated several actions and projects that I would like to discuss now, some that will have an impact in the near term, and some that will require some additional time for us to realize their full benefits.

We have decided to permanently shut down the iron and steelmaking operations at Hamilton Works on December 31, 2013.

We will record a non-cash charge in the fourth quarter of approximately $225 million to write down these assets.

Decisions like this are always difficult, but they're necessary to improve the cost structure of our Canadian operations.

This action will result in a sustainable improvement in our cost structure of approximately $50 million per year.

And reduce our cash needs at these facilities by approximately $25 million per year.

This reduction in our total steelmaking capability also improves both our iron ore and coke balance, and allows us to take additional actions.

We're ceasing operations at two of our oldest, highest cost and maintenance and capital intensive coke batteries at Gary Works, resulting in an improvement in our average coke costs.

And eliminating future maintenance spending and capital investments needed to sustain operations at these batteries.

Also, as we discussed in the past, we had two contractual commitments to purchase certain annual minimum volumes of iron ore.

The first of these contracts expire at the end of 2013 and the second expires at the end of 2014, and we will not be replacing either of these contracts.

On the finishing side of our operations, we have agreed with our partner at Double Eagle Steel Coating Company to dissolve this venture, as there has been a significant decline in the market demand for electrogalvanized products and a shift towards hot dip coated technology.

After a thorough review of the business trends and conditions, it was concluded that the economic viability of the electrogalvanized production at Double Eagle could no longer be maintained at an acceptable margin.

We are in the process of moving volumes from the joint venture to our own facilities, including transitioning customers to alternative products that serve their needs, while providing us with an appropriate return for the material, customer service, and technical support we provide.

We are projecting a $20 million annual improvement in our margins by bringing these volumes and customers into our existing facilities.

These actions, which I emphasize represent just the beginning of our Project Carnegie efforts, will result in sustainable improvements to our operating results in excess of $75 million annually.

We continue to work on many fronts and to make progress on additional projects that, while not easily quantifiable at this time, will ultimately provide sustainable improvements to our cost structure and margins.

Our iron ore assets provide significant opportunities.

And we are focused on improving our ability to effectively convert those opportunities into value for all of our stakeholders.

We have been implementing process improvements at our Minntac operations that are improving our yields and costs.

And while this has afforded us the opportunity to utilize our own iron ore at our European operations when market conditions are appropriate, it also positions us to pursue the longer-term objective of using our own iron ore resources to benefit from the low-cost natural gas market in North America by incorporating direct reduced iron, or DRI, into our operations and cost structure.

We have concluded the testing phase of our work at Minntac.

And have determined that, with the appropriate investment in process and facility improvements, we can produce DRI quality pellets.

And we have advanced to the engineering phase in order to define the specific time line and investment required to commence production of DRI quality pellets.

In addition to improvements on the cost side of our business, we need to enhance our ability to meet the increasingly complex and evolving product requirements of our customers, to keep steel as the material of choice, and position ourselves as the supplier of choice.

The US automotive market is a strategic priority for us.

And at our PRO-TEC automotive joint venture we continue to qualify products from our new continuous annealing line for the automotive customers, as we provide a cost-effective and environmentally-sound solution for meeting the CAFE and safety standards for future vehicles.

The project to expand the size range of our small diameter pipe mill at our Lorain tubular operations is on track.

And when completed it will allow us to more effectively load our facilities, as markets such as the deepwater Gulf of Mexico, continue to grow, and unconventional shale plays are developed.

I would like to emphasize that the projects and initiatives I covered here today represent only a small piece of the total scope of Project Carnegie.

We are pursuing sustainable improvements across all of our business functions, including administrative, commercial, procurement, logistics, and outside services, to ensure that they are adding appropriate value to our bottom line.

Our total annual spending in these areas is in the billions of dollars.

And we will continue to update you each quarter on new projects and initiatives as they are developed, become ready, or are implemented.

I would like to turn the call over to Dave for a few additional comments on value creation and shareholder returns.

Dave?

Thank you, Mario.

Since I joined US Steel on September 1, Mario has been very clear on five priorities he wants me to focus on to help transform US Steel to sustainable profitability.

Obviously I'm just getting started and need to move faster on this.

Number one, macro business strategy.

Two, Project Carnegie, value creation.

Three, business measurements, to motivate a greater sense of urgency.

Four, investor communications.

And, five, reducing complexity and streamlining business processes.

We will have the due diligence phase of our macro business strategy completed this quarter.

The last thing we need right now is to start wordsmithing a new vision and mission statement.

Instead, we are intensely focused on Project Carnegie, chartering projects to add value, get leaner faster, right size, improve our commercial capabilities.

And, as Mario keeps telling all his leaders, we must earn the right to grow.

We'll define and exploit our sustainable competitive advantage and focus the business on our core strengths.

We know everybody wants us to give them a Project Carnegie target of how much money we're going to make by when.

We won't do that.

Sure, we have big aspirations, but we would rather be judged on the numbers we deliver than be distracted by spending a lot of time communicating our aspirations and a target right now.

We'll be working to develop business measurements.

You understand how economic profit works.

Return on capital must exceed weighted average cost of capital.

We have not created economic profits for our shareholders for five years.

You're not happy.

We're not happy.

That's not acceptable.

We've got to fix the business.

In order to be a good company we have to deliver economic profits.

And we creating incentives and developing a balanced score card that motivates behavior to generate more cash.

We have a lot of cost take-out to do.

We will move deliberately, intentionally each and every day to make tough decisions, put actions in place, to win.

As we transform our business we'll be communicating with investors more about our strategic ambitions.

Not financial targets, but instead getting you comfortable with where we will focus our efforts.

And you can judge us on what we deliver.

We expect investors to reward us when we exceed expectations and punish us when we don't.

We know investors will.

We're using Six Sigma methodologies as part of our Project Carnegie to examine all aspects of our business.

As we reduce complexity, streamline our business processes, and focus on our core businesses we create more opportunity to go beyond cost reduction and earn our right to grow.

Mario, thanks for asking me to join the US Steel team.

I wouldn't have come to US Steel if I was not confident in your leadership.

I look forward to better days.

I know you want to cover the markets and the fourth-quarter outlook before the Q&A so I'll turn it back to you.

Thanks, Dave.

The overall flat-rolled supply chain in North America is in the healthiest position it has been in at this time of year since the economic recovery began.

In recent years, market sentiment at this time had typically been turning negative.

But as we look to close out 2013, we're experiencing a market that has a different feel to it.

Since early 2012, lead times across most of the North American mills have been shorter than what most would consider normal.

And we have seen cautious order entry patterns from spot market buyers at a time when end users are continuing to ratchet up their consumption rates, resulting in lower inventory levels in North America.

While this may result in some opportunities that we can capture in the near term, an industry capacity utilization rate of less than 80% still suggests that mini cycles are possible.

And we are positioning ourselves to have a book of business which allows us to profitably navigate these cycles, and still be poised to maximize what the market will give us during the peak periods.

Tubular market drivers during the third quarter were mostly positive, led by strong oil-direct drilling in the US, supported by rising crude oil prices and increased drilling in the Gulf of Mexico.

The US natural gas-directed rig count improved quarter over quarter, but remained near its lowest level in over 14 years.

And the Canadian rig count increased quarter over quarter as a result of operators returning to the oil patch after the seasonal downturn due to the spring break.

In the US, drilling operators continue to improve efficiencies through the deployment of multi-well pad drilling.

And as a result, an average US land rig was able to drill 5.37 wells during the third quarter, an increase of 9% from the fourth quarter of 2012.

Total of demand for OCTG increased quarter over quarter by 5% to 1.77 million tons.

Domestic OCTG shipments increased by 3% from the previous quarter, while imports, led by Korea, increased by 7%.

In August the International Trade Commission voted affirmatively that the US OCTG industry had been or was likely to be injured by unfairly traded imports.

The Department of Commerce is scheduled to determine preliminary countervailing duties on the subject countries in December.

Preliminary anti-dumping duties are expected in February 2014.

Now turning to our outlook for the fourth quarter, we expect total reportable segment and other business income from operations to decrease compared to the third quarter.

Fourth quarter results for our flat-rolled segment are expected to be near breakeven.

Overall, repairs and maintenance costs are expected to increase by approximately $60 million, as compared to the third quarter, due primarily to a reline of a blast furnace at Gary Works and a planned blast furnace maintenance project at Fairfield Works.

Despite higher average spot and market-based contract prices in the fourth quarter, we expect average realized prices to be comparable to the third quarter, due to a higher percentage of hot-rolled shipments in the fourth quarter.

Shipments are expected to increase slightly quarter over quarter.

We expect results from our European segment to improve in the fourth quarter and return to profitability due to higher shipments and lower facility repairs and maintenance costs, as a blast furnace outage was completed in the third quarter.

We expect average realized prices for the majority of our products to increase compared to the third quarter.

However, overall average realized prices in the fourth quarter are expected to decline compared to the third quarter, due to a return to a more normal level of hot-rolled shipments.

Fourth-quarter results for our Tubular segment are expected to be comparable to the third quarter, as the benefits of reduced operating costs are offset by slightly lower average realized prices and shipments, as end users are expected to decrease drilling activity in order to operate within their 2013 capital budgets.

Inventory management by our customers may also be a factor as we approach year end.

That completes our prepared remarks and I will now turn it back over to Dan to start the Q&A session.

Thank you, Mario.

Keily, can you please queue the line for questions?

(Operator Instructions)

Luke Folta with Jefferies.

Hi, good afternoon, guys.

Congratulations on all this -- you've announced here.

I'm still trying to take it all in.

But it's, I think what we've been wanting to see as far as pushing forward some of these initiatives.

So, congrats there.

Thank you.

I guess that answers a number of my questions.

One thing on the pricing side, I wanted just to understand, it seems like everyone's taking a bit of a harder line approach on contract pricing for this year -- for next year, that would be for 2014.

And I just wanted to -- I don't necessarily need you to get specific on it but I just want to understand how big of an opportunity do you think it is to change the way that US Steel thinks about pricing in general, and goes about contracts with some of these key end markets and OEMs that you sell to.

Is that an area you think that there's potential meaningful upside for you going forward?

Prices are, in any shape or form you look at it, a direct consequence of market forces.

And the market forces are comprised by demand, by capacity utilization, and by other dynamics and logistics that certainly impact those things.

And in essence for us, the dimension of offering good quality service, a good value to our customers is a good reason for us to be rewarded for some of these things that we do.

So it's never easy to define where these things go but that's the dimension in which we operate.

Okay.

And then just a follow-up on the cost side.

We saw some nice cost improvement sequentially, about $11 a ton lower cost on 300,000 tons of lower shipments, which is interesting.

Was that pretty much all lower maintenance costs?

And are we looking at a situation where we've just basically seen a push-out in maintenance into the fourth quarter?

A meaningful portion of cost improvements certainly come from maintenance.

But we have quite a bit of work being put in place as far as reliability, being more proactive on some things, addressing quality process stability and controls.

It's a conjunction of things that under Project Carnegie slowly begins to solidify a better level of operating performance.

Thanks a lot, guys.

I'll turn it over.

Brett Levy with Jefferies.

Hi, guys.

Talk about the pipe business.

Obviously the case has been filed.

Talk about the behavior.

Initially it seemed like, especially seamless pipe, was on the way up.

And yet you're guiding that the pricing may actually start to come back down again.

Talk about your order books going into 2014 in pipe, and whether or not you see some upside in pricing, maybe in the first quarter.

Brett, I think part of what we see is a normal fourth-quarter dip in demand.

So that's going to have its impact on pricing.

Some of the pricing in tubular takes a little bit longer to flow through because of the mechanisms.

A lot of quarterly mechanisms are negotiated quarterly-type pricing.

So, I think from that standpoint, that little bit dip in demand, people are trying to rein in, stay within their own budgets, trying to avoid some ad valorem taxes on year-end inventories.

Those are probably the bigger factors that are going to play into the fourth quarter for us.

And then how about just the amount of inventory that's on the ground in the pipe business?

And also the nine countries that are being you studied right now, do you see them in the open market behaving better during this period of scrutiny?

I'd say inventories are pretty much in line, maybe a little bit towards the higher end of what we would consider normal.

But still, anything less than six months is probably in the normal range.

Behavior-wise, we haven't seen anybody cross the line that would prompt us to go towards the critical circumstances type argument.

Nobody's turned that way on us.

Korean imports picked up a little bit this quarter.

But nothing that really would jump out as being somebody that's really trying to beat the process.

But the International Trade Commission voted affirmative 6 to nothing that the US OCTG industry had been and was likely to be injured by unfairly traded imports.

I think the investigation will proceed and an affirmative decision should result in import prices reflecting more of a regular market condition versus prices distorted by unfair trade practices.

Thanks very much, guys.

Dave Katz with JPMorgan.

Hi.

I was curious, on the Hamilton Works iron and steelmaking decision, if you anticipate any pushback from the Canadian government?

We've engaged the Canadian government is fully aware.

We follow every proper procedure and legal guidance that is necessary in situations like this.

We're very open and engaged with them in this regard.

And the early indications are that they would have no issue with it?

That really is for you to ask them if they did.

We didn't notice anything.

Okay.

And then with regard to Minntak and the pellet capacity and capability, understanding that it's early days and you're looking to understand the timing and the cost, but the indications thus far that you've had, would that lead you to conclude that the timing and cost will be supportive of you going forward?

Or are you still at the investigative stage where later on you may make the decision not to move forward?

The process has to be very solid.

You have to validate, for example, that you have not just one or two portions of the ore body that are truly capable of sustaining for a long time the conditions necessary in composition in order for you to get a stable production of DRI.

And the studies so far have revealed that this is the case.

Our ore body is competent enough for that purpose.

Which led us then to go to the next level of assessment, which process should be the most suitable for us to be able to get into that kind of operation.

And, of course, do all the financial analysis required to see if this is something that would deliver a solid, sustainable return.

Sal Tharani with Goldman Sachs.

Good afternoon.

Mario, can we talk a little bit about how to look at your maintenance costs.

Obviously a lot of these assets are old assets and you're doing some stuff to reduce it.

But how to look at it over the full-year normalized basis, what kind of cost.

Because this thing moves around dramatically from quarter to quarter.

As you mentioned, $75 million of cost improvement, but just look at in the fourth quarter, flat-rolled alone will absorb $60 million of maintenance cost.

I just want to understand how to look at on a full-year basis for your overall business.

We can give you -- I don't have in front of me the full schedule for every blast furnace repair that we have in front of us.

But we certainly can give you an indication of when is it that we're planning to do them.

And the improvements that you find here are designed for longevity.

It's really not something that you can in one year detect a significant progress.

And that's where some of these different looks at alternative forms of operating, EAFs coming into play, will that give us more flexibility, how would we tie some of that to the strategy of blast furnace repair.

All of that being considered at this point.

But for your guidance, Dan can give you later on what we're designing for the repair and maintenance for next year.

Sal, if you go back to a couple of quarters, we had the thought that we were catching up from some of the years where we tried to avoid spending money when things were at their lowest.

2012 and 2013 probably are pretty similar.

And they'd probably be on the higher end, especially now that we're going to have some fewer facilities to worry about, particularly some older coke batteries we don't need to take care of.

That would probably continue our thought that 2012 and 2013 were probably going to be the high water mark.

It's still going to be pretty lumpy quarter to quarter just by the nature of a big project can really move the dial that much at one time.

What was your cost in 2013 for the maintenance so far has been, including the $60 million, for the full year?

I don't have those full year numbers here.

I don't know that we ever got that precise.

But, like I said, just directionally, probably similar to 2012, and 2012 and 2013 were probably a couple of the higher years out of the last thee of or four.

Okay.

I have one more question before I go back in the queue.

Mario, you mentioned something in your prepared remarks, you are positioning the Company to benefit from mini cycles.

Can you elaborate what does that mean?

You've seen, this business, if you look back, have cycles of six years, eight years.

And you've seen it has cycles of six months.

So the design for flexibility that we're putting in place takes into consideration that probably cycles of six months may be the case.

And we need to be able to look at those and figure out ways in which to be more flexible.

That's what I mean.

Evan Kurtz with Morgan Stanley.

Hi, good afternoon, guys.

Nice work on some big decision-making over there.

It's nice to see that you guys are really attacking costs.

Actually had more of a short-term question though to start with.

Just wondering if you could walk us through the guidance on the fourth-quarter flat-rolled business.

One of the big pieces that puzzles me a little bit is I know Lake Erie was offline for most of last quarter.

And I assume you had a good amount of startup costs hit in the third quarter.

And I would imagine that that would actually start to contribute to volumes and profits in the fourth quarter.

So, could you walk us through some of the moving pieces to bridge 3Q and 4Q?

Evan, we're talking about a big maintenance cost difference.

You really didn't see much in maintenance cost for Lake Erie.

It was down because it was a labor situation.

So it wasn't we were actually spending maintenance dollars.

And those carrying costs that we talk about tend to be fixed costs that are not being absorbed by product which, you're right, now they will be.

But I think the other thing is, when you talk about the other change, we're talking about some mix and things like that, is, we, because Lake Erie was down for four months, we didn't have the opportunity to sell as much steel as we could have in the third quarter.

So that was one of the reasons our volumes were down.

There's was demand out there.

We just didn't have the steel to sell.

As we go into the fourth quarter we're in a better position at least to start selling, taking those orders that we would have liked to have taken last quarter.

But it is more hot rolled.

So, if you just look at average realized price, it's going to bring that price down.

But it's still good business that we would have taken last quarter if we had the ability, and we will take it this quarter.

There is something else, Evan.

We have commitments to our customers and we had to turn our whole planning affair around to deliver from many other locations product to the customers.

And certainly that wasn't the optimal way to operate.

It was very complex.

It required tremendous effort on the part of our teams.

And now we're beginning to move back into a more stable environment of operations.

Okay.

And maybe one other.

You mentioned iron ore contracts.

What were the size of those contracts that you're actually able to unload at this point?

Each contract was generally in the range of about 1 million tons a year, give or take a little bit.

Great.

Okay, I'll go back in the queue.

Thanks, guys.

David Gagliano with Barclays.

Hi, thanks for taking my questions.

I wanted to come back, obviously, to the detail that you provided on the initiatives underway currently.

And also try and reconcile that with the $75 million figure that was mentioned.

If I have my notes correct, I think you said permanently shutting down Hamilton would be $50 million.

Dissolving the JV on the electro side would be another $20 million, which is almost $75 million there taken together.

But then you also obviously mentioned shutting down the two coke batteries at Gary Works and also obviously not renewing the iron ore purchase contract.

What are the expected improvements associated with those two projects?

And what others am I missing in the tally?

Those coke batteries are very capital intensive every time you need to repair them.

And that was what is actually in front of us.

If we were to keep them running, we're going to have to invest quite a bit of money to repair them.

And they are not as efficient as some of the other operations that we have.

So really, we're protecting capital expenditures in that regard, free capital for something else.

And certainly we're going to benefit from a level of efficiency by utilizing some of the more modern facilities that we have.

And then I think, Dave, if you saw on the iron ore contracts over the last two quarters we talked about a couple times having some iron ore sales out there.

We weren't necessarily using all those pellets and really were passing them through so there wasn't a lot of cost or revenue benefit to that.

It was more just keeping our inventories in line by taking market-based pellets and selling them at market prices.

That's not a big, dramatic change in the short period like that.

But I think Mario made a point on the coke battery side it's much more of improving our position going forward on where we need to spend money and where we can spend it productively.

And old coke batteries didn't make that list.

Okay.

And then in terms of the timing, obviously there's some things that have to be cleared here on the Hamilton Works side.

When should we really be expecting to see these cost improvements start to show up in the result?

Is it as early as Q1 2014?

Yes, 2014 you should begin to see those come in.

Okay.

Perfect.

Thanks.

Curt Woodworth with Nomura.

Good afternoon.

With the effort to shut down the hot end at Hamilton and essentially some other things, would you be in a position in getting out of some of these iron ore contracts to be more net long on iron ore and sell more third party?

And is that the idea around DRI where that would be for third-party sales?

Right now given current conditions, being capable of supplying our basic needs is already a good benefit.

And the nuances around that we still have some work to do.

Okay.

And then on the coke side, would you have to go back into the merchant market for those coke needs?

We do not believe we'll need it, Curt.

We should be sufficient in that regard.

Great.

Thank you.

Timna Tanners at Bank of America-Merrill Lynch.

Hi, good afternoon.

On the DRI story it's something we've been hearing about for a while, so it sounds like you're continuing down that path.

But I was wondering have you done anything regarding natural gas supply or the permitting of the DRI itself, the capacity?

No, that's all still in the works.

Okay.

And then I saw that you're relining Fairfield.

But you've been talking about Fairfield for years now as something that could potentially be converted maybe to an EAF or require a bigger reline down the road.

Does this change that dynamic?

There's not a big reline, Timna.

The reline is at Gary.

Fairfield is just a standard maintenance project to extend the campaign.

So, no, the big project is the Gary project.

Fairfield's more of a standard ongoing blast furnace maintenance type project for us.

So reline is still to come on Fairfield?

That's still something that's still one of your decisions maybe as part of this broader project?

That would be something we'd have to cross that path at some point.

Yes.

The big reline is a couple of years down the road still.

Got you, thank you.

Gordon Johnson with Axion Capital Management.

Thanks for taking my question.

In addition to the cost saves that you guys have announced today, are there any other additional cost saves?

And of the capacity that you're shutting down, can you maybe walk us through what the fixed absorption costs are associated with shutting down that capacity?

I think really on the Hamilton capacity, that $50 million is really the cost.

A chunk of that was depreciation.

The rest of it is more costs that we will move away from here by not having to support that operation.

So $50 million is the cost impact.

Since about half of it is depreciation, the cash benefit is going to be $25 million.

Okay.

Thanks.

And then, lastly, have you guys seen -- it seems like some of the cost or the price hikes that have been announced are not necessarily being accepted by the end market.

And it looks like there's been a significant spike in some of the licenses for imports of HRC and other products into the US.

Have you guys seen any near-term risk there?

And do you see that as a near-term potential hurdle?

In our case, we're in the middle of actual negotiations.

And if you look at the published prices, it certainly has taken hold, hot-rolled being around $660 or so on the average.

And the futures do not show a lot of return to the old days.

So I think that to a degree it's taken hold.

All right.

Thanks a lot, guys.

Brian Yu with Citi.

Thanks.

Good afternoon.

Mario and Dan, if we look at your metallurgical coal costs for 2014, last year you guys enjoyed a pretty substantial drop of 20%.

When you look at where the seaborne price is for the fourth quarter, what do you think is a reasonable assumption for next year's met coal costs?

Brian, we're in negotiation with our suppliers now.

So we would rather not get into that publicly.

We think it's better if we can work with those guys just between us for now/ And certainly, as you'll come to expect from us, we'll get you an answer in January on how that transition looks year to year.

Okay.

Second question, follow-up, and this goes back to Evan's question earlier on the FRP guidance.

If I look at your third-quarter results, you guys did roughly $80 million in profit.

And if we back out the $60 million in additional repair and maintenance, it gets us to about a $20 million type of number.

Volumes are going to be up a little bit, pricing flat.

So I deduce from that you're going to see some higher cost in the 4Q?

Is this because of volume from Gary that's coming from Lake Erie versus Gary Works, which is lower cost, that's driving the higher costs?

I think you have it both right.

Okay, thanks.

Matt Murphy at UBS.

Hi.

Just a question on your CapEx guidance of $530 million.

Before it was $710 million.

Are we seeing some of that CapEx slip into 2014 or is that some spend that's being eliminated?

Yes, Matt, I think we have some -- we have a mixed bag there.

There's some deferral.

There is some that we actually opportunistically had better option to lease some things that we originally had in capital budget.

And some of it is tightening it down and changing the scopes on the projects and being careful where we spend our money.

And some of it being more efficient the way that we're doing things too.

Okay.

Thank you.

Phil Gibbs with KeyBanc Capital Markets.

Hi, good afternoon.

I had a question on any costs associated with these strategic moves that you're making.

Is there any one-time cash costs associated with any of the labor or the employment base of taking these strategic actions?

The only cost that we've come across are the ones that's we've reported so far.

I just meant when you shut down Hamilton or you take off a bit of this coke-making capacity, anything there that you would have to report?

One of the things at Hamilton is, that facility had not been operating for a while, so our employee base, we had basically reassigned the union employees.

So that headcount's something we already really addressed.

Same thing on Gary coke.

That's a pretty small operation in general.

I think we're pretty lean employee-wise and we're going to try to absorb as many as we can, just some attrition will probably take care of part of it.

Dan, is this coke onyx that you're talking about?

No, these are a couple of the very old, traditional byproduct batteries.

1950s era vintage.

They're really at the end of their useful life.

Okay.

All right.

My other question was largely on the prior gentleman's question on the CapEx reduction.

So I think you guys covered that pretty well.

I appreciate it.

Good luck.

John Tumazos with John Tumazos Very Independent Research.

Thank you for taking my call.

My question involves process.

How long will it take for you to review the eight locations where US Steel melts steel, the various offset rolling mills, mines, infrastructure, ancillary facilities?

Then after you've gone through the whole system with the Carnegie analysis once, how often will you repeat it -- exchange rates, wages, all those things, raw materials, natural gas, electricity change from time to time?

This is a journey, John, and we just began it.

And we should for the next foreseeable quarters be very intensely focusing on these analyses.

And just as we reported something to you today, as soon as we validate the right course of action, we will be declaring that declaring that to everyone.

Thank you.

David Lipschitz at CLSA.

Good afternoon.

I don't mean to beat a little bit of a dead horse.

Can you tell us what the maintenance relative to second quarter was, how much was it down or up or whatever the case may be?

I don't know if I have that one here with me.

You're going back too many quarters on me.

No -- I know it was up in the second quarter like $30 million over first quarter.

What was it in third quarter versus second quarter?

Like, what was last quarter maintenance?

Was it down or up versus the quarter?

Last quarter we were up $45 million-ish.

And when you gave original guidance, what was in that number?

Was that what it was or was it higher?

Your original guidance was breakeven.

So I'm just wondering, to get to the cost cutting and all that type of stuff, was it maintenance or was it actual just better operating results?

It was a little lower than we thought.

So we gained a little bit out of that.

But I think we were trying to pick up a little bit everywhere we can to help the bottom line, and so that contributed.

But really just in general across the plants I think we did a little bit better.

Okay.

And so is that possible to happen in the fourth quarter as well?

I think we always encourage our guys to do better.

No question about it.

They're supposed to go after minimizing that.

Okay.

Thank you.

Aldo Mazzaferro at Macquarie.

Hi, gentlemen.

I just had a really simple question.

And I missed a couple of minutes of the front of the call.

But in your price realization in domestic flat-rolled in the third quarter, can you say how much that was affected by mix change as opposed to pricing in the market, say, versus the second quarter?

We really didn't strip out mix because mix was part of it, contract versus spot is part of it, how things roll in on our different pricing structures is part of it.

But certainly the higher spot prices, as they flow through the whole chain, were a piece of that.

But it was mostly probably price more than mix at this point.

But mix was a positive number rather than negative; right?

Yes, it was.

Because we had a little bit less of the basic product, since we had a little bit less steel to sell.

Great.

And then how about fourth quarter?

I know you're going to have the outage, is that going to push the mix back down a little?

We expect in the fourth quarter we'll actually have a little bit more to sell than we did.

And, like I said, the demand was there last quarter, we just couldn't take advantage of it.

We plan to take advantage of it this quarter.

Last quarter we were affected by Lake Erie being out for an extended period leading into the quarter.

This year, this quarter we're in a little bit better supply situation.

So you think mix about the same then?

No, we should probably have a little bit more hot-rolled into the mix because, like I said, those orders we couldn't take last quarter that we're going to be able to take this quarter.

Okay.

And then, Mario, can I ask one overriding question on the Project Carnegie?

I know it's many faceted and things.

But is there anything that you're excluding, even to the point of saying outsourcing in a major way.

I see you're going to change your slab flow at Hamilton, and you're going to change your coke flow.

And I'm wondering if you're thinking about those kind of things at all, the operations, in terms of outsourcing, logistics or outsourcing, maintenance, or things like that.

Is there a big picture there that you could talk about?

We look at everything, but there is one particular approach that is quite interesting.

Actually, many of our people inside of our plants have plenty of capability to take on some additional work in a much more efficient way.

So, like I said, it's being analyzed from all angles but there is quite a capability that we're looking at internally that we should be able to tap more for more value.

Very interesting.

Thanks very much.

[Nick Jamerfik] with Royal Bank of Canada.

Hi.

Just had a question on Hamilton.

Is there any expected working capital benefit from the shuttering there?

There's really not, Nick, because we had not been operating that steel shop for a while.

So that really didn't change the balance for us.

The benefits there are really the immediate, the benefits of getting away from the carrying costs more than anything else.

Thanks.

Sal Tharani with Goldman Sachs.

Thank you.

Mario, I want to ask a question on DRI again.

You mentioned that you can use more DRI in your existing furnaces, improving efficiency.

I know DRI costs more.

So, the first thing I want to understand is, is DRI a portion of DRI can be replaced, or a portion of the pallet can be replaced with DRI with better cost efficiency?

And the second thing, if that's not correct, then is DRI and the future EAF project are mutually exclusive?

Or they go hand in hand, it means you won't do DRI unless you go with EAF in future.

Actually, the answer to the first question is yes, we can make DRI, and if we can then we would look more integrating it with an EAF operation.

Now, they can be mutually exclusive.

They're not necessarily -- they don't have to be linked directly.

So we have options there that we're looking at.

Okay.

Great.

Thank you.

David Gagliano with Barclays.

I just wanted to ask a quick follow-up.

I wanted to clarify one thing.

The $75 million target or figure that was mentioned earlier, how much of that is non-cash?

About $25 million is the depreciation in Hamilton, the rest of it is cash.

Okay.

All right.

Thanks.

Okay.

So, we're coming to the end of this call.

But before I sign off I would like to acknowledge our employees for their hard work and dedication.

Because transformation can be difficult and stressful but ultimately very rewarding.

And we are truly appreciative of their commitment to our successful future.

Our outstanding safety performance is a real example of what our people can achieve.

And that same focus and cooperation is a foundation we can build on and we can earn our right to grow.

Thanks, Mario.

And I'd like to thank everybody that was on the call with us today for your continued interest and support of US Steel.

And we look forward to talking to you again in January.

Thank you.

Thank you.

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