美國鋼鐵 (X) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 earnings conference call.

(Operator Instructions)

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

Now I'd like to turn the conference over to our host, Mr. Dan Lesnak, Manager of Investor Relations.

Please go ahead, sir.

Thank you, Justin.

Good afternoon, and thank you all for joining us on the United States Steel Corporation's fourth-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 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 start the call, I will turn it over to our CFO, Dave Burritt.

Thank you, Dan.

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

Turning to slide 3: Adjusted fourth-quarter 2013 results.

We reported income from operations for our reportable segments and other businesses of $146 million, an improvement from the third quarter, and our eighth consecutive quarter that we have been profitable at the segment level.

Our fourth-quarter results reflect better conditions than those faced as we exited 2012.

We're pleased to close the door on a tough year.

We weathered the storm with five years of losses, and are ready for a better 2014.

In 2013, we got your attention with the $1.8-billion goodwill impairment charge, and secured your interest with a five-year labor agreement at Lake Erie Works, permanently closed both the hot end of Hamilton Works, and coke batteries number five and number seven at Gary Works.

As promised, we will do our best to bring you process, productivity, and performance improvements each quarter as we earn our right to grow.

Our leadership team and employees are being inspired by the possibilities of the Carnegie Way.

Our business transformation is under way, and we know we must do better, and our confidence is growing that we will.

Dan will now provide additional details about fourth-quarter segment results.

Thank you, Dave.

Our flat-rolled segment had operating income of $87 million in the fourth quarter, as we realized benefits from higher average spot and market-based contract prices.

Shipment increased slightly, as steelmaking resumed at Lake Erie Works in October, providing supply to offset the blast furnace projects that we completed at Gary Works and Fairfield Works in the fourth quarter.

We also benefited from lower costs, as our operations ran well and our plant operators did an outstanding job of managing their costs.

We were able to complete our blast furnace outages projects at Gary and Fairfield efficiently and under budget.

Our tubular results decreased as compared to the third quarter.

Shipments decreased as drilling activity was constrained by end users working to stay within their 2013 capital budgets, as well as customers managing their inventory levels at the end of the year.

Imports, which remained high ahead of the anti-dumping preliminary determination and the OCTG trade case next month, and additional domestic capacity continued to pressure tubular selling prices.

Our tubular results were comparable to the fourth quarter of 2012, despite lower prices, as we reduced operating costs and made progress in our semi-premium and premium connection volumes.

Results for our European segment improved in the fourth quarter, and returned to profitability due to higher shipments, and lower facility repairs and maintenance costs, as a blast furnace outage was completed in the third quarter.

Average realized euro-based prices for the majority of our products remained relatively unchanged in the fourth quarter.

However, overall average realized prices in the fourth quarter declined as our hot-rolled shipments returned to more normal levels, as we had more product available with all of our blast furnaces back online.

I would now like to turn the call over to Dave Burritt to cover several important items.

Thanks, Dan.

Turning to slide number 7, as mentioned during the last earnings call, Mario has been very clear that we will earn the right to grow by initially focusing on five priorities to help drive the transformation at US Steel to sustainable profitability.

You'll recall those five priorities were the following: one, macro business strategy; two, Carnegie Way value creation; three, business measurements to motivate a greater sense of urgency; four, investor communications; and five, reducing complexity and streamlining business processes.

We completed the due diligence phase of our macro business strategy in the fourth quarter.

We're pleased with the identified benefits we intend to harvest, and have launched projects across the core business processes using Lean Six Sigma methodologies.

We are chartering Carnegie Way projects to add value, get leaner faster, right-size, and improve across our core business process capabilities, including commercial, supply chain, manufacturing, procurement, innovation, and operational and functional support.

We'll define and exploit our sustainable competitive advantage with relentless focus on economic profit, our customers, our cost structure, and innovation.

We've said this before and I'll say it again: We know everybody wants us to give them a Carnegie Way target of how much money we will make by when.

We won't do that.

We have big aspirations, but we'd rather be judged on the numbers we deliver than be distracted by spending a lot of time communicating our aspirations now, and then reconciling targets later.

We've been busy designing and developing new business measurements.

You understand how economic profit works: Return on capital must exceed weighted average cost of capital, or WAC, throughout the economic cycle.

We will be putting in place accountable profit center statements that focus each profit center leader on delivering profits above our weighted average cost of capital.

We're cautiously optimistic that we will have better economic circumstance in 2014, and with incentives and a performance score card that motivates behavior to generate more cash.

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 dedicate our efforts.

And you can judge us on what we deliver.

The work that Dan does today will be enhanced even further to make sure our message is being heard and understood.

You will recall that we reported $75 million in cost and margin improvements for 2014 on our third-quarter earnings call in 2013.

We are now pleased to report that we have completed additional projects that will provide sustainable cost improvements of $100 million annually, with $75 million being generated in 2014.

Although we are still in the early stages of our transformational process, our cost and margin improvements now total $175 million annually, with $150 million being realized in 2014.

Sometimes investors think that transformations require large investments.

Of course, sometimes they do, but our focus is on process improvements first.

Through process improvements, and then strategic investments using Six Sigma methodologies, we are examining all aspects of our Business.

Reducing complexity and streamlining our business processes does not require huge investments.

We are working harder and smarter on our core business processes to create more opportunity to go beyond cost reduction.

We won't be satisfied with just earning the right to grow.

As we earn the right to grow, we're going to make struggling businesses profitable, or admit we can't and exit them.

We will be ambitious and we will grow, and grow profitably at the right pace, at the right time; better days are ahead.

Slide 8: The funded status of our pension and OPEB plans has improved significantly as the economic recovery continues.

Our total unfunded status, as of the end of 2013, is $2.5 billion; a $2.4-billion improvement from the $4.9 billion at the end of 2012.

That is the lowest level since the end of 2006.

As you know, our pension and OPEB obligations are a significant part of our cost and capital structure.

The unsustainably low interest rate environment and stock market impacts from the financial crisis have pushed our costs and unfunded status to unusually high levels.

As a result of actions management has taken in the past, we are now benefiting from the combination of strong market returns in 2013 and a slowly increasing interest rate environment.

Our pension and OPEB costs continue to decrease.

Our 2014 costs will be down over $100 million from last year, and down over $250 million per year from their recent high point in 2011.

This is an important P&L and balance sheet improvement, but we know cash is king.

On slide 9: Touching briefly on cash flow.

Although 2013 turned out to be a much more difficult year than 2012 from both an income and cash flow perspective, we continued to generate cash, and were disciplined in our approach to capital spending.

Improving our cash flow will be an important factor in our ability to move forward with our transformation, and we are currently focused on several projects that specifically address improvements to our cash flow, working capital management, and liquidity.

All of this work is part of the Carnegie Way; transformation that aligns with world-class business processes.

We will benchmark what world-class performance looks like, no matter the industry, and become process improvement experts, especially as it relates to cash flow.

Before I turn it over to Mario, just a few brief comments on the economy.

Economic trends give us cautious optimism about 2014.

The Federal Reserve Board has begun tapering QE3 slightly.

The President and Congress seem able to keep the government running, and the geopolitical environment appears no worse than 2013.

After a recent pullback in the stock market recently, we see no reason why we can't get back on the economic recovery path.

In brief, we see 2014 as better for US Steel; much better than 2013.

Now, I'll turn the call over to Mario to discuss the current state of the markets we serve, our outlook for the first quarter, and several important initiatives from our ongoing Carnegie Way efforts.

Mario?

Thank you, Dave.

Good afternoon, everyone.

Thank you for being here with us this late in a very long day.

The North American segment begins the year in a better position, from multiple perspectives, compared with the onset of 2013.

First and foremost, overall market sentiment is not as pessimistic as it was a year ago.

Then, many customers and analysts speculated about spot market pricing deteriorating to the low-$500 range for hot-rolled coil, and end-user demand for some of the stronger sectors was tempered this time a year ago.

For example, the automotive build schedule was forecasted at only single-digit growth for the first year post-recession.

The yellow goods sector was actually looking to recede in demand, due to large global inventories.

Looking forward now, the industrial equipment market is set to improve year over year, and automotive growth, after a very strong performance in 2013, is expected to increase again in 2014.

The service center industry is also better positioned than last year.

In both Canada and the USA, the general service center customer base reported shipments in the second half of 2013 increased by more than 1 million tons, as compared to the second half of 2012.

Statistics recently published by the MSCI suggest better inventory and shipment position in North America than it was last January.

Both shipments per day and months of inventory measurements in Canada and in the USA are in the strongest position than they have ever been at the beginning of the year in the last four years.

Even the construction industry appears to have joined the recovery, as 2013 put in place construction square footage was estimated to be up 28% versus two years ago.

While there is a long way to go to achieve pre-recession norms, progress in 2013 was encouraging.

Turning to Europe, the recovery in the Eurozone manufacturing sector accelerated further at the end of 2013.

The latest improvement in overall operating conditions was underpinned by solid and accelerated growth in the Netherlands, Germany, Ireland, and Italy.

The strengthening upturn in the manufacturing sector is helping the Eurozone recovery become more firmly established.

Economic activity in Europe is expected to continue to grow modestly at the end of the year and over the first half of 2014, with a gradual shift in growth engines from external to domestic demand.

Lower inventory levels, combined with an improving economy and stronger manufacturing sector, are helping to stabilize prices.

Demand for steel is expected to improve in 2014, alongside the economic recovery, while the restocking that was missed in 2014 is expected to reappear.

Tubular market drivers during the final quarter of 2013 were mostly positive, with continued strength in oil direct drilling in Gulf of Mexico drilling, near multi-year highs.

Crude oil prices fell from the previous quarter, in average about $98 a barrel, but still remain at profitable levels for operators with oil acreage in their own portfolios.

The natural gas directed rig count fell 10 rigs, averaging 370 for the quarter, but throughout the quarter remained above the year low of 349 experienced in last June.

During the fourth quarter, natural gas in storage began to decline, and natural gas prices increased during the quarter.

As expected, the Canadian rig count continued to increase, and averaged 379 rigs, up 8% quarter over quarter, as the industry carried on efforts to ramp up for the Winter drilling season.

We expect the rig count to increase slightly in the first quarter, as both oil and natural gas prices remain at profitable levels for most producers.

Natural gas prices will be determined, in the short term, by the Winter weather.

As such, natural gas drilling is expected to gradually increase throughout the quarter, as producers focus on replenishing natural gas inventories that will continue to be drawn down over the Winter season.

The overall forecast for 2014 drilling activity in North America, primarily in the US, is positive.

Furthermore, now that most major plays have been delineated, operators may focus more on drilling and completion activities compared to other spending categories, such as seismic evaluation and associated preliminary exploration actions.

Drilling in the Gulf of Mexico is expected to remain strong, as operators continue to develop their long-term prospects in the US offshore waters.

The pressures on OCTG spot market prices will continue, as imports remain high.

The US Department of Commerce is expected to announce preliminary anti-dumping duties in February for the OCTG trade case.

The level of these duties could affect import pressure heading into the second quarter.

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

We expect first-quarter results for our flat-rolled segment to increase primarily due to higher average realized prices and shipments, as well as reduced repairs and maintenance costs.

Average realized prices and shipments are expected to increase as a result of higher contract and spot market prices, and improving end-user demand after fourth-quarter holiday downtime.

Repairs and maintenance costs are projected to decrease as compared to fourth quarter, due to the completion of the projects at Gary Works and Fairfield Works.

We will also have reduced idle facility costs after the shutdown of the iron and steelmaking facilities at Hamilton Works.

Raw material costs, primarily for purchased scrap and energy costs, are expected to increase.

We expect first-quarter results for our European segment to be comparable to the fourth quarter, as the benefits of increased average realized prices are offset by an increase in raw material costs, primarily for iron ore and other operating costs.

Average realized prices are expected to increase compared to the fourth quarter, due to a more favorable product mix and an anticipated gradual recovery of the spot market, while shipments are expected to remain comparable.

First-quarter results for our tubular segment are expected to decrease, as the benefits of reduced operating costs and increased shipments are more than offset by a decrease in average realized prices and an increase in substrate costs.

Average realized prices are projected to decrease, primarily due to pricing pressures from continuing high import levels and increased domestic supply.

Shipments are expected to increase as drilling activity begins to improve.

Now, I would like to discuss some areas where we are making progress on transforming our Business as we pursue sustainable profitability.

At the end of last year, we completed the acquisition of the Sparrows Point number one caster, as the assets of the former RG Steel plant were liquidated.

Engineering for the caster installation at our Granite City Works, where this caster fits the current footprint very well, is well under way.

After obtaining final permits and project approvals, the installation of this upgraded caster later this year will enhance our commercial opportunities as a substrate supplier to the energy sector in 2015.

We're pleased to have received the necessary state permits and approvals to extend our Minntac Mine boundary by about 400 acres, extending the permitted life of our mining operations, which are critical to our North American operations.

This allows us to mine more of our existing reserves, and positions us to continue to explore opportunities to generate value from one of our most significant assets and competitive strengths.

We also remain focused on our customer needs, and opportunities that we have to improve our competitive position.

There has been considerable discussion lately about light-weight solutions for the automobile industry.

This issue is one that is not new to me.

You need to remember that US Steel has been involved in the light-weighting dialogue with our customers for some time.

Of course, the CAFE standards have accelerated some of the activity within the automotive community.

We are taking the threat and the initiative very seriously, as we've seen what can happen to a product when you don't get the job done.

We have a great deal of work under way with our automotive customers to address their concerns, offer them ideas on solutions we have to offer, and accelerating development of new technologies and grades to get the job done.

We have invested a significant amount of effort into another solution: Our continuous annealing line at our PRO-TEC Coating Company joint venture in Ohio.

This facility offers our customers a solution with which they are very familiar: steel.

We're getting a very positive reception to our new continuous anneal line, which began operating last year, and we have been awarded parts in several 2015 platforms across a wide spectrum of manufacturers.

The early feedback on our quality, and most specifically, the light weight and flatness of the product, has us eager to continue to develop even newer grades of higher formable advanced high-strength steels to meet our customers' demand to provide them additional light-weighting options.

We're also working to improve our position in the energy tubular markets.

Our shipments of our proprietary semi-premium connections increased by nearly 70% in 2013, and we continue to introduce new semi-premium and premium connections into the market.

Connections and oilfield technology servicers and support continue to provide significant opportunity to drive higher margins for our tubular business, and increase our exposure to premium markets.

We're accelerating our efforts to increase our presence, and have added additional staff and resources.

This increased focus should enable us to develop and go to market with more of our own connections, and to capture the significant margin opportunities that are associated with these highly engineered products.

And offer our customers the technical support and expertise they require to continue drilling in more complex and challenging conditions.

The last item that I would like to discuss is our operations in Fairfield, Alabama.

We will be requesting the necessary permits to construct a technologically advanced electric arc furnace steelmaking facility at Fairfield Works to replace the existing blast furnace-based steelmaking facility.

In conjunction with our extensive blast furnace-based operation in North America, the flexibility from moving to an electric arc furnace-based steelmaking at Fairfield would improve the ability of our North American operations to adapt to global market conditions, and would enhance our ability to continue to supply all our flat-rolled and tubular customers in a more efficient, sustainable, and cost-effective manner.

We estimate that permitting for the project could be 9 to 12 months following the filing of the applications.

Based on that timeline, construction could begin in the third quarter of 2015, with project completion potentially in mid-2017.

The move to EAF-based steelmaking at Fairfield would improve our raw materials position for both iron ore and coke, and would reduce our exposure to the merchant coal market.

This improved raw materials position could provide more opportunities to benefit from our iron ore resources, and could reduce the need to maintain our coke-making infrastructure at its current level.

Additional benefits from this transition could include reduced capital spending and maintenance costs associated with maintaining blast furnace-based operations, reduced our exposure to transportation costs associated with getting raw materials to Fairfield, and significantly improve the environmental performance.

We anticipate that, when fully operational, the new EAF-based raw steel production capacity would be about 1.1 million net tons per year, and would primarily supply our rounds caster to provide substrate for our seamless pipe operations.

The business case for this project, as we see it today, is strong enough, which is why we're filing for the permits now, and we have started the basic engineering for the new facility.

If the current business case is still valid when we have received all of the necessary permits, we will then seek the approval of our Board of Directors to proceed with the project.

And I will be prepared to move forward in the fastest possible manner.

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

Thank you, Mario.

Justin, can you please queue the line for questions?

(Operator Instructions) Sal Tharani.

First, that $100 million additional cost saving, David, you mentioned, can you give us some color on where it's coming from?

The previous $75 million you had given us some concrete areas where you're getting it.

Where this is coming from mainly, what are the big components in there?

Sal, this is Dan.

This $100 million, the first $75 million was very specific, noticeable public projects.

This $100 million is more of across the board savings and probably gets into where we think there's some competitive advantage we don't want to give away by explaining to our competitors exactly how we're doing this.

It is primarily in the flat-rolled segment for your modeling purposes.

But like I said, we think there's some competitive advantage to not really give entire detail on that.

Okay.

The next question is on this EAF you mentioned, Mario, in the Fairfield.

I just want to understand, is it a standalone project or does it depend on your DRI project?

Also, what's the CapEx, you think, and how do you think you will fund it over the next couple of years if you construct it?

The merits of this EAF is on a standalone basis, Sal.

Anything related to DRI would be a plus because the EAF would have full flexibility then.

We can use scrap.

We might be able to just bring DRI in.

But it has all of its merits on its standalone condition.

We don't know exactly what the costs would be as we're going through engineering, but it's going to be one of the most efficient approaches that are available out there.

Great.

Thank you.

Meredith Bandy.

I was just wondering if you could tell us a little bit more about your met coal contracts?

Are those signed or what's the status of those for 2014?

Sure.

Yes, we do have our contracts for North America in place for 2014.

Between the combination of some good negotiations with our suppliers, some logistical improvements and some continued advancements on our ability to use some more cost effective blends, we expect that our coal costs in North America are going to be down $25 a ton this year.

Luke Folta.

No CapEx number on the EAF?

Could you give us some sense in terms of what you think the production cost savings could be, just in terms of replacing the old blast furnace there with an EAF?

Not really.

We have a couple of options on how to go at it and I'll be able to give you more numbers as we move forward, some details, engineering process controls are put in place.

In the third quarter, you guys beat pretty nicely because the maintenance project wasn't there and it got pushed into 4Q.

Then in 4Q, you guided to breakeven and you hit $87 million in the flat-rolled segment.

A divergence of that magnitude one could maybe start to think that perhaps the guidance was somewhat sand-bagged.

I just want to understand how you think about that and what the big divergence was and how do we think about the first quarter 2014 guidance?

Looking at it, it looks like if prices are going to be up, shipments are going to be up.

Pension expense is down.

Met coal costs are down.

You've got this cost savings initiative out there.

It seems like moderate improvement might be an understatement relative to if you start to put those pieces together.

I would hope you're right.

Yes, look, I think a couple of things.

In fourth quarter, we did better commercially than we thought.

Some of those prices came in a little bit sooner, which probably is why you're not going to see as big a jump in 1Q.

We picked up some of it early.

You saw the maintenance difference, the outages went very well, we came in $15 million under there.

We said before in our remarks, operators did a very, very good job.

Maybe not specifically Project Carnegie events, but I think the mindset of, if you don't need to spend it, don't spend it, is probably getting more ingrained.

The operating cost performance at the plants was really, really outstanding.

It was a big contributor to that.

Those would probably be the biggest things.

When you get into the first quarter, the one thing we would caution is the changing coal prices will have some phase-in period.

We'll have some carryover tons.

We'll have some inventory to work through.

Be careful how soon you run that change in.

That $25 is our average across the balance of the year, so you won't see all $25 per ton right away in the first quarter.

The other thing, Luke, I would offer on the operational side, we had a pretty challenging early start in the year with all these winter storms and the impact it's had on some of our facilities and we're still in the mode of catching back up.

We don't know how much of that impact you will see.

Dave Katz.

I was hoping that you could provide your expectations for 2014 CapEx.

Sure, David.

Actually, whenever I have some time, on slide 19, back in the appendix, I do give some of the guidance for some of those bigger items.

Right you now we're looking at about $650 million for 2014 on CapEx.

Curt Woodworth.

With regards to the expansion or potential expansion at Minntac by expanding your territories, is the thought process there more just to extend the life of the mine or potentially increase capacity, potentially free up more third party sales, either just pure pellet or DR?

You can consider all of the above.

It's going to provide more efficiencies.

We have a lot more flexibility on what we can pull out of there and open the roads for more solid backing to anything we want to do as far as mining is concerned.

What's the timing around development of either increasing capacity there?

Also the shutdown at Fairfield, I think a lot of that is sourced from Keetac.

Does that alter the mine plan or the outlook for that operation as well?

One part is Fairfield, at the earliest you're talking three years out.

That gives us pretty much a fair amount of lead time to figure that out.

This Minntac permit is as much about increased production as it is about the efficiency and the ability to get at our existing reserves and maintain our cost profile there without having to make the mining more difficult.

We've had some discussions on the last calls about potentially some incremental improvements to the output at Minntac, but these are really driven towards just giving us a better access to the material.

Okay.

Thanks.

David Gagliano.

On the cost changes improvements in 2014 versus 2013.

First of all, just on the coal, just to fill it in, can you remind us again what the expectation is for total coal consumption in 2014?

When you factor everything in, we probably will be somewhere in the area of nine million tons.

Okay.

Thanks.

If you add that up, the coal and the other $100 million of additional cost savings, I think it adds up to somewhere around $25 a ton of steel production roughly year-over-year decline.

First of all, is there any reason to expect that your costs by the end of the year on the steel side shouldn't be at $700 a ton?

My guess is that's going to depend on a lot of other inputs by energy, scrap, some of the other big pieces that we don't control directly, other metals, additives.

Certainly iron ore and coal are pretty well-defined for us, and coke, the bigger pieces, but there's probably still a fair amount of variability that could come up in those other areas.

Okay.

Holding all other factors constant, are there offsets that we need to be thinking about here, other than obviously [nat] gas and scrap?

Not that we see in front of us right now.

On the maintenance side, we think maintenance costs will be down about $25 million for the year, but it's pretty hard to check much past another quarter or so on most of that.

Perfect.

Thanks.

Tony Rizzuto.

You've got a lot of things going on here, obviously.

It does seem as if the guidance is conservative.

That's fine and we're happy to see that.

But just talking a little bit longer term and thinking about some of the longer term issues and I think about typically Mon Valley and Fairfield, when you're addressing some of the issues from a competitive standpoint I think that have always been there.

Mon Valley is another facility and I think about the hot strip mills at both of these facilities.

How would you say they are situated right now and are you looking at the possibility that you might need to make some upgrades to those facilities over the medium term?

You're right, Tony.

We are actually doing a value stream mapping of all of those operations and there is certainly a few things that if we could put in there would make them more productive and efficient.

But to a very large degree, if you look at the markets they serve and the products they make, and in interaction with our customers, they may be very interesting operations going into the future.

You intrigue me with that comment, Mario.

Could you maybe expand upon that a little bit?

Not more than that right now, Tony.

It's a very complex equation that we deal with here as we look into the overall streamlining of everything, the evaluation of complexity that we have, how do we minimize that, provide focus.

This whole concept of value creation, focused on coming out of each operation, it's pretty intense when you look at the fact that we have multitude of capabilities and where is it that we're best applying them all.

That's why I'm a little cautious and that's why we go quarter-over-quarter, clearing up the slate and we keep revealing to you what we find for sure.

Okay.

Just to follow up on the pension side in terms of cash contributions or required payments in 2014 and 2015, do you guys have any color on that you can provide to us right now?

Yes, Tony.

We're definitely in a position where we don't have mandatory contributions to the main plan, as we haven't for a long time.

Total cash out the door for pension OPEB, non-discretionary, our current estimates about $540 million.

Is that 2014, Dan?

That's for 2014, yes.

We wouldn't have, really, 2015 numbers, because the annual remeasurement at the end of the year really is a big factor in driving those numbers.

But for 2014, $540 million is our best estimate right now.

Okay.

Could you refresh my memory, I don't have the financial statements in front of me, what was 2013?

2013, we actually came into the year expecting it would be about $550 million.

Our actuals wound up at about $340 million.

We actually had some opportunities in the fourth quarter to take advantage of some of the highly funded status of some of our benefits plans and utilize some of those funds.

We had that opportunity.

We took it.

But just without that, we're down about $10 million from where we thought we would have been last year.

Okay.

2014, that $540 million number, Dan, do you think we could get a nice surprise as we go through the year that you might not be making those kind of cash outlays?

The ability we had in the fourth quarter to exercise some of that, we have a little bit of that left, but not nearly as much as we had available to us this year.

Okay.

If you can expand a little bit, what is your maintenance CapEx these days and what is slated towards growth out of that $650 million number you gave us?

I don't have a good breakdown of -- we really don't look at it from maintenance.

We think about more of sustainability and value creation and market penetration, but I haven't seen a real detailed breakdown that I could really be confident to give you the right answer right now.

Let me take another look.

We can cycle back later on that, maybe.

You got it.

Thank you.

Evan Kurtz.

Maybe just picking up with where Tony left off, do you have any guidance for us as how should we think about the impact on earnings from maintenance in 2014 versus 2013?

Our best estimate right now is that maintenance will be down about $25 million year-over-year.

Okay.

Great.

Then a similar question on contract pricing, I assume you had some calendar year contracts that probably got repriced significantly higher, I would imagine, with spot pricing doing what it's been doing.

Can you kind of talk about the layering in of contracts through the course of the year?

We have concluded some contracts and certainly, they're coming in a little bit better in price and spot prices have also been going up.

I think, overall, you should consider they're going to be better this year.

Right.

Will we see a big chunk of those come online right here at January 1 or is it something that we'll see it through the course of the year?

You will see it through the course of the year as we have more contracts to negotiate going into the end of the first quarter, into the second quarter.

Okay.

One more on Tubular, you're looking for margins to squeeze a little bit in the first quarter, I guess your substrate costs are rising and you're not getting the same follow-through on the sales price for Tubular.

Remind me what's the timing on that.

I know there's some program sales that you do.

How long are those fixed and when can you try to normalize margins in that business?

I think going into the second quarter, we'll have a better handle on that to give you something.

Timna Tanners.

As a first question, I thought it would be fun to let you weigh in on the steel versus aluminum debate in terms of autos.

You're a big manufacturer or big supplier to that industry and just wanted to get your perspective, given the F-150 switchover to more aluminum.

Like I said in my remarks, it doesn't surprise me as aluminum has been working hard at it for quite a bit of time.

Maybe we had a little bit of a slow start in the broader manner which we have certainly -- we are tackling right now.

I think steel has tremendous capabilities.

We're developing several new grades, working very closely with the customers.

A lot of good revisions to design engineering and where is it as some of these new grades of steel that are coming out can fit.

Yes, aluminum moved quicker in a certain area.

We moved quicker in some other areas, as I mentioned.

We've caught some very interesting contracts.

We're continuing to lightweight and we're broadening the capability for development quite significantly.

This is just a point in time in this battle.

Okay.

Great.

I don't want to dwell on Fairfield if it's a long ways away, but I'm just curious about the closure costs.

When you make that decision, how do you think about the costs of exiting a blast furnace?

We haven't seen a lot of those lately, wanted to get your perspective.

Totally manageable.

I think there's certainly a big difference between shutting down a piece of equipment, like a furnace, as opposed to shutting down an entire plant.

At Hamilton, that's probably the most recent example, shut down hot in there, you don't get nearly the issues you get into when you shut down an entire plant.

Michael Gambardella.

Another question on Fairfield, what type of metallic seed do you need to make seamless pipe?

Certainly something that I can get from scrap that is available, readily available.

So you can make seamless OCTG --

Yes.

-- material with all scrap, no --

Yes, we've tested quite a few different types of combinations and we're quite comfortable that we can make what is necessary for good, quality pipe.

With just scrap?

Yes.

Okay.

That's great.

On the cost cutting side, did I hear you say the early part of the call that you're looking at $150 million this year?

That's correct.

Yes.

Does that include the pension and the OPEB?

No.

No, this would be just projects associated with our Carnegie transformation.

The $100 million reduction of pension to OPEB would be another piece, the lower coal cost would be another piece.

Okay.

Can you identify any of the $150 million for us?

$50 million of it was from the write-down of the Hamilton assets, what we identified in the first $75 million.

This next piece is areas that we think will be competitively sensitive of telling people exactly how we're doing it, particularly our competitors.

Okay.

Final question, what's your sheet business operating at in terms of percent of capacity right now?

Roughly 80%.

Okay.

All right.

Thank you very much.

Brian Yu.

Mario, my question is, if you put me in the camp of those who are still trying to reconcile your guidance, in 4Q, you guys obviously did very well, hot-rolled band prices were better than what I, and I think many others, expected.

Maybe it would help us, when you're saying the first quarter guidance, what's the band of hot-rolled prices you're basing that on and then we can overlay the cost savings that you're expecting on top of that number.

Brian, I actually haven't seen the numbers put together that way, the band cost side.

I really can't help you with that right now.

I'd have to do some research for you.

Okay.

Maybe I can try to look at it another way.

With these cost savings that you're anticipating, if we take a holding all else equal type of environment, would you be comfortable with us basically saying, if things don't change much, profitability in the upstream or the flat-rolled segments should be at least $250 million better; $100 million from OPEB and pension, $150 million from the Project Carnegie savings?

Over the course of the entire year?

Yes, that's right.

Actually, pretty much the pension and OPEB savings would fall in that line that is below the segments.

Out of the $150 million run rate savings we're talking about for 2014, probably 90% to 95% of that would be in flat-rolled.

Got it.

All right.

Aldo Mazzaferro.

Dan, the savings you just mentioned, the $150 million run rate, wasn't some of that already in the fourth quarter, though with the Hamilton shutdown and the Gary coke ovens and things you initiated the last time or no?

Not from a cost side, because the write-down of the Hamilton assets came at December 31 and the big impact is a change in depreciation.

No, there would have been very, very little from that in the fourth quarter.

It really all starts this year.

Okay.

Mario, can I ask a quick question on Fairfield?

After you put an EAF in there, do you still intend to make and sell flat-rolled sheets?

We have plenty of flexibility coming from the rest of our system, Aldo, to be able to support our customers.

John Tumazos.

Congratulations on all your contributions to the corporation.

With the potential withdrawal of the flat-rolled at Fairfield and the reduced molten output at Hamilton, which other facilities in the corporation would pick up those tons?

Presumably, you don't want to produce less for the benefit of competitors but enjoy the productivity gain in-house.

John, that would just depend on the order book and which customers want it from where.

Certainly, if you look at our utilization, we're not talking about dramatic change in capability.

We certainly haven't run anywhere near 100% for a long, long time.

Would Granite City pick up the flat-rolled volume from Fairfield if you go the electric furnace route?

It would really depend on which customers need which product and the most efficient way we could get it to them.

We have some ability just about everywhere throughout our system.

Which mills are making more with the Fairfield melt shop phase-out?

Is that going to Gary and Great Lakes?

I would say that when we're talking about three years out, it's probably way too soon to even figure out exactly what the pattern will be.

Thank you.

Andrew Lane.

Could you shed some light on the factors that played into the decision to proceed with an EAF build at the Fairfield location, specifically?

Is a function of regional demand for specific product types that you'll be able to produce there by use of an EAF?

Are you just addressing the least efficient furnaces first or what other considerations played into that decision?

It starts with the marketplace for sure.

We keep translating that inside of the system and because there are so many other things that are being looked at.

You can't just look at this one in isolation.

But it starts in the marketplace.

Okay.

Andrew, also, that is one of our furnaces that has been running on its longest campaign.

It's been running a long time.

It's going to come to the end of its efficient life at some point in the future.

Okay.

Understood.

So that makes it a prime candidate.

Additionally, given that you're replacing, it appears to be, 2.1 million metric tons per year of blast furnace production with 1.1 million per year of electric arc furnace production at Fairfield, do you anticipate that Company-wide production capacity will decline materially if you pursue additional blast furnace replacements or will EAFs be added on an incremental basis as well?

You should consider that we're not going to give up capacity at all.

It's a conversion to a more of flexible environment that gives a little more efficiency to the system.

Okay.

Thank you very much.

Charles Bradford.

You had a $16 million equity loss in the quarter.

Was that United Spiral?

That was.

Yes.

Okay.

A couple years ago, you built a coke brick heading plant at Gary and there was talk you were going to build a second one if the first one worked, but we haven't heard anything about it.

What's happening there?

The first modular carbonic at Gary, we've continued to refine the process.

We want to make sure we get that running exactly the way we want it, and at its levels it should.

We're being deliberate about it because, frankly, we're satisfied with our coke position right now.

We're not short.

Once we get that running exactly like we want it, we'll take a second look at the next module.

That will really be driven by our coke position.

Do we need the coke or not?

We don't really plan to invest in coke infrastructure to be long coke.

That doesn't seem to be a good return project.

Understood.

It's just there's been a lot of questions about how well that unit is actually operating.

When we started it up, Chuck, it certainly had its challenges, both from an equipment perspective, as well as process control perspective.

A lot of engineering has been put in place and I think there is a pretty good light at the end of this tunnel.

We really are in control of everything else to go to the next module if we ever feel that it's going to be needed.

Thank you very much.

Phil Gibbs.

Congratulations on the progress.

Thank you.

Mario, I really thought it was ingenuitive that you moved the Sparrows Point caster, I believe you said, into Gary.

Can you elaborate on that a bit more?

Is that factored into any of your cost reduction targets for this year?

Yes, Phil.

Actually, it's going into Granite City.

There is a pretty nice match with the current footprint that we have.

It will enlarge the capability to supply quite a bit of the energy markets that you know are going to be needing some of the product that we're going to be able to make there.

Okay.

As far as ultra high strength steel, there's clearly a need for that in a lot of the next generation automobiles.

Can you help us as far as ultra high strength, maybe as a percentage of your mix and maybe what you envision over the next few years?

Yes, a lot of that goes into the body and white parts, the unexposed parts.

There is a lot of development and, again, it's a combination of just being able to replace a heavier steel with a more efficient steel and also be able to participate in the new designs that create opportunities for different combinations of what exists and what is coming out.

It's really a lot of different alternatives that are being looked at and really, steel still is a big deal for the automakers and it's pretty promising what we see coming out of our labs today.

The $150 million of cost saves that you've identified through your efficiency actions, did any of that sneak into 2013 or is all of that really on the table for blending in the operations in 2014?

This is all 2014, Phil.

Sam Dubinsky.

Could you give some more color on market dynamics in Europe?

Correct me if I'm wrong, but I could have swore that the first half, at least Q1, you typically see some sort of inventory restock and it doesn't seem like that's happening this year.

Could you maybe just describe what's going on in the European business?

It's starting slow, but I believe that it's going to pick up going into the second quarter.

Okay.

In terms of domestic sheet pricing, obviously, it's been a phenomenal market for the past few months.

How do you see sheet pricing playing out in the first half of 2014, given some of the concerns over imports and you also have some of the raw materials such as iron ore and met coal and scrap starting to soften a bit.

How do you think that sort of flows through in terms of market pricing the next few months?

I think imports are probably the biggest driver that can impact prices going forward, Sam.

I think the other things are not yet showing any signs of impacting significantly, but imports could.

Okay.

Lastly, what's the update on the OCTG case?

I would have thought that we would start seeing imports moderate.

When there is a decision, is that the moment that imports moderate or is there sort of a longer review process that gives foreign competitors a little bit more time to keep on dumping in the market?

Once a determination is firm and concluded, you've got to remember that it reverts back to the moment of the termination.

At that moment, I think you'll begin to see some tapering off of imports.

What's the time frame, exactly?

The next decision coming from DOC is mid-February.

That's when they will establish preliminary duties.

That's when customs will start collecting duties.

One of the things we have seen is there was some acceleration of imports and we did, in fact, file critical circumstances claims that they'll also rule on.

Those are designed to keep people from trying to flood the market before that determination date.

We'll see how that plays out.

If they would find in favor of that, that would actually make all the duties retroactive 90 days.

That's a decision that will come a little bit later.

Thank you very much.

Sal Tharani.

What kind of tax rate should we assume for the first quarter?

You've been giving a very low tax rate for the last couple of quarters.

I was just wondering if you have any number for that.

We would tend to given you guidance when we see something unusual, so I think you can read the absence of guidance as things are fairly normal.

Okay.

Mario, I just wanted to understand on the working capital side, I don't know if you think there's an opportunity there.

There's some (inaudible) that you have extended some payments on some of the vendors and one of your neighbors, Alcoa, has done a very good job.

You actually were at Alcoa in the past.

Have done a good job in the last couple of years, expecting a significant amount of cash out of the working capital.

I'm just wondering if there's anything you're doing on that front to get cash out of them and shore up the balance sheet on the working capital side.

You're right, Sal, there are opportunities in that regard and we'll certainly look at it.

Is there any color you can give or you're just sort of working on it?

Too soon to tell, but we're looking at it.

Meredith Bandy.

On the tax rate, are there any NOLs that we should be aware of?

You said you've come off an unfortunate string of losses.

I'm going to have to check into that one for you, Meredith.

Why don't you give me a call later and let me see what I can find out for you?

I'll do that, thank you.

Also, there will actually be some disclosure in our 10-K that will come out the end of February.

Evan Kurtz.

A question on United Spiral, kind of reading some news articles that perhaps you may be looking to monetize that asset.

Is that anything you can comment on at this point?

Maybe you can just kind of give us an overview of what they're doing there and what's kind of the magnitude of the losses these days?

At this point, Evan, we're looking at what the situation is, but, no, we made no decisions, so we probably don't have anything more to add right now.

Okay.

Relaying some investor feedback.

One of the big pushbacks I'm getting is that, of the costs out there, a lot of folks are kind of saying that well, this isn't real, this is more just a function of rising prices, that's why we're seeing better results.

I just wanted to give you a guys a chance to maybe comment on that and kind of share your views of what's kind of -- get to the core of the cost program.

We just gave you $150 million that's coming out of costs.

That is the cost side of the business.

That's not commercial.

That's truly the cost side of the business.

Aldo Mazzaferro.

I was wondering if you could possibly give us a little bit more detail on the fourth quarter costs.

From your guidance, it looks like you beat your guidance by something like $80 million and I think we identified about $15 million or so of lower maintenance than expected.

I'm wondering if you just could help us fill in the gap there of where the additional $70 million or so may have come from?

Yes, Aldo, the other pieces, we called out some of them in the release, plant costs, other spending and plant costs, our people did a very good job.

We had a little bit of favorable trend in some raw materials costs.

You're comparing to our guidance, not the actuals.

Commercially, pricing came in a little bit better than we thought, so we had some pricing benefits.

So outage improvement, plant costs lower, little bit raw materials helping us, some commercial effects in our favor, those are really the pieces that make up that number.

Can I ask one more follow-up on the Fairfield plant.

I was wondering if you do go just to Tubulars and you're running EAF as opposed to coke ovens and blast furnaces and BOFs, the headcount would obviously be a lot different.

I'm wondering, are you expecting to move headcount between plants or what is the strategy on the headcount?

It's too far out.

But you've got to remember, we have a natural attrition that is natural to the Company.

I wouldn't dwell on that being any issue going into the future, nor our people should be concerned with it, because it's just natural stuff that could eventually happen.

There wouldn't be any need for a drastic move there.

Tony Rizzuto.

I know that capital avoidance is a big part of Project Carnegie.

I was wondering if you can remind me of what the capital costs would look like for a major blast furnace reline at Fairfield, as well as a hot strip mill upgrade?

A full reline with everything being addressed, you could be talking north of $100 million.

My understanding is hot strip mill upgrade could be in the range of maybe $0.5 billion.

Am I off base on that, Mario?

If you're going to put a full, brand-new mill, that's what it would be.

What we're hearing here is that there is a possibility, as you're looking at the flow paths here, that we may no longer see the flat-rolled production at Fairfield in the future?

It's too soon to tell, Tony.

We got so much capability and flexibility as we look into the alternatives, that's a conclusion that is not validated yet.

Matt Murphy.

Mario, just wanted to pick your brain a little bit more on your 2014 outlook.

Last conference call you commented an expectation that we see more kind of six month mini-cycles rather than longer, sustained cycles.

I sense you're sounding a little more positive on this call.

Have you changed your view on sort of near-term market dynamics?

No, I still think that can be the case, Matt, for sure.

I see a very gradual move on this one with many cycles in between.

I don't see us getting back to peaks like we've seen back in the past.

With the exception of the extremely high level of overcapacity in the world and still pending situation with imports, those things can fluctuate quite dramatically, creating the mini cycles I referred to.

Thanks.

Okay.

Thanks, Dan, and thanks for the questions, everyone.

Especially, I want to thank our employees who are working so hard for you still to transform the way in which we work.

As I have said before, to all of you, transformation can be difficult and stressful, but ultimately, very rewarding.

We truly appreciate our employees' commitments to our success in the future.

Our outstanding safety performance is a real example of what our people can achieve and that same focus and cooperation is a foundation that we can build on and we can earn our right to grow.

But before I turn it back to Dan, I want to let you know that because of Dan's added responsibilities, he is being advanced to General Manager of Investor Relations.

He has quickly become a trusted partner for Dave and me and I know he will continue to earn your trust by providing honest and forthright insights about US Steel and the steel industry.

Thank you, Mario.

Thanks, Dave.

I really appreciate being part of the transformation here.

For everybody on the call, thank you for joining us.

We certainly appreciate your interest in US Steel and we look forward to speaking with you again in April.

Thank you.

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