美國鋼鐵 (X) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the US Steel first-quarter 2014 earnings conference call.

(Operator Instructions)

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

I'll like to turn the conference over to Mr. Dan Lesnak, Manager of Investor Relations.

Please go ahead.

Thank you, John.

Good morning, and thank you all for participating us on the United States Steel Corporation's first-quarter 2014 earnings conference call and webcast.

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

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 morning, everyone, and thank you for joining us.

We reported income from operations for our reportable segments and other businesses of $154 million.

This represents a improvement from the fourth quarter at the segment level.

We are pleased to start 2014 with a profit and strong cash flow.

We weathered not only the economic storm with five years of losses, but also the first quarter's extreme weather.

We are encouraged by the way employees overcame much of the first quarter hardships, which included a significant spike in natural gas prices and logistical challenges in both receiving raw materials and delivering steel products to our customers.

The Carnegie Way played a significant role in driving performance improvements that offset many of the first quarter challenges.

We have instituted a loss and found management approach.

If bad things happened, like the extreme adverse weather conditions this year, we know that is a loss to value.

We are developing a culture -- a collaborative accountability culture -- that highlights lost value quickly and then uses Six Sigma-based project teams to find the offsets.

Today this lost and found process is far from perfect, but it does set expectations and encourages teamwork at multiple levels.

Now turning to cash flow on slide 4. As we have been placing much more focus on cash flow, we are pleased to report that at the end of the first quarter we have an excess of $1 billion of cash on the balance sheet and our total cash and liquidity is now in excess of $2.7 billion.

We have been consistently generating cash from our operations, generating over $650 million in the last 12 months.

But as we look forward we will need more cash to pursue high-return projects and profitable growth opportunities.

In addition, to increase cash generation that will come from improving margins through our Carnegie Way transformation, we identified approximately $700 million in additional cash flow improvements that will be realized in 2014.

Of that $700 million, we will generate over $300 million of additional cash flow from a tax deduction resulting from liquidating, for tax purposes, a non-US entity that is a holding company for most of US Steel's non-US operations.

You can find more details on this transaction in our 2013 10-K that was filed on February 25.

The remaining $400 million will be generated by improvements in working capital.

Once again, the Carnegie Way transformation is helping us look at each of our business processes, compare them with world-class performance, and make the changes necessary to capture value.

For the first quarter we realized about $250 million in cash flow benefits from these projects, so we have about $450 million remaining to be realized over the final three quarters of 2014.

Looking forward, we're putting together a cash deployment strategy that also allows us to increase our funding of R&D to accelerate our development of new and innovative products for our customers and to target capital projects to increase our operating capabilities, flexibility, and reliability.

To support this new cash deployment strategy, we have announced the creation of a new role, of Chief Technology Officer at US Steel.

David L Britton has assumed the newly-created role and will be responsible for a further expansion of the Company's worldwide innovation, technology, engineering, and research and development of products and services and solutions.

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

Thank you, Dave.

Our flat rolled segment had operating income of $85 million in the first quarter.

We faced substantial challenges related to the severe weather conditions that resulted in higher natural gas, electricity, and other fuel costs; and logistical issues on both inbound raw materials and steel product shipments to our customers.

Over the last couple years we have improved our ability to ship our blast furnace fuel mix, based on changes in natural gas, injection coal, and coke costs.

And we quickly switched to less natural gas and more coal and coke when natural gas prices spiked.

But we still had a $60 million increase in natural gas costs as compared to the fourth quarter.

Lower [primary] maintenance costs and benefits from Carnegie Way projects that have been implemented and are hitting by line, helped us achieve income inline with the fourth quarter.

Our tubular segment had operating income of $24 million in the first quarter.

Prices continued be pressured by high level of imports.

The effects of lower prices and higher substrate and energy costs were only partially offset by lower operating costs, including benefits from Carnegie Way initiatives in the tubular segment.

Our European segments had operating income of $32 million.

The increase in the fourth quarter was primarily due to income from the sale and swap of carbon emission allowances and higher average (inaudible) prices.

Carnegie Way initiatives were offset by higher raw materials and operating costs.

Now I'll turn the call back over to Dave for some additional comments on our Carnegie Way transformation.

Thanks, Dan.

As promised we will update you every quarter on our progress on the Carnegie Way transformation.

And we are delighted to inform that we are making solid progress.

In the third quarter, we highlighted $75 million of ongoing profitability improvements for 2014.

Last quarter we highlighted $100 million more in annualized improvements from process improvements, supply chain and logistics, and SG&A savings, with $75 million being realized in 2014.

This quarter we have implemented projects that will improve our margins by an additional $140 million in 2014.

These benefits primarily include improvements in our manufacturing processes, supply chain and logistics, and additional SG&A reductions.

This increases our total Carnegie Way benefits to be realized in 2014 to $290 million.

I'd once again like to emphasize that these are not targets or objectives.

And they are not speculative.

These are the results of projects and improvements that have been implemented.

Now I'd like to provide additional color on our Carnegie Way transformation on slide 9. Fundamentally different than other transformations, the Carnegie Way is anchored in a strategy of value creation, supported by disciplined and relentless improvement.

Our aspiration is to earn economic profit throughout the cycle and thus deliver above-market returns to our stockholders.

Our strategy has two phases.

Phase 1 is earning the right to grow.

Phase 2 is about driving profitable growth.

Earning the right to grow is not just about having a goal and picking great people; we follow consistent execution methodology called Six Sigma, and our entire leadership team is fully committed and accountable for the goals we set.

We measure where we succeed and where we fall short.

We are very clear about our aspirations and we monitor progress through a performance scorecard.

We will reward our people when they succeed; we will deliver on our commitments; and when we do we, earn the right to grow.

Let's discuss phase 2, drive and sustain profitable growth.

To drive and sustain profitable growth, we will organize around where we make money and have an intense, purposeful march to where we create value for our stakeholders.

With our increased cash flows, we have increased flexibility to support our key initiatives, such as research and development.

We are developing robust business processes and driving improvement efforts with lean Six Sigma methodologies across manufacturing, supply chain, commercial, procurement, innovation, and functional support, like HR, IT, legal and accounting.

All of these areas are being benchmarked with companies in the steel industry and best practice companies outside the steel industry.

We know a journey doesn't happen overnight.

So far we have made some progress.

The Carnegie Way is comprehensive; there are no sacred cows, everything is on the table -- strategy, commercial, operations, organization.

If someone has an idea, they build the business case, construct the possibilities, recommend a team with clear deliverables to succeed.

If it passes our selection filters, we just do it.

The Carnegie Way is driven by value creation.

We want to deliver economic profits -- profits that exceed the weighted average cost of capital, every year.

We have identified a robust pipeline of value creation opportunities.

We are managing a very disciplined execution across this pipeline.

The Carnegie Way has unique DNA within US Steel.

The Carnegie Way builds off of unique strengths of US Steel -- our history, our brand.

Our employees believe in our success.

As they embrace our journey, their capabilities grow.

Our brand still means something.

Our very principles are foundational and a source of value and pride.

Our strategic review is taking a rigorous and fresh look at where and how we make money, and that will drive major strategic decisions going forward.

We have a strong market position in automotive.

Despite the recent announcements on other materials, we have put together a formidable team with more aggressive plans to defend and strengthen our position in automotive.

We are thoroughly reviewing our operations and identifying facilities, regions, products, and contracts where we do and do not earn economic profit.

We are evaluating what are the potential areas where, and if, improvements can be achieved.

We expect to generate cash in excess of that required to service our balance sheet.

And we are reviewing opportunities to deploy that cash to high-return projects both internal and M&A.

We will keep you posted as these progress.

And now I will turn the call over to Mario to cover several important areas.

Thank you, Dave.

Good morning, everyone.

I'd like to begin by discussing our safety performance.

We remain fully committed to our core value of safety and to being a global leader in safety processes and performance, both inside and outside our industry.

From a statistical standpoint, last year was one of the safest in our Company's history.

The results you see here reflect a safety management process that requires good structure, engagement, teamwork, individual accountability, and process ownership by our entire workforce.

Every employee understands that they are responsible for working safely each and every day.

And they must look out for the well-being of their coworkers as well.

Based on the latest data available from the Bureau of Labour Statistics, our performance for cases involving 31 or more days away from work, US Steel ranks among the best-performing companies in the iron and steel industry category.

For the second consecutive year, and for only the second time in our long history, our performance in this category reached the single-digit level, with only five such cases in 2013.

These figures represent real and important progress on our part, and for that I like to thank our employees around the world.

However we still have experienced incidents at our facilities that resulted in fatalities.

And when this happens, we always take immediate action to address the root causes and reaffirm safety's importance throughout our Company.

We recognized, as we began engineering our corporate transformation through the Carnegie Way, we could draw inspiration from safety's approach to improvement.

In addition, we saw opportunities for the Carnegie Way to create what I call a virtual circle -- safety by identifying new, innovative approaches to processes company-wide that will deliver and drive further improvements in our safety performance.

Now turning to steel market conditions.

Most forecasts we have seen call for demand increases year-over-year, and despite the rough start to the year that much of the country has experienced, that seemed to really skew the supply and demand relationships in the market, we are seeing plenty of positive signs out there which suggest some solid demand increases are in store.

March auto sales were at their best levels since June 2008.

A major appliance manufacturer reiterated in their most recent outlook that they see growth between 5% and 7% this year.

And our construction customers indicate that things may heat up in their field after a difficult winter.

Perhaps the one area where we see less robust demand is from our flat rolled customers, who produce OCTG, as they too are feeling the effects of unfairly traded material lending on our shores.

All in all, though, demand seems to be slowly picking up speed and it is across most every flat rolled industry that we participate in.

Tubular market drivers during the first quarter of 2014 were mostly positive, with continued strength in oil direct drilling and colder than normal winter conditions that prompted increased natural gas prices.

Sustained crude prices near $100 per barrel continue to motivate producers to develop oil resources, as evidenced by the increase in the number of oil direct rigs during the quarter.

Although the natural gas direct rig count decreased over the quarter, the fundamentals supporting the natural gas industry remain positive.

The brutally cold winter resulted in the largest cumulative natural gas storage withdrawal on record, and resulted in massively depleted storage inventories.

Overall, tubular demand is good, but prices continue to be impacted by the unfairly traded import volumes.

For our European operations, we expect a continuation of the market conditions seen in the first quarter.

However, when compared with the same period last year, conditions have improved.

Forward-looking indicators for the manufacturing and construction sector improved recently, and should this trend continue, it will likely still take some time before this improved sentiment translates into higher activity in the steel-consuming sectors.

Now turning to our outlook for the second quarter.

We expect reduced income from operations in the second quarter.

Our production will be limited, which will temporarily slow shipments, primarily due to continued weather-related logistical issues affecting both raw materials and finished goods.

We expect to report a loss for our flat rolled segment in the second quarter, as these operational difficulties have limited our production, resulting in lower shipments and higher operating costs as compared to the first quarter.

Although market conditions in North America are improving, average realized prices should be comparable to the first quarter.

Given our production disruptions, second quarter shipments will be geared to fulfilling contract commitments where prices are not moving at the same rate as the spot market; as well as negatively influenced by lower automotive [coated] production and shipments in this quarter.

But we do believe that our operational difficulties will be behind us as we exit the second quarter.

We expect results for our European segment to decrease in the second quarter due to the absence of the sale and swap of emissions allowances in the first quarter.

Shipments and average realized prices are expected to be comparable to the first quarter.

Our tubular results are expected to increase compared to the first quarter.

Shipments are projected to be higher due to increased drilling activity, and we expect average realized prices to be in line with the first quarter.

Before we take your questions I would like to give a quick update on our operations, including the significant challenges we are facing this quarter, and then cover our increased focus and progress on innovation and product development.

As we mentioned earlier, the unusually harsh winter conditions created many challenges for us in the first quarter.

And while we were able to offset some of the adverse impacts of higher natural gas prices and operational and logistical difficulties, we are being confronted by much more significant effects of these extreme weather conditions in the second quarter.

Our iron ore pellets are transported primarily across Lake Superior, and as has been widely reported, ice conditions in the Great Lakes, and particularly Lake Superior, are the worst we have seen in over 30 years.

Following early disruptions to typical lake shipping at the end of last year's shipping season, the opening of the 2014 shipping season has been slowed by record-setting ice levels which continue to affect us today.

Typically, the halt to lake shipping lasts approximately 70 days.

For this year, we are currently over 120 days, and vessels traveling across Lake Superior still require a Coast Guard ice cutter escort, which limits the number of vessels and extends the normal travel times.

As a result of the difficulty moving pellets from our mines to our plants, we are managing our steel production in line with our available pellet inventories.

We have also been challenged in our ability to make certain products, due to an unplanned outage at the steel shop at our Great Lake Works.

We are working to complete repairs and we expect to resume steelmaking operation at the Great Lake Works by the middle of May.

While this steel shop has been down, we have worked aggressively to utilize our entire steelmaking system to satisfy our customers' needs.

We have moved certain products to other plants where possible, and have drawn down our (inaudible) process and finished inventories.

And we have brought in slabs from our other plants to feed the finishing operations at the Great Lake Works.

We have been communicating with our customers on a daily basis, and remain intensely focused on finding solutions to their specific individual needs.

And we will continue to do so until this temporary disruption to our supply chain has been resolved.

Speaking of our customers, we are increasing our support and commitment to research and development to expand and accelerate our capability to provide steel products and solutions of the future.

Our customers are requiring increasingly demanding and complex products to support their future needs, and we are positioning ourselves to develop and deliver on those products, to keep steel as the material of choice -- an environmentally sound and value-enhancing choice for all of our customers' needs.

We continue to make significant progress in developing and taking to market a full suite of our own proprietary premium and semi-premium connections for our tubular customers, as well as providing the technical support and services to provide the best total solution for their exploration and production operations.

As we noted earlier, our connections volumes continue to grow, and with our increased investment in our facilities, we will see our rate of progress accelerate in this extremely important and highly profitable segment of the energy tubular business.

In our automotive market, competing materials have been aggressively advancing the discussion about their ability to offer lightweight solutions to the automotive industry.

We take these alternative threats very seriously.

And our customers are coming to us and actively seeking steel solutions.

And there many individual products that we are working on directly with them.

We are working diligently on economical Generation 1 and Generation 3 advanced steel solutions, that each of the automotive customers are demanding from us, as they replace the mild steels and bake-hardened [rolled] steels.

This really attacks the weight reductions in the near term: getting the plain carbon steels out and replacing them with more modern, safer, and lighter steels.

Using these advanced steel solutions, we have designed a steel body [in light] for a midsized sedan that can also be applied to other vehicle platforms, including SUV and pickup trucks.

That will fully enable the light weighting that our customers have identified as necessary to meet the CAFE requirements.

We believe this is the best long-term solution for our automotive customers, and it will involve the extensive use of what we call commonly as the Generation 3 advanced high-strength steels.

Fortunately, our Company has been on the forefront of developing new grades and applications for the automobile manufacturers, and now have an important piece of ammunition in our arsenal -- that being the continuous annealing line at our PRO-TEC joint venture.

You heard me talk about this before, and perhaps several of you were at our open house just under a year ago.

The last 12 months at the line have been just extraordinary, as we have begun making grades of steel there that were conceptual in nature less than two years ago.

In fact, we have run coils produced at our existing steel making facility through the continuous annealing line that have properties that fall not on the threshold, but right in the middle of the spectrum of Generation 3 steel.

The ultimate solution we will take to our automotive customers will be a value-enhancing, formable, joinable, paintable solution that our customers are familiar with.

That is steel.

It will also be a safer, less expensive solution that is much more familiar to the end-users and the repair facilities in the event repairs are needed.

So we see these challenges from other materials as real, but believe that we have and are still creating steel solutions that will deliver even more value to the automobile manufacturers and their customers.

We have made the commitment and we have made investments and we intend to deliver on these solutions.

Now let me turn back to Dan.

Thank you, Mario.

John, can you please queue the line for questions?

(Operator Instructions)

Evan Kurtz, Morgan Stanley.

Good morning, guys.

Good morning, Evan.

Congrats on the results for given such a tough environment.

Thank you.

It was certainly challenging.

A quick one on repair and maintenance going through the course of the year.

It's getting pretty difficult to model with all these moving pieces.

Great Lakes and Gary and iron ore and so forth.

Could you just maybe walk us through some of the numbers of how you see repair maintenance impacting 2Q versus 1Q?

And then the second half of the year -- have you been move any maintenance outages up into the first half with this equipment down?

So that maybe we can look for lower-cost in the second half?

Yes, let me just briefly address this.

Of course, the second quarter will see an increase in maintenance given the fact we have to deal with the challenges that were unexpected.

The second half though, we should get back to normal.

And your model should be good for that.

We look across the total year.

We are still comfortable we are going to be in line with what we talked about last quarter -- being a little bit better than we were last year.

We are working hard to be more efficient and do a better job.

So I think will be able to offset some additional costs from a couple of these recent incidents.

Okay.

And then just maybe on coal.

I know you are expecting some of the benefits of lower coal prices to start flowing through in the second quarter, but given that you have been operating at reduced levels, how should be thinking about that?

We are still seeing some flow.

It maybe been slow a little bit -- we're still positive quarter over quarter.

Coal costs continue to drop.

Great.

Okay.

And then, maybe just one on Europe.

What sort of impact have you seen from Ukraine?

I thank you for the detail on some of the demand in the region, but maybe you can match it up with what you are seeing on the supply front, as well?

So far, we have not seen disruptions.

We are very closely watching what is going on over there.

We continue to maintain very good contact with both our suppliers and our customers.

We do have some inventory that we have built over time; that gives us a little bit of expanded protection.

But so far we have not seen any disruptions.

We have no reason, at this moment, to see any change to the continuous supply of materials.

Okay.

And then how about the supply of steel in the region?

How do you see the market shaping up over the remainder of the year?

It should improve, but slowly.

We are seeing there is a better sentiment in many of the markets that we are playing in.

There should not be anything dramatic, but we should see a slow improvement in the course of the year.

Great.

Thanks, guys.

I will turn it over.

Thank you.

David Gagliano, Barclays.

Great.

Thanks.

Just a couple quick questions.

If we look ahead to the third quarter, we assume the operating logistic issues are behind the Company.

What should we be expecting, in terms of a sequential improvement in the flat rolled business in the third quarter?

If we assume all the other non-control-ables stay the same.

I guess what I am asking is -- what is the total dollar impact strictly tied to these production disruptions and logistic issues?

I do not think we have a figure that we can offer you at this point, unfortunately.

I think a lot of this is going to depend the flow of materials.

As pellet deliveries pick up the pace, that will determine how quickly we ramp back up.

At this point, we cannot give you a clear number, and we are definitely not ready to give third quarter guidance.

Okay.

Let's switch to Carnegie.

Total of $290 million of savings 2014.

Obviously that is very impressive.

Yet we are still looking at a loss in the second quarter, obviously impacted a by everything that we talked already on the production logistic issues.

So my question is, how much of that $290 million is actually flowing through the second quarter expectations?

We are not getting into that granularity.

Al these projects -- some are immediate, some are over time.

We are more comfortable -- we have a better grip on the full year.

It be nice they were all $50 million increments like Hamilton, but there are hundreds of projects going on.

There are some in there: some blast furnace fuel usage efficiency, cinder usage improvements in Europe.

That's a project that is going to deliver somewhere in the neighborhood of $30 million.

Some contractor -- in-sourcing contractor work.

At several facilities we found much better solutions.

That is probably a $20 million piece.

To go through all the projects to make that $290 million will take a long, long time because there are really hundred projects there, and hundreds more coming behind that make up those numbers.

I said we are trying to at least help you on what segments they are in.

Whether it is business process, supply chain logistics, like I said, those are couple good examples of some of the bigger ones.

But there are just a of projects that are implemented that are smaller pieces that when you do enough of them it adds up to a big number.

I totally understood.

And the actuarial information has been very helpful.

I guess what I'm trying to get at is the timing here.

Is this a back half -- back end loaded, or is a lot of it already in the second quarter expectations?

Can you give us some sort of framework as to timing here?

There is a mix of both.

When you think about -- like the big piece was obviously last year to Hamilton, that spread across the four quarters.

That took effect January 1. There will be projects that are basically steady across all four quarters.

There will be some projects that depending on how fast we ramp back up and when we get there, the flow will change.

The overall guidance (inaudible -- background noise) is going to move to a loss because of all of this does includes there are benefits flowing through there.

But to really get into quarter by quarter benefits is pretty tough.

Okay.

All right.

Thanks.

Sal Tharani, Goldman Sachs.

Good morning.

Good morning, Sal.

You made a comment about deployment of cash for growth projects.

I was wondering if these are -- if there is an M&A possibility, or are you looking at those also?

Are these all internally -- internal growth projects?

It is really covers everything, Sal.

You never know what comes around.

We just feel like we need to keep our eye on the cash generation and be prepared.

These are -- these growth projects -- are there, aside from what you are doing for Carnegie Way, is that correct?

I think everything right now is part of the Carnegie Way transformation.

I don't think we would say there is anything we do that is not influenced by and certainly driven by where we are creating value.

The projects that create value are the ones we are going to pursue.

I think, as Dave said, we have a lot of things we are considering.

When we have something that is far enough along that it's pretty definite, then we will talk about it.

We really do not have anything today that we are ready to get into.

Okay.

In terms of the charge you have on slide 8 about Carnegie Way savings, supply chain is about a $100 million.

I'm just wondering if you can you give us example?

That is a big amount on just supply chain and logistics.

Logistics is certainly a big piece of it.

We spent considerable effort in where we source from and who we source from.

Consolidation of suppliers to get volume positions, strategic alliances, contracting -- a lot of it is contractors.

Eliminating contractors is part of that.

So those are a lot of things that if you think about what you spend in a $16 billion cost structure, there is a lot of opportunities.

But some of the bigger ones would be, improvements in the supplier base, more strategic alliances, more consolidation, consistency, and logistical efficiencies, taking as much transportation out of the equation as we can.

Okay.

The last one I have is that you've been giving this guidance on Carnegie Way for the last three quarters, and getting (inaudible).

I was wondering which inning are you in, do you think, on this whole effort?

It is a journey, Sal.

We are building on it and hopefully we can continue to find the important areas where we can take away some of the system, improve the value we create, and keep building on it.

Do think there is a lot more fat to be taken out of the cost structure?

We are looking to earn the right to grow.

And the journey there will require that we find more, in that aspect.

That is why the disciplined approach with value in front of everything we do, is how we are going at it.

And part of it is, we implement a project -- pick Gary Works.

We implement a project at Gary that we find value in, that probably spurs five new projects behind it, Fairfield, Great Lakes, whatever.

If it works at Gary, let's go to the next plant and see what we can do there and what the value is.

So every successful project has potential to inspire more projects behind it.

And that is how the pipeline continues to build.

Dave Katz, JPMorgan.

Good morning.

You say you expected $700 million of a cash release in 2014, of which $400 million would be working capital.

You released $363 million of working cap in 1Q, but said that the cash release in total in 1Q, of that $700 million was only $250 million.

Can you reconcile that to the expected working capital flows over the remaining quarters into the timing of the tax inflow?

On the tax piece -- certainly the bigger piece will come when we get the refund from the prior years.

We laid that out in the 10K, I think.

That is one piece.

One of the bigger pieces in working capital is, we are mov -- we are making sure we benchmarking against the right people and moving our terms, consistent with our competitors and with the market.

Getting our payment terms in-line with the market is a big piece of that.

That will build throughout the year.

Okay, but again coming back to the $363 million and $250 million -- there is a discrepancy between those two amounts.

That could be really normal working capital fluctuations that are a part of doing business.

The two items we called will be items that are outside of what you would normally see in our working capital flows.

Okay.

At the beginning of call you talked about the lost and found management approach, where you are looking to find offsets when things go wrong or there are unforeseen circumstances.

You talked about at Great Lake Works how you're bringing slabs from other locations.

But, in terms of longer-term offsets to avoid a similar issue, can you talk about what you have done to help prepare the Company so that we do not see a repeat of that outage?

In general every time you make some plans you have assumptions and you have structures that you put behind the assumptions to go execute.

Those things are not always perfect, things happen.

The ability to really identify what changes and then go look for how can we compensate, is really a mindset of speed tenacity and structure to do it.

One example of what is going to be a better support for planning and execution comes out of what we're calling reliability-centered maintenance.

It's a very extensive process in which you will create a much more robust ability to be more dependable.

Things like that should certainly move us in the direction where some of these issues that catch us by surprise are going to be minimized.

Luke Folta, Jefferies & Company.

Good morning, gentlemen.

Good morning, Luke.

Two quick ones.

First on North American flat rolled shipments, industry data suggests US shipments are roughly flat year-on-year for the first quarter.

You are down 8.5%.

Is that mostly due to the constraints in terms of capacity and raw materials?

Or is there some, I guess, Carnegie Way limiting sales to unprofitable customers, or some sort of strategy there that is impacting that number?

I think it is both.

You do have an impact but there is -- we have currently, less contract percentages in the portfolio, we have more flexibility on the spot side where we can make choices in areas where they are not delivering the value that we need.

So it is really both.

And just a follow-up to that.

Can you talk about any of the contract business that you have rationalized?

Of a percentage of your contract business that you had last year, how much of that didn't repeat into this year, just given those choices?

We are probably running in the range of 70% contract business last year, I think that number is quite closer to 60% today.

Right.

Okay.

And then just secondly, the energy cost, you said that nat gas costs were up $60 million, if I heard correctly, sequentially in 1Q.

How much that reverses into the second quarter?

Thanks.

I think that really depends on where gas prices go.

We've said -- we took a lot of actions where we can swap different fuels for a better net cost, we did.

But I think that really could be driven by the relationship of gas to coal and coke costs.

If hadn't moved quickly as we did, that $60 million would have been a meaningfully worse number, Luke.

Thanks, guys.

Thanks.

Matt Vittorioso, Barclays,

Yes.

Thanks for taking my question.

I guess I'm going to ask an earlier question in a slightly different way.

You did report a positive benefit from working capital of $363 million.

By the time we get to year-end what would you expect that $363 be for the full-year?

Is it the $400 million that you noted earlier?

Or are there offsets to that that would reduce it?

How do we map your guidance to what will be reported on the income statement at year-end?

That is just -- what our operating levels will be, what is demand going to be?

That is pretty far off to try and forecast.

The particular items we called out are going flow through outside of normal fluctuations.

But I would say if you watch market conditions, as they go up and down, you should expect to see the rest of our working capital move as it normally would.

Okay.

Does that tax refund also flow through your changes in working capital on the income statement?

No.

That will be in addition?

Okay.

Just a quick follow-up on the overall market.

We've heard some investors talk about potentially some of the recent strength in HRC prices being related to disruptions like you've seen in your own supply chain.

The supply disruptions being met with normal spring demand, but as we move through the year that might ease.

With the raw material prices coming down, iron ore prices coming down, met coal is at pretty low prices.

What is your view on the second half of the year for steel prices, given the lower raw material price environment, and given the fact that supply chain disruption ought to be curtailed in the back half of the year?

How do you sort of put all that together to come out with a price forecast?

I'd suggest that these mini-cycles will continue, and depending on the amount of unforeseen supply conditions, I just -- we just go with the way that mini-cycles are.

It is really hard to give you a figure there.

It is going bounce up and down.

Tony Rizzuto, Cowen and Company.

Thanks very much.

Good morning.

Good morning Tony,

You quantified the natural gas impact in Q1 at $60 million, I wondering if you could quantify the logistical challenges that you faced and what those resulted in the quarter?

Natural gas is easily measurable.

I do not think we have a nice clean number where we call that one out.

I think everybody in the market saw a lot of that impact, and from that standpoint we're not any different than all of our competitors in our region in the first quarter.

Okay.

If I can just -- look at the guidance that you provided for flat rolled.

Obviously, the guidance is big enough you can drive a truck through in terms of a loss for flat roll.

Just trying to think about a little bit more.

If you could give us a sense of the average operating rate that you guys are expecting for the second quarter?

You did better than we thought you might do in Q1.

Is there anything you can say about that to help us out and try to model the fixed cost aspect?

Well you know, we are expecting to restart Great Lakes 10 days from now or something like that.

Gary has come back to life; it's still tied to the supply materials, so we are monitoring that closely.

The ability that we are going to have from a supply perspective to ramp up faster, will really determine how much we're going to be able to recover, Tony.

We are right at the beginning of the phase right now.

Okay.

And then you mentioned earlier on the last quarterly conference call, and there was a question earlier about coal.

You had indicated, I think in the last quarter, that for the full year there was going to be some pretty significant savings.

I imagine, obviously, those are coming through a little bit more slowly.

Where are you are along the lines that you indicated, $25 a ton?

I think you purchase 9 million a tons a year?

Yes.

How far into that would you be and -- if you can give us a sense there as well?

Tony, you're right.

That number is still (multiple speakers).

Those contracts are in place so that's what the numbers will be.

Like I said, it does take a little bit -- you have to carry over tons, you have some inventory burn.

So we probably got slowed a little bit.

You'd expect that, as we get second half of the year, we should be very close to the number we were talking about.

Okay.

And then as far as mix, you made some comments about mix and logistics for that a little bit.

So your contractual ratios come in a little bit as you indicated.

But could you give us more delineation on your mix, as you are seeing the second quarter shape up?

Auto versus some of the other products -- containers, et cetera?

The only thing that I can tell you, Tony, is that we have a lot more flexibility, given the challenges that we have as we have opened up more space for spot business.

Given the pressure that we have, we really have a lot more flexibility to address the contracts that we have.

I think we are going to be somehow skewed towards contracts in the second quarter, more than spot.

Brian Yu, Citi.

Great.

Thank you.

First question is -- this goes a little back to what Tony was asking you.

Can you give us a sense of how much of your capacity is available today, given Great Lakes outages and them also iron ore?

Once Great Lakes comes back online, where does that put your available capacity?

By the end of the second quarter, should we you assume that effectively you would be pretty close back to normal operations?

We will be back to -- that is what we're expecting, is that we are going to be back at the end of the second quarter to normal operations.

Would you give us a sense that the steps and the milestones, where is the utilization or available capacity today, once Great Lakes comes back online where does that take you to?

I think the more -- the premier challenge there is going to be the steady supply of iron ore.

Because I think we had some pictures that you saw -- the cutters are still necessary to bring the vessels through.

The pace is slower and we have two vessels that have been pierced by unheard-of icebergs, that have been removed for repairs.

And it is going to take a week, at least, to get them back on.

It is really more dependent on our ability to keep bringing the ore in and crank the capacity up and support it there, rather than -- you go up and then you have to back down.

I think we are being careful and provide a steady flow, keep the operations in control, and then get to the end of the quarter at a very sustainable pace.

Okay.

Follow-up question on project Carnegie.

The $200 million in cost savings, I've always viewed US Steel as one of those companies that always try to save costs, just like your competitors.

With this incremental $290 million, is this something that's above and beyond what the Company has been doing in the past?

And effectively would leap-frog you guys ahead of your competitors, and essentially move you down the cost curve?

Or is some of this normal cost savings that everybody else is doing too?

Definitely something that should differentiate us going forward, no question about it.

That's the determination that the team's have in front of the them is to do a lot better and make it sustainable.

Not something that we are curtailing temporary.

It's changing the way in which we do things, we look at the amount of waste and take it out.

It's really -- that is why we call it transformation.

Okay.

Thank you.

You are welcome.

Gordon Johnson, Axiom Capital Management.

Thanks for letting me ask a question.

Just focusing on a prior question that was asked, looking at the second half, we're looking at import licenses into the US, the spread between the US and foreign HRC prices.

And it looks like, unfortunately, you may not get the benefit from the price hikes in 2Q.

So looking to the second half, and, specifically, at expectations for your earnings, it looks like people are expecting your earnings to increase significantly.

Is there potential risk to those earnings if we see an influx of imports into US shores?

And I have a follow-up.

As I was mentioning before, Gordon, these mini-cycles have so many different levers there that it is hard to say.

But if you look -- the recent past that there has been quite an interesting sustainable period that where prices have been sustained here, regardless of the ups and downs.

But I personally feel if it is going to be volatile -- big time imports come in, I think it will certainly impact prices.

That is helpful.

I guess focusing on a question that was asked again, but just in a different way.

Looking at where iron ore prices are right now and some of the puts and takes around iron ore prices with the port inventory in China and potential risk there, if we continue to see a deterioration in iron ore prices, again, do you expect that to negatively impact overall steel pricing?

And how do you plan to navigate, if iron ore prices and thus steel prices continue to fall, through the second half?

Thanks again.

I think it is back to what we're doing.

We're focused on the side of that equation we control.

I mean, supply and demand we can't control.

So our focus is on our business model and how we improve our structure.

Because it is a tough market, it's a volatile market.

We need a lower structure, we need more flexibility.

And that is what the objective is.

I think that is how we combat it.

Thank you.

Thank you.

Timna Tanners, BofA Merrill Lynch.

Good morning.

Good morning.

Just wanted to probe a little bit.

Taking a step back, so you are going pay down the convert in a couple weeks.

We thought you would want to preserve some of that liquidity.

So I thought that was a good chance to revisit uses of cash going forward.

If you could provide an update how you are looking at some of the things you've talked about with regard to DRI or expanding iron ore?

We saw that you are restarting a coke battery; I'm not sure fits in.

But if you could give us an update on some of the projects you talked about?

Thanks.

Well we are sitting here with $2.7 billion of liquidities.

So I don't think that's a very small number.

The projects that we set out to go pursue, they remain in the queue.

People are working at it.

The DRI assessment continues.

We have validated our iron ore certainly as capable.

We do have enough reserves.

It will play, eventually, a role in two fronts.

It may an alternative supply for us, once we get the electric furnace in place.

It may turn into a product.

We're analyzed that possibility: too early to tell.

The converts are the converts.

If the share price gets there, it is paid that way.

If not, we've got enough cash to deal with it.

Go ahead, sorry.

Couple additional cash items we just called out, even after we have converts, we're looking at a pretty substantial cash position here.

No doubt.

I was not trying to suggest otherwise.

I was looking to get an update.

That is helpful.

I just wanted to also then touch base, if I could, on SG&A was lowest since 2007 -- I just wanted to confirm that that is a new sustainable level, that you have probably outlined as part of the savings on Carnegie.

And then also, talking about the CapEx numbers, how do you know these that these are the new levels that are sustained?

So on SG&A and CapEx, if you could give us more thoughts there?

Thanks.

Well, I think with SG&A our view is that it needs to go down.

There is still a lot of work we have in the pipeline and I don't not think we are satisfied we're where we need to be there.

CapEx -- if you look back in the appendix and read our full 10Q, we're forecasting $624 million for the year.

and that continues.

Yes, that's where we're at.

First quarter flows, I think their everybody saw some challenges on projects.

You might have had some delays here and there.

We are still looking at somewhere in the $620 million range for the year.

Okay.

Got you.

Thanks.

You are welcome.

Michael Gambardella, JPMorgan.

Yes.

Good morning, guys.

Good morning, Mike.

A couple of questions.

First on the outages.

These outages -- the ones that are related to the raw materials flow limitations, is it fair to say that you guys are being more negatively affected than most other mills on the lake?

Yes, it is.

If you look at the geographic positions that we have, when you compare the mine and the ore supply with the operating facilities, we really are the ones that are much more dependent on Lake Superior than any other one.

And what we learned throughout this winter here, certainly is a new data point.

And we are analyzing how we will be prepared to deal with this.

Is this the new norm?

Are we going to have -- what is the best solution?

Do we put more ore some other place?

Are we going to go into semi-fab inventory?-- Semi-fabricated inventory.

All of those things are being analyzed as a consequence of what we just learned here.

All right.

A lot of your competitors on their conference calls for the first quarter highlighted the significant outages in the sheet market, primarily at your operations.

And one of your competitors, New Core, on their call, didn't identify you, specifically, but they did say when they have customers coming to them that are customers at these plants that now have outages like yours, they are basically saying, we are not going to take your business unless you can guarantee that you will buy from us the rest of the year.

And they say that they are locking in business for the rest of the year with basically your clients.

So I know your outages -- you expect to be back up by the third quarter.

But are you -- do feel that you lost market share permanently?

Well, not permanently, but for the rest of the year?

Because some of your competitors, maybe all of them, like New Core, are basically telling the customers they're not going to give them the volume right now unless they guarantee to take volume from them and not you for the rest of the year.

I think what you are commenting is just a fact of life.

This is the way it goes.

There is more to a customer relationship, as you also know Mike, than a temporary disruption.

The context in which we operate with our customers is much broader than that.

Everybody is susceptible to having a difficulty at a certain point in time.

I look at the relationships and the way that we are handling the situation -- the way the customers are responding to a very large degree, it is the opposite of what you just commented.

They are working with us because they understand how we are dealing with it.

They understand what has happened.

They demonstrate that they are committed because there is a lot more benefit that they have in dealing with us than just looking at this temporary issue.

Justine Fisher, Goldman Sachs.

Good morning.

Good morning, Justine.

I just wanted to clarify on the cash flow side again.

When you started with a slide on cash flows, you can expect all the credit analysts to harp on this issue.

When you say that you expect a $700 million cash flow improvement, can you just define what you mean by that?

Is that total cash flow versus what it was in 2013?

I know we know working capital, per your comments should be about $400 million gain for the year.

But how do find that $700 million?

Is it relative to something?

Or is it just absolute working capital plus cash flow from operations?

Can you give us some color on that please?

These are two discrete incremental projects that are worth $700 million in cash.

But is the $700 million an increase in cash versus full-year 2013?

Or just cash the should be generated and will it be offset by something?

I just don't know how we define that number.

This is cash that is going to be generated that is new.

A move in payment terms is a cash --new cash that is going to stay.

Once you get your payment terms back out to the industry standard, that will bring $400 million in the door.

And the tax piece is -- we have a refund coming.

They are going to send us a check.

Right.

Okay.

And then my other question is just as far as we might judge the impact of project Carnegie.

One way I might think we could look at is by looking at the Company EBITDA margin.

But of course every quarter EBITDA margin can also be significantly affected by changes in price or outages, as we saw in the first quarter.

So if you were to give investors and analysts a number to look at so that we can see tangible results of project Carnegie -- should we look at the EBITDA margin?

Would the Company consider giving us kind of a margin excluding raw materials?

Or something like that going forward, so we can see in the numbers the benefits of project Carnegie maybe not overshadowed by changes in pricing or raw materials?

I think all of your the market forces are always going to be there.

Our changes are going to show up in our margins.

But yes, depending on what you plug into your model for HRC prices or whatever else, the commercial impacts are going to be what they are.

I don't think we would try and model that out.

We are attacking the other side of the business.

The extent - our objective is that our margins will be the best they can be at whatever the commercial conditions are.

Okay.

Thanks.

Phil Gibbs, KeyBanc.

Good morning.

Good morning.

Thank you for taking my question.

Sure.

Mario, just wanted to get some of your thoughts on that automotive platform.

And some of your vision on some value creating efficiency projects and that piece of the business.

I know you had discussed re-orientation of the footprints, some new products, geographies.

Where are we in that process?

And what should some of the bigger things in that piece look like going forward?

Or what do you envision in that piece?

Early here in the game, we are boosting the capabilities that we've had for awhile.

Both in the energy business as well as the automotive business.

So we should see an acceleration of delivery of new projects into the market.

There is a combination -- for example connections development with the ability to ramp up production in those, which we should see coming up in the next 18 or 24 months, becoming very meaningful.

The other one is the acceleration of the breadth of high-strength steels, that are going to be required for the light-weighting that we're envision delivering to the OEMs.

It really has been probably a lack of proper amount of resources.

And I think we are addressing that quite intensely over here.

The other thing, is the closer that we get with the customers -- we are learning more and we're able to give them references in how they structure their design for the applications they need.

That can accelerate the utilization of these steels.

Moving away from previous references on angles, curvature, how they connect things -- is going to give us more of an opportunity to help them achieve what they want and preserve the value that steel brings.

That is sort of, in general, what we should see happening in the next two years.

We are going to put in place a group that is going to begin to look beyond the normal technologies, and try to identify what are the new technologies that are coming in that we can connect to the solutions that we are thinking of bringing to the table.

So a lot to work on in the next two years, for sure.

Okay.

And then I just had one more if I could, Mario, I appreciate that.

You say you'll have production essentially up by the end of second quarter.

But when should we expect you to catch up on your backlog on contracts side so you can be a meaningful player in the spot piece?

Thanks.

I think by the time we enter the third quarter, I would like see our operations getting back to that kind of flexibility that we designed for the year.

And therefore, be at par with the contract commitments and having the flexibility on the spot side.

That is what we are looking at right now.

John Tumazos, John Tumazos Very Independent Research

Thank you very much for taking my question.

First, you said you're automotive galv volume will be a little less in the second quarter.

I would think from your standpoint, you would rather sell less slabs or less hot rolled and more of the higher value product.

Are the constrained facilities at Great Lakes and Gary important for interstitial free steels and depriving you of the feedstock for the automotive galv product?

Number one question.

Second, could you update us on your strategy for hot strip rolling and the generation three or generation four automotive steels.

A year ago you had some discussions with Allegheny Tech about their new rolling mill.

The first question, the answer is yes, of course they are connected.

There is a challenge there until we get the facilities back up and running.

That there is a challenge there.

And that is why we are so close to the customers.

To minimize impact on them.

John, I think the other thing is, we just referred to in the comments, we have produced gen three steel from our existing facilities.

But certainly, we would never rule out, if there's something available to us that will help us, we would look at it.

But we actually did -- the coils that we have that are gen three came off of entirely of our own facilities.

This is one of the things that we have been accelerating, when it comes to development.

Related to the previous question, that was asked.

We are faster in bringing to market solutions that we can deploy to commercial volume more quickly.

Do you feel at a disadvantage to the Ersoylar Metal, Nippon and Sumitomo solution being offered to customers from Calvert, number one?

And number two -- the number two Japanese steel company, JFE, also will want to get into the market and supply the automotive companies from Japan and the US.

How does your capability in gen three or further improvements compare to those two solutions from competitors?

In simple terms, I do not think we are second to anybody at this point in the development of these steels.

Based on what we have seen and the responses we have had from the customers that we are working with, they actually are very surprised with the quality of the material that we have developed.

So I have absolutely no sense that we are behind anybody at this point and time.

Aldo Mazzaferro, Macquarie.

Good morning, Mario, how are you?

Hey.

Good morning, Aldo.

John just asked my question on the automotive decline on coated products.

You did say it was due to the supply constraints rather than any loss of market share to aluminum or anything like that, right?

Yes.

So my other question is on the production run rate and things.

I'm looking at your working capital declines, which were quite impressive, the sources of cash out of the working capital.

Can you say a lot of that was from finished product that you sold out of inventory?

Or was a lot of it more from the inability to get raw materials in?

You broke up, Aldo.

We lost the end of your question.

I'm sorry?

Aldo, we missed the last part of that question.

You want me to repeat the question?

Yes.

You broke up on our end a little bit.

Oh, sorry.

On the working capital reduction -- actually in the inventory -- I am wondering if a lot of that is due to the sale of finished products from inventory as you replace the lost production?

Or whether it was for some other changes?

That's part of it.

Part of it is we have some lower end process to finish because we are catching up.

But not on the pellet side.

We have pellet inventory.

It's just not where we need it to be.

But as we -- you have your normal fluctuation, but certainly as we alluded to, to serve our customers we have to utilize some end process and finish that we otherwise we would not.

But there is also the raw material is less and in this inventory space, over time we will see probably a couple hundred million dollars increase in inventories throughout the rest of the year.

But the portion that we mentioned earlier relative to payables and terms, and the tax benefits will continue.

But the inventory number will probably come back by a couple of hundred million in a big chunk of that was related to raw materials.

Okay.

Second question.

Thank you.

On the outages that you suffered in the first quarter -- or even right now, say the month of April.

Can you say whether the Great Lakes outage is impacting your output by a greater amount than the Gary limitations?

Or is it Gary that is greater thank Great Lake?

It is balanced, Aldo.

But really it's driven by the pellets.

Pellet availability is the limiting factor.

All right.

We would like to thank everyone for being with us today.

We appreciate your interest.

We will be back with you come July.

Thank you.

Ladies and gentlemen this conference is available for replay.

It starts 11AM Eastern time, until May 14 at midnight.

You may access the replay at any time by dialing 320-365-3844.

The access code, 324155.

That number again, 320-365-3844.

And the access code, 324155.

That does conclude your conference, thank you for your participation.

You may now disconnect.