美國鋼鐵 (X) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by, and welcome to the United States Steel Corporation's Second-Quarter 2014 Earnings conference call and webcast.

At this time, all lines are in a listen-only mode.

Later there will be an opportunity for questions, and instructions will be given at that time.

(Operator Instructions)

And as a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Tom.

Good morning, and thank all of you for participating in this morning's conference call webcast.

For those of you participating by phone, the slides are included a webcast are also available under the Investors 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 will 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'll turn it over to our CFO, Dave Burritt.

Thank you, Dan.

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

Turning to slide 3, we reported income from operations for our reportable segments and other businesses of $132 million.

This is notable because we were faced with significant operating challenges, particularly in our flat-rolled segment.

Despite that, our employees remained committed to finding opportunities and developing solutions to offset all of the challenging issues they faced.

By utilizing the lost and found management approach we discussed with you on our April earnings call and maintaining the focus and intensity of our Carnegie Way transformation efforts, our employees found sources of value that kept us profitable through this difficult period.

We are driving disciplined execution against the pipeline of projects as part of the Carnegie Way methodology.

This pipeline of projects covers all core business processes including commercial, supply chain, manufacturing, procurement, innovation and functional support.

This is a deliberate, purposeful march towards value.

This is being driven by the thousands of employees, and it is driving a culture of accountability at all levels of our organization.

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 second quarter, we have almost $1.5 billion of cash on the balance sheet after we repaid $322 million of debt.

This $1.5 billion on the balance sheet is up from $600 million at the end of 2013 and $1.1 billion at the end of the first quarter.

As a result of this significant increase in our cash position and the debt repayment, our net debt has improved by almost $1.2 billion since the end of 2013.

It is now approximately $2.2 billion.

Our total cash and liquidity is now in excess of $3.2 billion.

As part of the Carnegie Way transformation, we have generated almost $1.4 billion of cash flow from our operations.

Last quarter, we highlighted two projects that would generate an incremental cash benefit this year of $700 million in 2014; $400 million from working capital improvements; and $300 million resulting from a large tax reduction we were able to take at the end of 2013.

We had already realized $250 million of those benefits in the first quarter, and we realized an additional $400 million this quarter.

Needless to say, we continue to look for more opportunities to strengthen our cash position.

We have developed a customer-focused macro business strategy that will drive resource allocation going forward.

We will use the cash to fund high-return projects and to pursue profitable growth opportunities.

We are comfortable that we have the cash on hand, as well as the ongoing ability, to generate cash to survive adverse market conditions.

We have started execution of several strategic projects that will develop the value-added products and services that our customers will need in the future that will keep US Steel as the supplier of choice for the products they need.

While we are pleased with our Carnegie Way journey, we recognize the large improvements required to deliver sustainable profits.

And we are collaborating with appropriate stakeholders in a mutually-beneficial way.

We are very pleased with the teamwork.

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

Thank you, Dave.

Our Flat-Rolled segment had operating income of $30 million in the second quarter.

Despite the weather and operational issues significantly impacting the quarter, the flat-rolled segment remained profitable thanks to benefits generated by our Carnegie Way efforts.

Logistical and operational issues curtailed production for part of the quarter, resulting in operating efficiencies, higher repair maintenance costs and lower shipments as compared to the first quarter.

Average realized proceeds benefited from improved market conditions in North America in the second quarter.

Our Tubular segment had operating income of $47 million in the second quarter.

Imports in the market continued to put pressure on pricing.

Despite stagnant prices, operating income rose on higher shipments due to increased drilling activity and lower substrate costs as compared to the first quarter.

Our European segment had operating income of $38 million.

Operating income increased compared to the first quarter despite the absence of income from the sale and swap of carbon emission allowances realized in the first quarter.

The segment primarily benefited from lower [iron] costs, while prices of shipments remained flat versus the first quarter.

Now I'll turn the call back 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.

Turning to slide 8, we continue to make significant progress as our pipeline of value-creating projects continues to grow.

And we continue to focus on the detailed and structured execution and implementation of these projects.

Carnegie Way benefits now total $435 million, with $140 million of benefits we reported in April.

Our total benefits had grown to $290 million for 2014.

During the second quarter, we implemented new projects that will improve our margins by an additional $145 million in 2014, getting us to the new total of $435 million.

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

A couple of examples of some of the bigger projects include the continuing reduction of the use of outside contractors.

Last quarter, we reported to you that the benefit from this in 2014 would be $20 million; and that number has now grown to $30 million.

Additional improvements in steel-making costs at USSK, last quarter we disclosed $30 million from the improved costs and yields at the blast furnaces.

And we have now implemented improvements at the basic oxygen steel shop that increased this benefit to $35 million.

And as we continue to implement our ERP solution, we eliminate the costs associated with supporting our old proprietary legacy systems, providing a $15 million benefit this year.

Again, this increases our total Carnegie Way benefits to be realized in 2014 to $435 million.

I

'd once again like to emphasize that these are not targets or objectives, and they are not speculative.

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

We have established best practices around measurement and tracking of the benefits we are realizing from these projects.

As I had said before, we are executing this at a rapid pace.

Our favorable results in a second quarter, given the challenges we face in our strong third-quarter guidance, are just beginning to show the improved earnings power that we are creating.

Now on slide 9. I would like to provide an update on our Carnegie Way transformation process.

As we have discussed in the past, the Carnegie Way is focused on value creation through a disciplined and structured improvement process with the ultimate objective being to earn an economic profit throughout the economic cycle and 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.

We are clearly still in Phase 1. But we are encouraged by the significant progress we have made and, more importantly, by the rate at which the process has been moving.

The momentum we have generated has facilitated the engagement of more of our talented people throughout all levels of our organization.

And we are seeing the talent and capabilities of our workforce expanding as they learn and adopt the Carnegie Way approach to problem solving and implementing effective and sustainable change.

While it would be convenient for the world to wait for us to get through Phase 1, that is not likely to be the case.

And we understand that if opportunities arise that would help us achieve the Phase 2 objective of driving and sustaining profitable growth, then we will have to adapt and pursue those opportunities with the same focus and intensity that is driving improvements as we speak.

We are focused on the opportunity and challenges of getting each of our existing operations to deliver the returns we need in order to earn the right to grow.

When we earn the right to grow, we can accelerate our profitable growth strategy.

The way we think about profitable growth is to pursue business where we can achieve economic profit.

In addition to organic growth, we will explore M&A activities only where we can earn economic profit.

That is, acquisitions that have a return on invested capital greater than our weighted average cost of capital.

But to be clear, we must be comfortable.

We generate adequate returns.

We look at a lot of possibilities, but pass on most because we don't see a line of sight to value.

We've already made some significant improvements to many of our businesses, and we have made the difficult decision to exit a couple that we could not fix.

We still have difficult problems to solve in many areas, and we are committed to finding the appropriate solutions to these problems on a timely basis.

We need to be ready to capture and create value for all of our stakeholders when the opportunity arises.

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

Thank you, Dave.

Good morning, everyone.

The flat-rolled market in North America appears to be very stable at this time.

And steel consumption in the US market has bounced back quite well after the harsh winter weather finally subsided.

The extreme weather conditions at the start of the year impacted numerous industry statistics such as steel production, service center shipment volumes, and construction starts.

Just getting materials moved around the country proved to be an extraordinary task, which likely dampened expectations as to the underlying strength of the economy.

However, second quarter data points have suggested that the market here is consuming flat-rolled at a rate well above 2013 levels, and has prompted both spot and contractual industries to keep buying steel to keep up with demand.

The inventory supply chain continues to operate at the relatively low level.

In mill lead times, we're fairly stable at four to five weeks for hot-rolled coiled most of the quarter.

We have not seen the typical summer slowdown in the North American market for several reasons.

Automotive build rate, which usually slows significantly in July for model year changeovers, have remained strong.

Both US and Canadian service center inventories are below typical levels, and both regions are shipping at higher volumes year over year.

The effects of significant mill outages in the second quarter have resulted in very lean supply chain inventories carrying over into the third quarter.

Construction demand and order rates have been improving.

The constant threat of important steel remains significant and can put somewhat of a cap in North American prices.

However, stronger demand has been helping to keep prices relatively stable.

Fundamentals in the energy tubular market were generally strong during the second quarter, led by strength in onshore horizontal oil drilling.

By the end of the second quarter, the oil direct rig count had climbed to the highest level in decades.

We expect the average third-quarter US rig count to increase to its highest level in the past two years, generating increased operator consumption of OCTG.

We expect the oil directed rig count will remain strong, with oil prices projected to remain near $100 per barrel throughout the third quarter.

Natural gas prices are projected to remain significantly above a year-ago levels during the third quarter, but we expect natural gas drilling to remain relatively low as compared to the strength in oil directed drilling.

The US Department of Commerce issued its final margin determination in the OCTG trade case on July 11.

Most importantly, for the domestic industry, anti-dumping margins were also placed on Korean imports, reversing the preliminary ruling from February.

Although we view the final OCTG determination as positive, OCTG supply, particularly commodity grade ERW, will likely remain abundant into the third quarter, as the market is well supplied with inventory, foreign offerings and additional domestic capacity.

However, increased demand for premium products could allow for some upward price movement.

Economic data currently indicates that a recovery in Europe is beginning to take hold, although momentum remains rather modest.

While demand has strengthened moderately, imports continue to make this a challenging market.

Now turning to our outlook for the third quarter, we expect a significant improvement in our Flat-Rolled earnings as we return to normal operating levels and are able to more fully participate in all of the markets we typically serve.

The contractual volumes we have in our order book are what we expected them to be, and we have not seen any negative change in spot market purchasing patterns on our facilities.

We expect our contract versus spot shipping mix to be in line with the expectations we had as we entered the year.

Our operational challenges in the second quarter negatively affected our North American Flat-Rolled earnings by approximately $150 million.

But those challenges are behind us now, and we are well-positioned to benefit from favorable demand in many of the markets we serve.

And our increasing Carnegie Way benefits will continue, and they will find their way into the bottom line.

In Europe, we expect seasonally lower demand, and we have blast furnace and caster maintenance projects to complete.

But lower raw material costs will partially offset these items, and our operations will continue to be profitable.

In our Tubular segment, we expect lower volumes as we complete the idling of our unprofitable operations in McKeesport and Bellville.

But improving pricing and a stronger product mix will result in slightly higher margins for our Tubular business.

While we are pleased that the DOC has granted us some relief in the recent ruling on the OCTG trade case, we do not anticipate that any benefits will be realized until after the third quarter.

Before we take our questions, I would like to give a quick update on our operations as we worked through the significant challenges we were faced with in the second quarter and our increased focus and progress on innovation and product development.

The operational challenges we faced in the second quarter were far greater than those we faced in the first quarter, and were some of the most difficult we have ever faced.

For example, the steel shop at our Great Lake Works was offline for half of the quarter.

And while we were dealing with all of these challenges, we worked aggressively to utilize our entire steel making system to satisfy our customers' needs.

We moved certain products to other plants where possible.

We brought in slabs from our European operations, and we drew down on our in-process and finished steel inventories as far as possible.

With all of our operations back online and our iron ore pellets arriving at normal rates by mid May, we were able to address our backlog of customer orders by the end of the quarter.

We entered the third quarter in a normal operating position, although it will take more time to completely restore our steel and iron ore pellet inventories to their appropriate levels.

I do want to express my sincerest thanks to all of our customers who endured the difficulties of the second quarter with us.

As we are acutely aware of the intense cooperation and communication that was required to keep their facilities running with flat-rolled steel deliveries from our plants.

Their willingness to work hard with us is a testament to the relationships which we have developed over the years.

And we are committed to serving them even more effectively moving forward, as we continue to roll out our reliability-centered maintenance program at our mills and our dynamic sales and operation planning process as part of our Carnegie Way transformation.

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

We are expanding the capability of our research and technology center in Pittsburgh, adding new research equipment and personnel that will support a motive in tubular product and process research, fundamental research in the development of steel solutions for our customers.

At our dedicated automotive research facility in Michigan, we continue to advance the development of advanced high-strength steels.

We have many process development projects, customer-focused projects using new products, and we are designing automotive parts solutions with our customers.

We have been developing new steels for use in vehicle platforms.

And there are still intensive vehicle platforms in 2015 that are capable of delivering comparable fuel economy to platforms using alternative materials for both cars and trucks.

And it is worth noting that these steel solutions offer a more economical total value proposition to our customers and leave a smaller carbon footprint than materials that cannot be easily recycled like steel already is today.

We are also developing new grades of steel that are making their way into future platforms, which will offer even greater value to our customers.

And in fact, we have produced generation 3 grades of steel that are being evaluated by our customers right now.

And we look forward to accelerating our commercial volumes of these grades with our customers.

Our dedicated tubular research facility continues to develop our line of proprietary premium and semi-premium connections into work with our customers to develop solutions for all of their exploration and production needs.

We are committed to innovation, and we plan to increase investments in innovation across the Company as we pursue those differentiated products.

Markets and steel solutions that can bring real value to our customers.

Thank you, Mario.

Tom, can you please queue the line for questions?

(Operator Instructions)

Luke Folta Thomas Jefferies.

Good morning.

Good morning, Luke.

Congratulations on -- to you and the team on the execution this quarter, pretty impressive.

First question, on the $150 million of cost improvement that you see in 3Q, can you talk about how much of that you expect to be discrete cost items that you saw in the second quarter associated with repair and maintenance and otherwise versus volume?

The main question being, does that $150 million include the volume benefit, or would that be something on top of that?

That -- Luke, that $150 million is basically what the change in 2Q would have been if we had not had those challenges.

When we talk about potential -- higher volumes in the 3Q, that would be a separate item aside from that $150 million.

That $150 million is just what equalizes you back to a normalized quarter.

So, that $150 million, at your volume level that you saw in 2Q, the discrete items that, if you didn't have the weather issues, that that would -- that's how to think about that, you just strip that right out of there?

Yes, that's right.

Okay.

Second one, I'm interested in your thoughts just on the Severstal deal.

I think it was in the press that you were at least kicking the tires on it or looking at it.

Just curious as to what your -- ultimately, is that something that you looked that?

Didn't see enough synergy or value in, or is it a function of the purchase price that was ultimately paid?

Can you give us some thoughts on you didn't pursue that to a greater extent?

Well, Lou, you will certainly get a much better level of information talking directly to them.

As far as we are concerned, we normally just remain alert to everything that happens in the marketplace, and we would pursue opportunities that would provide support to a solid business case.

Okay.

And just lastly, the $435 million of Carnegie savings that you've announced here today, how much of that should we think about already being in the first -- or the second quarter run rate numbers versus what we can see in the second half?

Thanks.

Those were really put in place throughout the quarter, so if you're going to allocate it, whether you'd say half a quarter benefit and spent the rest, that would probably directionally get you in probably the right zone.

Okay.

Thanks a lot.

Toni Rizzuto, Cowen and Company.

Thanks very much, and good morning.

Good morning, Tony.

Good morning, Mario.

My first question is just a follow-up, the flat-rolled shipment volumes, look, they were stronger than what we were anticipating.

And I -- in thinking about the third quarter, and you made the comment earlier about flat-rolled demand being above 2013 levels.

Should we be thinking about shipment levels for 3Q being closer to the first quarter levels, or is it possible we could be looking closer to 2012 levels?

I think you could consider potentially being slightly better than first-quarter levels.

All right, that's helpful.

And I just want to ask a question, just to follow-up question on Severstal.

And you had Great Lakes out for half of the quarter, and there's been some comments by some of the folks I speak to in the industry that US Steel maybe needed those assets to help improve the situation at -- in the Great Lakes.

And I was wondering if you could maybe make some comments about that and how that might have affected -- was it something that might've been important from the synergistic standpoint?

Or maybe you could just comment on that and any thoughts you may have to give us a little bit more color in understanding your position there.

No.

We are not in the situation where we would need anything else.

What we really need is to keep focusing through the Carnegie Way approach for maintenance and reliability.

There is plenty of opportunities there, and we know that we are not where we need to be or where we can be.

And that's what we are diligently working for, and the change in that regard has started.

Evan Kurtz, Morgan Stanley.

Good morning.

Good morning, Evan.

Good morning.

A question on the 8-K that you filed a couple days ago.

I think you made some amendments to some of your receivables purchase agreement up in Canada.

And it seemed like that might have been an initial step to potentially distance yourself a little bit from that business in case you did want to pursue some sort of restructuring process up there.

And I was just wondering, is that something that -- how are you thinking about that?

Is it something that we could see sooner or later, or just thoughts there?

The filing that you saw basically is geared up to continue to give us the additional levels of flexibility that in these kinds of business that were in are necessary.

We've been looking at every angle of our business, and Canada certainly is one that is challenging.

And we are still working on it, and we are going to keep working on it.

No decisions have been made on anything yet over there.

Can you say if that business is currently generating in a profit, or is it loss making?

Unfortunately, it's not generating a profit.

That's helpful.

Thanks, and maybe just one question on OCTG.

You mentioned that the trade case won't have any impact on the third quarter.

But the ruling left a lot of people scratching their head.

What does 10% to 15% mean for the industry?

As you maybe look out further when it will actually have an impact once inventories are worked down a little bit, how do you see that impacting the market?

Do you think that it's more of a volume impact, or is it maybe benefit on pricing?

Any sort of color there would be helpful.

What we perceive is that certainly the decisions that have been made will not have an impact on third quarter.

And certainly, the market will absorb, as it normally does, any forces that come to play.

We shall see what it is going to do.

But certainly, it was a positive decision, because we really have a position to compete and succeed if the level playing field is there.

Thanks so much.

Sal Tharani, Goldman Sachs.

David, a couple of housekeeping items in the press release.

Income from investing, can you explain what that was?

$57 million, I believe.

And what is the reason to take this big legal reserve at this point?

Sal, on income from investees, that's actually -- a big piece of that's related to our mining JVs.

But actually, it's just the accounting treatment.

There's actually a pretty big offset actually in cost of goods sold.

If you net that out, income from investees is really probably net more in the range of $20 million, which is more of a normal level.

We were probably seeing some better improve -- better results from the other flat-rolled JVs.

So, like I said, if you take that COGS piece out offset against that, $20 million if it came from investees is not really an unusual number.

Great.

And the legal reserve?

We always have things out there.

We've always -- don't want to comment on litigation when it's still in the courts.

We just had a piece that fell into the category of where you should take your reserve when you have some knowledge of quantifying it, and we did.

Okay.

Mario, just one more question.

We look at the flat-rolled market right now and look at the imports, you can see the imports share in US on the steel has increased a lot.

And obviously, you and other steel participants have commented about it.

Does it -- but even despite that, and we look at the service center shipment only up 5%, does it look like that actual demand is -- underlying demand is even stronger than what the macro rate suggests?

Because we don't see inventory build, despite all these imports coming in, and steel mills are shipping and having lead times extending continuously, although we are going to the summer.

What do you hear from your customers?

First of all, as we related, Sal, we are not seeing the normal summer slowdown that happens in some of the market segments.

The orders are coming in on a fairly regular basis in a pretty robust form.

And the interaction with the customers is not revealing any sign that there is a weakness that we could be realizing coming into third quarter.

So, I think the third quarter is poised to remain robust.

Thank you.

Brett Levy, Jefferies.

Hello.

AK talked about -- and I know that your pension cash payment and OPEP cash payment outlook is different than theirs, but -- or profile is different than theirs.

But do the interest rates and actuarial tables -- it seems like in some of the out years, 2015, 2016, et cetera, there's going to be big benefit to anyone who's got pension and OPEP.

Can you define what the cash benefit might be to you as you look out into some of the further into the future years?

Brett, we don't have any mandatory cash payments on the pension side outside of the specific agreement we have on the Stellco plans.

From that standpoint, our piece that's in our -- things that go into defined contribution plans, that is going to flow with the business.

But without having mandatory contributions in the defined benefit plan, there's probably not much of an impact that we would see out of that.

Not even in 2015 or 2-16 due to actuarial or interest rate assumptions?

We have no mandatory contributions now, so

And then on the Carnegie Way initiatives, is there a headcount number that is flowing out of this?

Has headcount been substantially reduced as part of the initial effort?

At some point on some metric, I know it is not the most pleasant topic, but some jobs have got to be reduced to achieve all of these things.

Is there number that I can put to that?

Not necessarily a number on headcount.

We, as we mentioned before, Brett, we have are pretty significant ERP implementation taking place.

And as we continue to roll out the process and the efficiencies that come from it, that does generate an improvement on headcount.

Carnegie Way focus, though, is a much, much broader much, much broader in context, and it's never been designed to go after people.

That's not -- people are what are creating the Carnegie Way for us, and there is plenty of shift from folks that have been dedicating a lot of effort on a tactical matter.

They are shifting their abilities to become much more analytical and strategic and intense.

It is very fluid environment over there, but the Carnegie Way is a much, much broader, much more powerful approach to unleash value than solely focused on people.

Matt Vittorioso, Barclays.

Good morning, and thanks for taking my question.

I just wanted to get some more color on the working capital.

Obviously, great job of managing that over the first half of this year, and it has contributed pretty significantly to your cash balance.

Could you give us some sense for how much of that cash contribution you would expect to potentially reverse in the second half?

If we look at 2013, you had a fairly large usage at the end of the year.

Are we looking to get back to neutral over the course of 2013 and 2014?

Just some color on the back half would be helpful.

Matt, I think we mentioned that we do have to get some inventories back in line throughout the rest of the year, because we really drew them down pretty hard in the second quarter to take care of all our customers.

Probably $200 million, $300 million would probably be maybe the inventory build that build that we're looking at for the balance of year.

Okay.

And did you get that cash tax refund in a second quarter, or is that still coming in the second half?

Most all of it came in.

As I said in our update, we -- the $700 million we identified for payables, improvements and tax, we're really have $650 million of that in hand through the end of the first half of the year.

Okay, great.

And lastly, just big picture.

Clearly, your credit profile is looking a lot better here, plenty of liquidity leverage on a net basis has come down.

We talked about wanting to wait and earn the right to grow, but if opportunities come in, obviously you've got to look at them.

How do you think about your balance sheet, just for your bondholders?

What should we be thinking about as far as leverage targets?

Usage of this a cash balance that you've got, how should we think about that going forward?

I think Mario described it, and Dave described it pretty well.

We're going to look to use that cash on higher return projects.

Things that are really going to deliver value for us.

I wouldn't say we have specific targets, but we certainly do recognize that improved earnings and improved cash generation to move those credit statistics pretty quickly.

Curt Woodworth, Nomura.

Good morning.

Good morning, Curt.

Mario, you talked about right to grow, at you're on pace for almost $500 million of project Carnegie benefits and over $1.2 billion of free cash just in the first six months of this year.

It seems like you would be pretty close to the tipping point of when you could do something more meaningful on the CapEx side or on the acquisition front.

In the past, it seems like you talked about the desire for more EAF-based capacity to try to have more levelized production throughout the year and potentially DRI facilities.

I'm just wondering if you could frame the opportunity sets that you see.

And even the context of the SDI acquisition of Columbus for $1.6 billion, that value you could build your own DRI facility in a sizable EAF.

Maybe just help us, a little context on the buy versus build decisions and maybe some of the things you are looking at?

Very early, we really focused hard that one of the big levers that we needed to create was the liquidity and the cash on hand.

Because this is a very volatile world, and opportunities come by when you don't expect.

We also, coming into this year, we knew that we had debt that was maturing and we are going to have to take care of it.

And we were beginning to conceive that the fact that EAFs were going to have a role to play as we move out into a more flexible environment into the future that we are going to have to generate cash to be able to cover the investments that we are willing to make.

The EAFs is, they going to become reality.

We will continue to move forward.

I think the flexibility that will derive from that is going to be very valuable for us.

DRI certainly is an opportunity that we continue to evaluate, because DRI is not necessarily just a raw material -- an additional raw material input to the system, especially with the EAFs coming in.

It will potentially become a new product for us, and we are trying to establish what that truly means because that defines the size of the opportunity for us.

And on top of that, it is my view that we have to invest significantly more when it comes to innovation.

And that scenario where a lot of opportunities will come as we develop the new products and the new solutions going into the future.

We are going to have to have the flexibility to go pursue those.

I think there's plenty in the pipeline that we are looking at.

The EAFs certainly is something that is closer to materializing than some of the other ones, but that's where we are going.

Okay.

That's helpful.

And then just a question for Dave on the working capital side.

Do you feel like there's more to go there as you look into 2015?

Or do you feel like the initiatives underway is going to get you what your target is by the end of this year?

This is Dave, yes.

We can do better.

We're, of course, I'd say the first couple of innings of the Carnegie Way, so there's a lot more opportunities for us to improve.

We are focused on six sigma disciplines.

We are very focused on the value creation.

And as we look at all the work streams, whether it be manufacturing or supply chain, and some basic things that we can put in place that we will improve.

We think there's more to be done on cash flow inventories across the whole value chain in effect.

One step at a time.

Again, this deliberate, purposeful march toward value.

And as we learn to adapt to the changing economic environment, we will find opportunities and we will act on them.

But again, to get back to something Mario said earlier, it is all about making sure that we create the value.

This is not about shipping more tons.

This is about becoming more profitable, creating a greater intimacy with the customers to meet their needs.

And all that being said, yes, there's more to do in all aspect of our business.

Timna Tanners, Bank of America.

Good morning.

Morning.

My first question is if you could give us some more color on what happened in the quarter from when you gave us the guidance to your final result.

There was a big swing in -- your tubular guidance was much better than you expected, but also particularly your flat-rolled, you had guided to a much poorer result than you ended up with.

What happened in the last two months of the quarter that switched that so sharply?

Primarily what happened was a remarkable reaction on the part of our teams as we utilize the approach of lost and found.

When we first talked to you last quarter, we were really under a lot of pressure.

And the teams moved so quick, so collaborative, and that were able to counter some of the issues that we're dealing with a lot of creativity and good work.

To a degree, I think that -- we could easily say that that was a primary driver that drove the results that you saw.

And to a degree, it surprised us too.

It was just remarkable what we did.

Okay, I don't know if that means lower cost, higher prices, better volume, but we can follow-up offline.

I wanted to follow-up on CapEx.

This is a bigger picture question, but in 2007, again, different management, the statement was made that $35 a ton was your very minimum that you could do in terms of CapEx.

If we look at your first half run rate, it is about $17 a ton.

How does that work that it has fallen by half?

Is the second half going to recover?

How does this reconcile with Mon Valley and Great Lakes on planned outages?

Thanks.

We didn't say $35 was a minimum, we said $35 was what you expect as maybe a normal run rate.

But certainly, minimum, you can see, we've spent well below that in prior years when we were really focused on protecting our cash 2009, 2010.

I said no, I would say that that $35 was not meant to be a minimum on what it takes maintain the business.

Going forward, we did -- if you -- one of the slides the appendix has that will show up in the Q, we are talking about $600 million for the year now.

We do expect that we will have things flowing little bit heavier in a second actually certainly than in the first half.

Okay.

Thanks.

Justine Fisher, Goldman Sachs.

Good morning.

Good morning.

I have one other question, sorry, on the working capital issue.

Specifically on the payables and the receivables lines.

Obviously you've cleared up the inventory issue for us.

But we've read in some industry trade rags that you guys have been stretching some of your payment terms with suppliers.

And I'm looking at payables, and they're up significantly.

Probably the highest that they've been in a really long time.

And receivables are down a bit, not as big a change as the payables.

But I was wondering, to one of the points made earlier, if those are sustainable changes and might go up?

Have the payment terms changed such that you guys can just have the payables stay at a consistently higher level, or was there something in the payables line specifically?

And then also for receivables that have led those to be a big benefit in working capital this quarter that might reverse, as well?

No, we wouldn't expect it to reverse.

Really what happened is, we actually got ourselves in line with the rest of the -- with their industry standards.

The fact is, we were paying too fast and collecting to slow.

I think as we can sync with what the standards are, that's the change you saw, and we would expect to maintain that.

Okay.

Thanks.

And then the other question is just on the Canadian province note on the balance sheet.

It is not as significant amount, just a little bit over $100 million notion on the balance sheet.

And with respect to the 8-K that you filed last week, the issue was getting some flexibility regarding that note.

And my question is, given the Company's significant liquidity, why would US Steel not just repay that note if there was any issue surrounding default definitions, et cetera, and what may or may not happen in Canada?

Why would the Company not just repay it, as opposed to go out and get consents in order to have flexibility around definitions in that note?

I would say that note matures in the end of 2015.

I think we're interested in really maintaining a strong cash liquidity position.

There's always going to be fluctuations in the business, so I don't think we're anxious to send money out the door before it has to go.

Okay, thanks very much.

Phil Gibbs, Keybanc.

Good morning.

Good morning, Phil.

As far as the second half CapEx, just going off of Timna's question for a little further clarity.

In a second half, you say it is loaded in the second half, but that's still a pretty big chunk, $400 million plus or minus.

Where do we think -- thinking some of the CapEx goes as far as projects or your facility downtime, or how do we think about that?

It is a whole array of things that are in there.

It certainly is going to be larger than what you've seen in the first half.

And if we are efficient in delivering in every front that we are working on, the numbers that we gave you, I think was $600 million total, that's probably where we're going to end up at the end of the year.

Okay, and I just had a follow-up on the tubular mix.

Has there been a change of the mix between line pipe and OCTG following the idling of those two facilities?

Or any flavor you could give us in the mix on the seamless side versus the welded products?

There is a transition going on, Phil, certainly.

For example, one of our facilities are still running.

One of them is about to end operations the next couple of days.

The other facility is going to operate until the end of August, so there will be a natural transition as they are idle.

Thanks, Mario.

Sure, thank you, Phil.

Jorge Beristain, Deutsche Bank.

I just really wanted to follow up on Timna's question earlier.

If you could give us exactly the sort of change that happened in the last two months versus your prior guidance that led to the much stronger than expected results.

Was it cost driven, would you say primarily, price driven, volume driven?

If we just could get a sense as to what happened versus the last guidance that you gave a few months ago, which was admittedly fairly weak on all that weather issues and now we see this much stronger beat.

Just trying to attribute what that was to specifically.

If I was to categorize them in order of importance, there's no question that the heaviest weight contributor was cost improvement.

Out of some additional efficiencies that they were able to draw from some of the other locations, we were able to have a little bit of a volume benefit to it.

And certainly in the end, prices held up pretty well.

Cost was really the biggest driver.

Great, and my second question actually was related to price, and also following up on Sal's question.

If you could help us square the current environment that you're seeing, imports are up strongly to the US you are still able to be maintaining prices well above world standards.

And what are you seeing in terms of the client end demand right now?

Do you think there's a restocking move happening right now, or do you think it is just an actual solid recovery and underlying economic use of steel right now?

Because it would -- it seems to be going against what we think would be happening in the market right now, given the import parity difference that you are at.

I think that there is -- that's a demonstration that there is a resilience in -- resiliency in the economic fundamentals that are now beginning to manifest themselves.

And in that regard, there's a tendency for people to boost their inventories a little bit more to make sure that they are going to be ready for what everybody seems to believe is going to continue throughout the rest of the year.

Charles Bradford, Bradford Research.

Good morning.

A quick question about Double Eagle.

You had previously said you were going to close it in the spring, but now that AK Steel has bought Dearborn, will that change the situation at all?

And do not have the right of first refusal on the acquisition?

Chuck, that's a subject that we have not yet had an opportunity to discuss with our partner.

Certainly, the discussion is going to take place, and then we will be able to give you a more clear answer what is going to happen there.

Thank you.

Sure.

Brian Yu, Citigroup.

Thanks.

Good morning, and congratulations on a good quarter.

Thank you, Brian.

My question is on Carnegie, and I think this goes back to Luke's question earlier.

If we look at the $290 million target previously, and if you realize about half of it, call it $145 million, and your new target's $435 million, that leaves $290 million for the rest of year.

Is that -- how should we allocate that to the various segments?

And more in terms of, I'm looking specifically at 3Q where you said that the 2Q outages had about $150 million impact.

Should we grow that number to include the Carnegie savings, or is that somehow incorporated already?

No, Brian.

The Carnegie -- the improvement in Carnegie savings is not part of that $150 million.

That $150 million really is a standalone number.

The only thing you would maybe clarify is that, remember, these aren't targets.

These are real, this is stuff that we have done.

We're not setting targets, we are just telling me you what's really what we've accomplished.

But like I said, no, that is not any improvement in Carnegie quarter over quarter for each of the segments would not be part of that $150 million in the flat-rolled.

Okay, so we should gross that number up by even more with those savings coming?

Absolutely.

Okay.

And then second one, is the loss on assets held for sale, can you remind me what's in there?

We just very -- we have non-core assets, smaller assets that, as we focus on cash, if it is not useful to us, it is not productive, we are going to get rid of it.

There's just small things that fall into that category, and as we get the opportunity to monetize them, we will.

Where was that sitting before?

What's that?

Where were those -- that $19 million, I think, in losses, where was that before?

That's just the fact that we got rid of some assets that we had a higher basis for than we've got proceeds for.

Okay.

Thank you.

Sure.

Aldo Mazzaferro, Macquarie.

On the -- I just had a question on your operations in Europe regarding raw materials and energy supply.

Is there some risk that we should worry about in terms of the [IPAR] coming out of Ukraine or natural gas possibly coming from Ukraine in terms of the fighting going on there?

What I can tell you all, so far we have not been impacted in any meaningful way throughout this whole period.

And what you hear about the sanctions and all that, we don't really have any specificity on what these additional sanctions might mean.

Once we better understand if, then we will be able to assess them.

But we've been all along putting backup plans and alternative plans in place in order to mitigate the potential risk that might come from it.

Would you have an alternative natural gas supply, Mario, if you needed it?

That would be the -- probably the weakest link, because Europe doesn't have an alternative for it.

So, to one degree that would be one of the buffers because any curtailment of gas to us would mean curtailment of gas to a much larger broad audience that would be impacted by it.

It is not that easy for them to just do that.

Matt Murphy, UBS.

Yes, reflecting on what we are seeing in a strong demand environment, good pricing, obviously imports have ramped up.

Can you comment at all on the view you have for necessity for further trade action to try and reduce the big ramp up we've seen in imports?

You have to titrate actions, Matt, to specifics.

You can't just look at imports and consider them because they are of a certain magnitude that you're going to bring a trade case.

There's a lot of work in these put in place to get factual around how those trades are occurring.

Is there really a dumping situation that you can validate?

And it takes quite a bit of time to do that.

This is one of the things that when it comes to International trade, that is critical.

The big change that potentially will occur in the future is that the definition of harm eventually will have to be adjusted to reflect the realities of how the modern world is playing.

Especially with the ones that don't want to live under the rule of law.

So, trade cases are going to be brought about.

We are vigilant.

Every time that we can validate something, which does take time and effort, we're going to be prepared to do it.

And how do you feel about the accepted -- acceptance on Department of Commerce and ITC these days?

Nucor made some comments, they feel like the government's finally getting it.

Are you seeing the same thing?

It certainly is a decision in the right direction.

You need to look at this as a whole, also.

All that we ask for, we ask for absolutely no favors.

All that we ask is for a level playing field so that all of our people and our capabilities can be rewarded by the effort they put in.

And the other competitors that want to come and play in North America, they come and play by the proper rules under the law.

And we have absolutely nothing against trade, but we don't properly -- we don't actually respect the fact that people are not respecting the law.

That's not the right thing.

So, we're going to keep vigilant.

Okay, thanks

Thank you.

We appreciate all the questions.

I'd like to turn it back over to Mario for a couple final comments.

Thanks, Dan.

Before we sign off, I really would like to thank our employees for remaining fully committed to our core value of safety.

From a statistical standpoint, last year was one of the safest in our Company's history, and so far this year, we are doing even better.

And as we've noted before, the successful engagement of our entire workforce is the key to the huge improvement in safety we have accomplished over the last 10 years.

And we are working to leverage that same type of employee engagement to drive our Carnegie Way transformation.

As we all know, transformation can be difficult, stressful, sometimes messy, but ultimately, very, very rewarding.

And we truly appreciate our employees commitment to working with us and with the determination to create a successful future.

Thanks, Mario.

I'd like to thank all of you for joining us and for your continued interest in US Steel, and we look forward to updating you again in October.

Thank you.

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