美國鋼鐵 (X) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the United States Steel Corporation third quarter 2014 earnings conference call and webcast.

(Operator Instructions)

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

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

Please go ahead.

Thank you, Shannon.

Good morning and thank you for participating in US Steel Corporation's third quarter 2014 earnings call webcast.

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

We also added a question and answers option in addressing frequently asked questions to our website for your reference.

On the call with me today will be US Steel's 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 in 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.

Turning to slide 3.

We reported income from operations for our reportable segments and other businesses of $479 million.

This is our highest segment income since the third quarter of 2008, when hot rolled coil prices were at record high levels of $1,075 per ton.

Theses strong results were driven by an excellent operating performance at our Flat-Rolled facilities as our operators worked exceptionally hard to recover from the difficulties we faced in the first half of the year, as well as solid contributions from our Tubular and European businesses.

We're impressed by and appreciative of the tremendous efforts from all of our employees who are focused on disciplined execution of projects that deliver value to our customers.

In addition to the strong performance in our Flat-Rolled segment, we saw improved results in Tubular, and our European segment delivered better results than we would have normally seen in what is typically the weakest quarter of the year in Europe.

While our operating difficulties in North America in the first half of the year made it difficult to see the results of our Carnegie Way transformation efforts in our bottom line, it is clear from our third quarter results that the benefits are real, they are substantial, and we are establishing an improved level of earnings power for our Company.

Looking at where we are through the first nine months of the year, our segment operating income has more than tripled compared with the last year.

Our adjusted EBITDA is well over $1 billion, and our adjusted earnings per share of $2.68 is already above the current full year consensus estimates.

While market conditions this year have been slightly better than last year, a significant portion of our improved earnings are the result of our Carnegie Way efforts, more than offsetting the unfavorable impacts of all of the operating and logistical issues we have faced this year.

We are, however, only in the early days of a multi-year transformational journey.

Now turning to cash flow on slide 5. We continue to be focused on cash and strengthening our balance sheet.

In the last nine months, we have generated over $1.2 billion in cash from operations.

At the end of the third quarter we had over $1.2 billion in cash on our balance sheet.

Our cash decreased from the end of the second quarter as we are rebuilding our steel inventories for the coming winter, and we made $140 million voluntary contribution to our main defined benefit pension plan.

Our net debt has decreased by over $1 billion this year, as we repaid over $320 million of debt in March, and our cash balance has increased by over $650 million.

A strong cash position, substantial liquidity, and an improved balance sheet will keep us positioned to invest in our facilities and support our increasing focus on innovation and technology as we grow our research and development capabilities to support the development of the steel solutions that will create value for both our customers and our stockholders.

As we earn the right to grow, we become better positioned to take advantage of profitable growth opportunities as they arise.

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

Thank you, Dave.

Our Flat-Rolled segment had operating income of $347 million in the third quarter.

This significant improvement in results from the second quarter was primarily due to higher shipments and increased operating efficiencies as our plants ran well and we returned to more normal operating levels.

Growing Carnegie Way benefits and lower energy and repair and maintenance costs also contributed to these strong results.

Our Tubular segment had operating income of $69 million in the third quarter.

Tubular results improved as compared to second quarter despite lower shipments.

We benefited from increasing market prices and improved product mix as seamless shipments increased and we shipped less pipe after the indefinite idling of our McKeesport facility during the third quarter.

Shipments were also affected by the indefinite idling of our Belleville facility in the quarter.

Our European segment had operating income of $29 million in the third quarter.

Results for our European segment decreased as compared to second quarter as we completed scheduled caster and blast furnace maintenance projects.

The unfavorable effects of lower shipments and higher maintenance repairs costs were partially offset by lower raw material costs primarily for iron work.

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

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

Turning to slide 9, we have continued to make progress as our pipeline of value creating projects has grown, and we continue to focus on the disciplined and systematic execution and implementation of these projects.

Carnegie Way benefits now total $495 million for 2014.

In July, we had reported that our total Carnegie Way benefits for 2014 would be $435 million, which included the full year benefits associated with projects at our Canadian operations.

Adjusting that amount to reflect the deconsolidation of our Canadian operations as of September 16, reduced our 2014 benefits to $410 million.

During the third quarter, we implemented new projects that will improve our results by an additional $85 million in 2014, getting us to the new total of $495 million.

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

A few examples of some of the projects include logistics improvements in the delivery of coal blends at our Clairton Works coalmaking operations resulted in about $7 million of annual improvement in coal delivery costs.

Reduced product yield loss on the 84-inch pickle line at Gary Works resulted in about $9 million of improvement.

And energy savings related to more efficient operation of the reheat furnaces at the Gary Works hot strip mill resulted in annual savings of about $7 million.

There are thousands of projects that in aggregate deliver substantial benefits that are getting us to the results we have achieved so far.

Again, this increases our total Carnegie Way benefits to be realized in 2014 to $495 million.

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

They're not speculative.

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

As I noted earlier, our strong third quarter results reflect the real improvement in our earnings power, created by our Carnegie Way transformation.

Now on slide 10 I'd 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 objective being to earn an economic profit throughout the economic cycle and deliver above market returns to our stockholders.

We have made some difficult decisions regarding some of our businesses and facilities, and we continue to make improvements in our cost structure, but we still have more opportunities ahead of us.

We are now in the process of implementing a new management structure designed to achieve three strategic goals.

One, to better collaborate with customers to create and deliver smarter and more innovative solutions for the markets we serve.

Two, provide focus to Carnegie Way projects within the operating units including reliability centered maintenance, process technology excellence, and continued commitment to safety and quality.

Three, create stockholder value and continue earning the right to grow by creating clearer and more focused accountability for our business leaders.

This management structure does not affect reporting segments as they currently exist.

The Company will continue to have our three reportable operating segments of North American Flat-Rolled, Tubular and US Steel Europe.

So you can expect the same segment reporting as in the past.

The management structure provides a greater degree of accountability and provides leaders with a more in depth focus necessary to drive successful execution of our business goals, and we will be sharing more details with you in the future as this new structure develops and becomes the way we do business.

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

Thank you, Dave.

Good morning everyone.

In addition to the changes in our commercial approach and management structure that Dave just described, I would like to discuss a very important initiative we are undertaking across all of our operations.

Our third quarter results show the significantly favorable impact on our results when we operate our facilities well, just as events earlier in the year reflect the unfavorable and disruptive effects of unplanned outages.

We're implementing a reliability centered maintenance or RCM process across all of our facilities.

RCM is a structured and disciplined approach based on doing the right maintenance, the right way, and at the right time, to increase the consistency and reliability of our operations.

Maintenance spending is a significant piece of our cost structure, and creating more efficiency in our maintenance practices by moving from a reactive approach to a proactive approach, we will reduce our maintenance costs over the long term.

The benefits of an RCM program go beyond just improving the efficiency of maintenance spending.

Following a structured program reduces the uncertainties and pressures associated with emergency repairs and reduces the risks to our employees and improves the safety of the working environment.

Improved facility reliability that comes from an RCM process will enable us to be much more effective in our production planning and facility loading.

Our commercial organization will have better visibility to determine what orders are most attractive to us, and our customers will benefit from improvements in our quality and delivery performance.

While it will take a couple of years to fully implement a strong and effective RCM program across all of our facilities, the improved earnings power that comes from this will produce real value for all of our stakeholders.

Turning to slide 11, I would like to touch briefly on the strategic actions we announced last month.

We have decided not to proceed with an expansion of our iron ore pallet operations at our Keetac facility and terminate the carbon alloy project at Gary Works.

We're comfortable with our raw materials capabilities in North America, and eliminating the potential spending that would have been required for these projects put us in a better position to pursue other projects including further development of advanced high strength steels for our automotive customers, to continue to develop premium connections for our Tubular customers and to invest in our facilities and modernize our operations, including adding electric arc furnace steelmaking into our operating footprint.

Our subsidiary, US Steel Canada, filed for and was granted protection under the Company's Creditors Arrangement Act or CCAA in Canada on September 16.

It was deconsolidated from our books that day.

Under the CCAA process, US Steel Canada will participate in a court supervised process to negotiate a restructuring with its stakeholders.

Subsequent to this filing, the court approved debtor in possession financing for US Steel Canada, and US Steel Canada entered into a new labor agreement with the United Steel Workers Hamilton that expires now in 2017.

This new labor agreement and the financing provide a sustainability and stability that will allow US Steel Canada to continue to operate while restructuring negotiations proceed.

Now before we take your questions, I would like to give a brief summary of what we are seeing in our markets and our guidance for the fourth quarter.

In North America, automotive demand remains strong, but we have experienced a typical seasonal order rate trend in several of the longer lead time end user markets that we serve, which is why we have undertaken several blast furnace maintenance projects this quarter.

While we remain optimistic about steel consumption trends in North America, the large surge of imports into this market which we continue to monitor somewhat tempers this optimism.

In the Tubular markets, we currently do not expect lower energy prices to have much effect on US drilling programs in this quarter, as most operators are still expecting a strong finish to the year.

Operators will remain focused on drilling horizontal wells in unconventional basins containing crude oil or natural gas liquids in low cost dry gas areas like the Marcellus.

However, the recent turmoil in the crude oil markets could have an impact on the level of drilling activity as we move into the new year.

Turning to our guidance for the fourth quarter, we expect segment income from operations to be lower than the third quarter, due primarily to a large increase in maintenance and repair costs in our Flat-Rolled segment, related to a reline of one of the blast furnaces at our Mon Valley Works and planned blast furnace maintenance projects at Granite City and Great Lakes.

We expect Flat-Rolled shipments to be as much as 10% lower than the 3.2 million tons we shipped in the third quarter, but we still expect our Flat-Rolled segment results to be more than $100 million and we expect improved results in both our Tubular and European segments.

Thank you, Mario.

Shannon, can you please queue the line for questions?

Thank you.

(Operator Instructions)

The first question is from the line of Sal Tharani with Goldman Sachs.

Please proceed with your question.

Thank you very much.

Good morning.

Good morning, Sal.

Mario, so far most of your Carnegie Way has been in the operations side, and it shows in the results of the third quarter.

But I was just wondering, you also alluded to now doing something on the commercial side.

I was wondering if you could give us some color, what do you mean by that and would that be something you will see in your average realized price or volume?

Where would that be, that impact will show up once you start implementing that portion of your Carnegie Way?

We are going to create some restructuring in the organization, both for marketing and commercial activity, Sal.

And we are in the process of finalizing the details for implementation.

It will probably materialize more in earnest as we move into the first quarter, but I think the focus in simple terms is we're going to have a much more in-depth ability to analyze how we're serving our customers, different segments are different in nature.

And, therefore, we need to provide a lot more focus for each and every one of those.

There will be an assignment of specific groups and teams that will focus on those segments and, therefore, they're going to be able to better understand and translate the needs of those different segments.

And the customers into the next phase of a realignment with operations, R&D and technical support are going to have to be put in place so that we can create improvements in that arena.

This is the basic concept that we're going to be working on moving into the first quarter.

And in the past you have alluded to that you needed ERP implementation fully done before you can take big commercial projects or commercial changes.

I was wondering where are you in the implementation of the ERP system.

We are two-thirds done in the Flat-Rolled side of the business, and we've begun the implementation of the Tubular side which will take a few quarters for it to be fully completed.

But what we have in place right now including all of the support areas, capabilities that have been put in place, are already enough so that we can then provide the better focus from a commercial marketing standpoint and begin to have better analytics that will lead to the solution that we're looking for.

Great.

Thank you very much.

You're welcome, Sal.

The next question comes from the line of Tony Rizzuto with Cowen & Company.

Please go ahead.

Hi, good morning, gentlemen.

Good morning, Tony.

Hey, Mario.

You guys are hitting profit levels that you haven't achieved since 2008, and I was wondering, in the context of Carnegie Way, could you comment on your ability as a Company to withstand a period of lower prices?

In other words, do you think you've lowered your breakeven points sufficiently to remain significantly profitable over the business cycle?

Tony, I just want to begin by re-emphasizing to you that this is a journey.

It's not something that on a simple quarter-over-quarter concludes the effort.

And what we're beginning to see right now is that the efforts that we're putting in place -- when we have a more stable environment, the power of earnings really increases, and that's was we're pursuing.

We're not done with what we need to do, but I think the signs of the power of the approach is beginning to show.

We're going to keep at it, and the goal definitely is to be able to deliver economic profit even in tougher environments.

Okay.

And just a follow-up on the previous question.

With the fuller implementation of the ERP system and better measurement capabilities, is it possible that you could even see an acceleration of the Carnegie Way savings or would that be an unfair assessment?

No, I think it is possible, but the key when you move into these transformational efforts is that you've got to keep -- you have to keep a cadence that gives full sustainabilities to everything you do.

I think this is one of the elements that we very carefully look at.

We make sure that everything that we're doing we can keep counting on, and that cadence is one of the secrets as how these things can continue to evolve with solidity into the future.

Excellent and very, very excellent results in 3Q.

We look for more of that in the future.

Thanks, guys.

Thanks, Tony.

The next question comes from the line of Evan Kurtz with Morgan Stanley.

Please proceed with your question.

Hi, good morning, guys.

Good morning.

So you guys are going to generate a lot of cash this year, and you talk about earning the right to grow.

It seems like you could at some point, pretty soon, put some of that to work given the liquidity that you have right now on the balance sheet.

One of the things that probably intrigues me the most is you mentioned a few times now, that you're looking at more EAF capacity.

I was just wondering if you could maybe expand on that a little bit and talk to us how far do you see that going.

Could this be a Company with a footprint that is some day half/half, or where do you see that going?

Well, I won't give you a percentage because we don't have that clearly defined yet.

But I can guarantee you that we're not going to sit on only one in the one that we have defined.

Analysis of footprint will be coupled to the better understanding that we will have of the markets, the trends, the needs out there and the changing world that we're in.

So these commercial entities that will be created, they will help us capture a much better and profound understanding of how many of those we're going to need to have, but certainly it's going to be more than one.

Got it.

And then maybe just something more specific.

I understand a lot of the coal contracts have been concluded for 2015 and was hoping you can maybe offer some insights into you how those are shaking out, what benefit they can provide next year.

I think we're going to stick pretty much with our standard practice that those type of things, we will give you our 2015 guidance in January.

Because until we really get our 2015 business plan fully in place, it's probably premature to really start giving guidance for what's going to happen in 2015 on some of those longer term things that we do tend to guide on in January.

Okay.

Fair enough.

Thanks, guys.

I'll turn it over.

Thank you.

The next question comes from the line of Luke Folta with Jefferies.

Please proceed with your question.

Hi, good morning, gentlemen.

Good morning.

I guess first question, just in the ongoing quest to try to get to a normalized maintenance number, it seems to me that the outages that you're doing at Great Lakes and Granite City are probably more along the lines of something that would be typical work that you do annually.

But the Mon Valley reline is a longer term project it seems.

First, is that a good characterization?

And can you give us some sense of what the Mon Valley piece of that is, specifically, from a cost perspective?

You're right, your assessment of the projects is correct.

I don't have a breakout, but certainly a reline is a much, much bigger event.

That project started in September.

It will wrap up sometime in the first half of November.

The other projects are shorter term.

But Granite City project has been completed.

We're in the process of bringing that back on.

The Great Lakes will also be done sometime early in November.

Your assessment is correct.

You have relines much less infrequently.

You do have, what's called blast furnaces, some pretty regular maintenance across time.

Just to get it close, could it be as much as two-thirds of the total maintenance increase?

Is that the right scale to think about?

Those three projects?

Those three projects will be driving the big difference quarter-over-quarter, absolutely.

Okay.

And then in terms of the pension and OPEB impact from the US Steel Canada consolidation, you guys obviously see how the balance sheet is impacted.

What do you expect the ongoing pension and retirement benefit expense to be, given the new structure?

I would say we've given -- in the back of the slide deck, we've given some update for what this year's impacts will be.

Same thing.

Next year, until we do our remeasurement of our plants at the end of the year, that's what really determines where next year's cash and expenses are.

And that really depends on ultimately what market returns are for the balance for the whole year and where interest rates are at that point in time.

So I think looking at the stock markets I think it's probably anybody's guess what returns are going to be by the end of December.

But certainly we did carve out for you, or at least update our guidance to reflect, the change that we see from the stub part of the year without having Canada from September 16 forward.

Okay.

Could I ask one more?

Sure.

Just lastly on the EAF investments, looking forward, should we think about this as any EAF investment that you make being to replace blast furnace BOF capacity, or could we see a situation where you actually expand the footprint by adding an EAF operation somewhere?

And if that's the case, where do you think the opportunities could be in terms of that side of the business?

Thanks.

p

Well, in principle the first line of assessment will lead to a replacement of capacity, Luke.

The more that we learn from these new commercial entities, there may be an opportunity for something else.

But at this point it's mostly capacity replacements, not addition.

Thank you.

Sure.

The next question is from the line of Brett Levy with Jefferies.

Please proceed with your question.

Hey, guys.

In the event of another polar vortex type winter, have you guys got any plans to move more raw materials to your mills?

Is there any working capital assessment that we have to adjust to reflect the fact that maybe you're going to be a little bit more cautious about leaving your mills with all the necessary raw materials before the lakes freeze?

Very definitely, Brett.

Historically over a decade, the locks would shut down for an average of 62, 63 days.

This past winter they shut down for almost 145 days.

And certainly nobody knows whether this is the new norm of what it's going to be, but we are definitely preparing our operations for a longer period of shutdown of the locks.

And we are doing it not only by of moving more pellets down south, but we're also increasing our semi-product inventory.

And all of this will consume an additional level of cash that should help us better prepare us for a tough winter.

But it certainly is not going to be for a full 145 days until we know better.

And what would be the working capital estimate associated with that?

Well, I think on the pellet side, it's really not a change on the pellets, because it's just a location of pellets more than anything.

Right.

You're just moving it from you to you.

I think until we get a better read on how many slabs we're going to build it's hard to say.

I don't think it's going to be anything that's going to be that dramatic as far as where we are in relation to our cash balance.

Thanks very much, guys.

Sure.

The next question is from the line of Matt Murphy with UBS.

Please proceed with your question.

Good morning.

And congrats on a good quarter.

I've got a question on CapEx.

You've talked about earning the right to grow.

In terms of your planning on Carnegie initiatives, do you see a shift coming in terms of the focus to date being on cost-out?

Are there more projects where you're looking at CapEx?

I mean, it's been running really low, so I'm not sure if you can give any color on 2015 if we see CapEx step up.

Does the RCM system you're planning require CapEx?

Sure, Matt.

We don't have finalized plans for 2015 yet, but I can tell you that one of the reasons why CapEx for this year has been running lower is because many of our folks found alternatives to the improvement that did not necessarily require more capital.

Some projects fell off of the list and for next year, actually our Board has just approved two strategic projects, one on the Tubular side, and the EAF has been finally approved.

And we're in final stages of negotiations to conclude some additional odds and ends over there.

But we expect that in general directionally correct, we're going to have more spending of CapEx into 2015.

Okay.

Thanks.

And then just on the import front, I'm just wondering if you can provide any color on what time line you guys are thinking might be right to consider in a trade case.

We had steel dynamics.

Now, maybe the timing isn't right, right now.

Nucore noted it's still collecting data.

Do your quarterly results factor into your thinking on timing or is it more about collecting data on importers?

We're always collecting data, Matt, that's for sure.

And we're going to be supportive of every effort in order to curb inappropriate dumping into the country.

Thank you.

And our next question is from the line of Curt Woodworth from Nomura.

Please proceed with your question.

Hi, good morning, guys.

Good morning.

Mario, could you talk about what the next steps are in Canada?

Is there a sale process under way from those assets, and would you look to participate in that?

And in the event that you don't, would you look at moving away from that asset and in Fairfield you're going to free up a fair amount of iron ore pellet capacity.

What would be the strategy to leverage that position on a merchant basis?

Well, the process that is in place is to help the USS Canada Board of Directors and the local management to engage in the negotiations necessary for the restructuring.

It's really their call, and we have absolutely no influence in how some of those decisions will be made.

Okay.

And then on the iron ore side, in terms of freeing up potential merchant pellet capacity, obviously that would fit in with an EAF strategy as well.

Can you just talk about that potential?

Absolutely.

One of the things for next year will be a review of efficiencies coming out of the ore range and more detailed and specific exploration plans that should deliver productivity improvements.

And according to our base analysis, there might be some opportunities for commercialization of ore, and we're still looking very carefully at the DRI opportunities.

So I think that there may be something there, and we should be able to identify it with more specificity going into next year.

The next question is from the line of Jorge Beristain with Deutsche Bank.

Please proceed with your question.

Hi, good morning and congratulations on the very strong results.

Thank you.

Mario, I guess my question is first on raw materials, your recent plans to cancel some of your own potential expansion needs in iron ore, how should we interpret that?

Is that because you do view taking the Company in the direction of electric arc furnaces in the future, therefore may not need the iron ore?

Or is that possibly because of the changes we've seen in the supplier landscape in the US, you may be able to source iron ore just as competitively from third parties and so you're looking at disintegrating if you will on the back end a little.

The context has to be looked at in whole.

Certainly we're very comfortable from a supply perspective with what we got.

I think the efficiencies we're going to be finding are going to be more than enough to grant us comfort in everything we do.

The market is the market, and I think you've seen volatility before, and I'm sure that that's going to continue.

But overall, you've got to keep looking at the context.

Okay.

And my other question just had to do with the -- specifically for cliffs.

They've been announcing a plan up in the Canada to potentially bring in a steel mill partner to do an offtake with their bloom lake.

Could you comment if you've been approached for that project or negate if you have any involvement at all?

I don't have any comment on that.

I haven't been close to it at all.

Okay.

Perfect.

Thanks very much.

Sure.

The next question is from the line of Phil Gibbs with KeyBanc Capital Markets.

Please proceed with your question.

Good morning, Mario, Dave, Dan.

Good morning, Phil.

I had a question on the Carnegie savings coming through this year.

I think about $485 million was your recent number.

How do we think about that into 2015 more on an annualized basis, because I know those benefits will largely stagger through the year.

And so it's probably more on an annualized level, but clearly you had what you had this year.

Yes, Phil.

And actually Phil, the number is $495 million.

Okay.

I think we kind of view that as we look at some of the other bigger, longer term guidance pieces we give, we're going to have more come on in the fourth quarter, so the ultimate 2014 number is still to be determined.

I think we're more comfortable that when we hit January, we will give you the incremental difference off of 2014 as the new base year.

And then as we build through 2015 we will keep on adding an update each quarter on other new projects that come on.

Okay.

As far as the maintenance spend per quarter, I think Luke asked a little bit about this, but just trying to get a handle on where you're at right now from an annualized level and where you could be over time with these new initiatives that you're putting in place.

I think we're probably the same thing, until we see our 2015 business plan, it's hard to say.

I think this year is probably coming in reasonably comparable to the last couple of years in total.

As we move into the RCM implementation that Mario talked about, you could have some upfront spending to get to a better place, and then your tradeoff is over the long term you've created a more efficient platform.

Until we get more clarity on 2015 and the pace of RCM implementation, we probably aren't ready to give that maintenance guidance yet.

But I said our expectations over the long term, the RCM definitely will have a favorable impact on maintenance.

Okay.

And Dave, I just had a housekeeping item because I know the tax rate can bounce around.

Do you have any thoughts on what that could be moving forward and how to think about that?

No (laughter).

If you look at our tax footnote in the K, we do have one item that gives us a benefit on an ongoing basis, and that's depletion related to our mining operations.

So that's one consistent item that will help us be below statutory.

But other than that, in the kind of transition we're in, we're probably likely to have events and discrete items along the way.

So we probably can't help you a whole lot more than that.

Okay.

Thanks a lot, guys.

Thank you, Phil.

The next question is from the line of Brian Yu with Citi.

Please proceed with your question.

Thanks and good morning.

And excellent quarter, guys.

Thank you, Brian.

Mario or Dan, can you help me just sort through the guidance?

You guys did a great $347 million in the Flat-Rolled business, and with Canada stripped out, we get a more normalized number, $367 million.

Maintenance expense could be up $150 million so we're left with about $217 million before I guess any changes in market conditions and pricing.

I was wondering if that's the right way to think about it, because that's still obviously a lot higher than the at least $100 million you guys guided to.

Well, I think Brian the other thing we're guiding to is and the combination of all that is we're going to see about a 10% reduction in shipments in that change.

That's a pretty significant number that certainly has an impact on your results.

I think that gets back to operating efficiency.

It will be above and beyond that $150 million change just related to maintenance.

Okay.

So $150 million is purely for the spending itself and not necessarily capturing any of the negative scale just for the quarter?

Right, yeah.

Okay.

And then second one is, are you guys still supplying iron ore to the Canadian operations, and how should we think about profits I suppose associated with those shipments?

We remain a supplier to the Canadian operations, Brian.

Is there a way for us to try to track that.

I believe that falls into your other segment.

I was wondering if you might be able to guide us, how we might think about the pricing mechanisms and associated margins.

Actually, Brian, that actually is in our Flat-Rolled segment, the mining business loan.

Yes, if we are -- and actually the way that it stands now with US Steel Canada being their own entity, due to deconsolidation, any transactions we have with them will be arm's length, so they'd be market based.

Can you say what the benefit in the quarter was, just for those days that they were deconsolidated?

No, I haven't seen that breakdown.

You're only talking about two weeks of the quarter really that they were deconsolidated.

Okay.

All right.

Great, thanks, guys.

Thanks, Brian.

The next question is from the line of Andrew Lane with Morningstar.

Please proceed with your question.

Good morning, gentlemen.

Good morning, Andrew.

Could you provide an update as to where you stand with the permitting process for the proposed EAF at Fairfield?

Are you still aiming to initiate production in 2017?

And then also, would you be able to provide an update on your exploration of the viability of DRI production?

Are we still in the early innings there or have you developed a more specific plan that you'd be willing to discuss?

Thanks.

Yes, the EAF plans remains on track, and we should be starting in 2017.

And you're also right on the DRI, we're still in the early stages.

There is enough change and nuances to this opportunity that we're still trying to corral and identify the full viability of that.

But progress is also on track, even though it's early stages.

Okay.

Great.

And then in your prepared remarks you mentioned a return to normal operating levels.

Is this just a reference to shipment volumes and utilization rates, or are you also indicating that third quarter profitability levels reflect a normalized level that you might expect in a mid-cycle environment?

The comments, Andrew, were really related to operating levels.

It's reliability, consistency, better quality.

It's solely operational.

Okay.

Thanks a lot.

Sure.

The next question is from the line of Nathan Littlewood with Credit Suisse.

Please proceed with your question.

Good morning, guys.

Congrats again and thanks for the opportunity.

Good morning.

Good morning.

Was just interested in chatting a little bit about a rather interesting announcement you had a few weeks ago.

The appointment of Debbie Shon as Vice President of International Trade and Global Public Policy.

Dan, you and I did talk about this at the time, but I was just interested in getting a little bit more color from Mario, if I could, on Ms. Shon's mandate.

Maybe you could talk a little bit about her KPIs under which she's been engaged or employed and essentially what you're going to have her working on for the next year or two.

As a matter of fact, we have our legal counsel, Suzanne Folsom here with us today, so I'm going to defer to her and Debbie will report directly to her.

So you're going to get an answer from source.

Fantastic.

Debbie Shon is a leading trade expert both in her private legal practice as well as she served USTR under President Clinton's administration.

And we're very lucky to have been able to convince Debbie to come join the US Steel team.

The reason that we went out to seek such fire power here in the trade area is that we have typically, as have many of the companies in this industry are, relied primarily upon our outside counsel with respect to handling our trade issues.

And we made a decision that we wanted to have in-house capabilities as well.

So Debbie has joined the legal government affairs department which I'm responsible for, and she is directing our trade activities in Washington from in-house, as opposed to from outside the Company.

We still have our outstanding legal outside advisors, but we wanted to be closer to our trade issues.

The next question comes from the line of Timna Tanners with Bank of America.

Please proceed with your question.

Hello, good morning.

Good morning, Timna.

Along those lines I guess, I was -- just wanted to revisit the Tubular issue now that you did get some recourse against the Koreans.

And maybe it's too soon, maybe you can comment on this, the volumes are still a little high coming from them.

But you certainly did get a nice price response.

So are you looking for both price and volume benefits?

Are you content with the price benefit?

How do you see now looking back at it, how this worked out?

Well, we certainly would look forward to better benefits from what we accomplished.

But I think the fact that imports continue to pour in validates one of the critical points that we addressed in the case.

Some of these people have designed our business to attack the United States market.

And I think what we're seeing right now is a validation of that principle.

But you could pursue further recourse if you decided to then, down the road, if it's onerous?

Is that what I am interpreting from your comment?

Yes.

Awesome.

And then just the only other question I had was in your guidance for Flat-Rolled, you mentioned lower volumes, so lower fixed cost leverage.

You also mentioned outages and you mentioned some pricing weakness.

Your prices have been really consistent throughout the year, and as I review page 19, you only have about, what, maybe 40% exposure to spot?

So how much of your variability on the outlook for the fourth quarter has to do with the price of steel and maybe it's other things that you're more concerned about, if the you could give a little more color on that.

I think clearly the maintenance and the volume are the two biggest drivers.

You're right, we will see some flow-through of the recent downturn on our spot times.

It probably -- maybe gets into some of the monthly adjustables by the end of the quarter.

But I would say our perspective is the biggest drivers are definitely going to be the change in volume and the change in maintenance.

Okay.

Super.

Thanks for the clarification.

The next question is from the line of Justine Fisher with Goldman Sachs.

Please proceed with your question.

Good morning.

Good morning, Justine.

I was hoping that you could give us a little bit more color on the OCTG business and the potential impact of lower oil prices.

I know it's probably not the right question to ask a Company how bad it could get.

We're getting that question a lot from people now.

I was wondering if you guys could walk us through maybe particular product lines that you think might be more affected or not.

What contracts you might have in OCTG and whether or not you think any decline in demand that happens in 2015 might affect imports more than domestic.

How should we think about the moving parts as far as the impact on your business?

You should keep track of what's going on very carefully because it's volatile.

Right now if you look into the US and North America, for example, the number of rigs working for oil and gas, they had have increased, and they are still at a good level.

I do not think that the operators will make a knee jerk reaction on the fact that there has been a significant drop in prices for now.

As a matter of fact, many operators still validate new projects on $80 oil.

So, I think that folks are certainly looking careful at that.

There is -- this is going to -- the lower prices is going to impact the economy on the other hand positively, so there will be more consumption.

People will have more money to spend.

And therefore, I think we are at a transitional moment that is going to take a little bit of time for people to sort out exactly where this is going to go.

Okay.

Thanks very much.

Sure.

The next question is from the line of Gordon Johnson with Axiom Capital.

Please proceed with your question.

Thanks for taking my question and congrats on a great quarter.

Thanks, Gordon.

Thank you, Gordon.

Thanks, guys.

So I guess just going back to the breakeven question, it looks like the guidance for Q4 suggests earnings could see a fall, sizable fall from Q3, and you guys said that some of that's related to price and some of that's related to volume.

Is there any way you guys can give us a specific breakeven point that we should think about with respect to HRC prices and your earnings?

And then I have a follow-up.

I really don't think we can, Gordon.

So much depends on how fast HRC prices move up and down, the timing on how it would you affect contracts, whether they're short term adjustable or long-term.

It just is so dependent on the flow.

Rapid increases or decreases in HRC could have very little impact.

If it's more gradual, it could be bigger.

That's just such a wild card because it's so dependent on timing and pace.

Okay.

Thanks.

That's helpful.

And just lastly, there's been some rumors that there could be some trade cases in the CRC & HRC space, but when we look at October still imports thus far looks like HRC imports are up 82% month over month.

It seems like the foreigners at least expect or don't think there's going to be a trade case.

Can you guys give us any update there with respect to potential trade cases on HRC imports?

Thank you.

The assessments required for validation of a trade case are not simple, nor small.

And therefore, the analysis they continue, and every time that we come to the conclusion that we do have everything that is required, we are going to go and we're going to go after these (inaudible) practices.

All that we just want is a fair playing field, and we will continue to aggressively pursue these cases and address these issues with the US government.

Our final question is from the line of Evan Kurtz with Morgan Stanley.

Please proceed with your question.

Hi, guys.

Thanks for taking my follow-up.

Just got me thinking on this iron ore commercialization potentially.

Some of your suppliers have unlocked a lot of value through MLPs.

We've seen it on the coke side and on the coal side as well.

And I was wondering, have you thought about perhaps structuring the iron ore business into some sort of an arrangement where you have long-term contracts and could potentially drop some of those assets into an MLP?

We have looked at that repeatedly.

Iron ore, coal, coke, whatever.

We just never saw the economics making sense for us because when you're the primary consumer of almost the entire output, that changes the economics.

And do you really have a good mechanism for growth?

I don't think we're thinking about growth outside of -- we're really focused on our primary business of making steel, making steel profitably.

Thank you.

Before we sign off here, I'd like to acknowledge the hard work of our employees and their extraordinary efforts to improve our Company while they remain fully committed to our core values of ethics, integrity and safety.

Slowly but surely, we believe that all of the initiatives being pursued will make us stronger, better positioned to serve our customers, and will provide for a better and safer workplace for all of our employees.

I really want to thank you for joining us today and for your continued interest in US Steel.

We look forward to updating you again on the Carnegie Way journey again in January.

Thank you so much.

Thanks for participating everybody.

Thank you.

Ladies and gentlemen, this conference will be available for playback on the AT&T digitized replay system beginning at 10:30 AM Eastern Time today running through Wednesday, November 12, 2014 at midnight Eastern time.

You may access the AT&T playback service by dialing 1-320-365-3844, and entering the access code of 338903.

Once again, this conference will be available for playback beginning today at 10:30 AM Eastern time running through Wednesday November 12, 2014 at midnight Eastern time.

You may access the AT&T playback service by dialing 1-320-365-3844, with the access code of 338903.

That does conclude our conference for today.

Thank you for your participation and for using AT&T.

You may now disconnect.

The company would like to clarify the statement regarding Board approval of the EAF project given in response to a question from Matt Murphy - UBS analyst.

The Board has approved the final engineering for this project.

Final project approval will be requested from the Board after the engineering work has been completed in early 2015.