美國鋼鐵 (X) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the United States Steel Corporation 2014 fourth-quarter earnings call and webcast.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Please go ahead.

Thank you, Kate.

Good morning, and thank you for participating in our conference call webcast for fourth-quarter and full-year 2014.

For those of you participating by phone, the slides included on the webcast are also available our investor section of her website at www.USSteel.com and there's also a question-and-answers document addressing frequently asked questions on our website for your reference.

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

Following our prepared remarks, we'll be happy to take your questions.

Before we begin, I must caution you that today's conference call contains forward-looking statements, and that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent annual report on Form 10-K and updated 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, and 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 $420 million.

Full-year 2014 results are at a level we have not seen since 2008.

Our results improved in both our tubular and European segments, and our flat-rolled segment, and very good results in a quarter that included three significant blast furnace maintenance projects that increased our costs significantly and limited our shipment levels.

The ability of our flat-rolled operations to generate operating income of $82 per ton on much lower shipments reflects the significant improvement to our cost structure.

Our business model, which focuses on profitable volume rather than just filling up the blast furnaces and the increased earnings power that has come from our Carnegie Way efforts.

Our employees remain focused on the execution of projects that improve our business model and develop solutions that create value for our customers.

We made significant progress on our Carnegie Way transformation in 2014 and our strong second half results validate that.

Looking at the full year, our segment operating income nearly tripled from 2013.

Our adjusted EBITDA was almost $1.7 billion and adjusted earnings per share for the year was $4.47.

While market conditions, which we cannot control, were better for our flat-rolled segment in 2014, they were more difficult for both our tubular and European segments.

While the overall impact of favorable market conditions in 2014 as compared to 2013 contributed to our improved results, a larger portion of our improved earnings are the result of our Carnegie Way efforts.

Now turning to cash flow on Slide 5. We have significantly improved our ability to generate cash, both from improved earnings and effective cash management strategies.

Cash from operations was almost $1.5 billion.

A $1 billion improvement over last year, and our free cash flow for the year, was over $1 billion.

We remain focused on generating strong cash flows and maintaining a disciplined cash management strategy.

This will position us to more effectively deal with the short-term cyclicality that is common in the steel industry, and also to take advantage of the opportunities that can arise at different points in the longer term industry cycles.

Now turning to our balance sheet on Slide 6. Our balance sheet continues to get stronger, and our credit ratios continue to improve.

We reduced our net debt by almost $1.2 billion in 2014 by paying off debt as it matured without going out to the credit markets for funding and growing our cash balance at the same time.

Our liquidity has increased to $3.1 billion, a level we have not seen in quite some time.

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 segment results.

Thank you, Dave.

Our flat-rolled segment had operating income of $709 million and EBITDA of almost $1.2 billion in 2014.

This is the second highest level of earnings that we have generated in our flat-rolled segment in the last 10 years, second only to 2008, when [hot-roll coal] prices averaged $859 per ton.

The significant improvement over last year's results include the favorable effect of higher selling prices and lower [raw materials] costs, partially offset by the adverse effects of the extreme weather conditions and significant facility outages earlier in the year and higher energy costs.

But these items only represent a portion of the improved results with Carnegie Way benefits providing more than half of the improvement over 2013's results.

Turning to Slide 8, our tubular segment had operating income of $261 million in 2014.

The improvement from 2013 was primarily due to Carnegie Way benefits, higher average (inaudible) prices and lower maintenance costs, partially offset by higher (inaudible) costs for hot-roll bands purchased from our flat-rolled segment.

Our European segment had operating income of $133 million in 2014.

The improvement from 2013 was primarily due to the realization of over $100 million in Carnegie Way benefits, as the effect of lower selling prices was mostly offset by lower raw material prices.

Before I turn the call back over to Dave, I would like to provide an update on our pension and OPEB obligations.

The steady decrease in our pension OPEB expense that we've seen since it hit its peak in 2011 will continue in 2015, as we expect our pension OPEB expense to decrease by $68 million as compared to 2014, with the largest portion of the decrease coming from lower pension expense for our [defined] benefit plans in the United States.

We decreased our discount rate from 4.5% to 3.75% when we re-measured our pension OPEB plans as of December 31, 2014.

The funded status of our US pension OPEB plans has improved by $1.4 billion as compared to 2012 when our discount rate was also a 3.75%.

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

Thanks, Dan.

Turning to Slide 11.

As promised, we will update you every quarter on our progress on the Carnegie Way transformation, as we continue to implement projects and realize meaningful savings.

We ended the year with $575 million of Carnegie Way benefits for 2014.

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

A couple of examples of projects contributing to substantial amounts of our growing Carnegie Way benefits include new magnetic separators at our Minntac iron ore operations are providing higher concentrate yield, more efficient operations, and increased pellet making capability, resulting in $10 million of annual improvement resulting from lower pellet production cost.

Improvements to facility loading decisions at our flat-roll plants are resulting in increased volumes of higher-margin products on our finishing lines, improving margins by approximately $10 million on an annual basis.

Earlier in the year, we disclosed $30 million in savings related to blast-furnace improvements at our Kosice plant, and as improvement in these operations has continued throughout the year, the annual benefit from these projects has reached $40 million.

While these projects have resulted in large contributions to our total benefits, there are thousands of smaller projects that have helped us reach the impressive levels we achieved in 2014.

2014 is now our new base year for measuring our Carnegie Way progress.

As we start 2015, we have a tailwind from the carryover impact of projects implemented throughout 2014.

Realizing the full year run rate of benefits from these projects will result in an improvement in 2015 of $150 million as compared to the new base year of 2014.

As we did in 2014, we will continue to complete and implement projects from a substantial and growing pipeline of potential opportunities and will provide quarterly updates on our total benefits for 2015 as compared to 2014.

As a reminder, these Carnegie Way figures are not targets and objectives and they are not speculative.

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

The impact of our Carnegie Way transformation is showing through in our results and will be an important weapon for us as we deal with the significant market headwinds we are currently facing.

Now on Slide 12, 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 business cycle and deliver above-market returns to our stockholders.

I highlighted earlier our focus on increasing our ability to generate cash and maintaining a strong cash position.

Our cash deployment strategy is aligned with our Carnegie Way transformation objectives, as we continue to earn the right to grow and drive profitable growth.

Maintaining a strong balance sheet, continuing to improve our pension and OPEB position, maintaining and continuing to enhance the competitive advantage of our mining operations, and completing significant transformational projects such as the EAF project at Fairfield, on time and on budget, will help us earn the right to grow by closing the gap to delivering economic profit across the business cycle.

We will drive profitable growth through our investment in advanced high-strength steels for our automotive customers, and by getting closer to our customers and creating value enhancing solutions across all of our newly formed commercial entities.

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

Thank you, Dave.

Good morning, everyone.

Although the Carnegie Way transformation is a multi-year journey, we must still deal with intense short-term volatility that affects our markets and, at times, must make temporary adjustments to our operations to address rapidly changing order rates, as well as adjustments that allow us to properly maintain our facilities, and make facility upgrades to improve our capabilities.

We will have blast-furnace outages starting soon at several of our operations related to normal maintenance, facility upgrades and customer order rates.

The most significant outage will occur at our Granite City Works.

As we have disclosed previously, we acquired a caster from the former Sparrows Point facility.

Replacing one of the existing casters at Granite City with this caster will increase the range of products that we can produce at Granite City, giving us the ability to serve a broader range of customers from this location.

The demolition of the old caster and installation of the new caster will take several months and, during this period, we will be limited to operating only one of the two blast furnaces at Granite City.

We started this project yesterday and currently expect to complete this project in late June.

We have a scheduled maintenance outage for one of these smaller blast furnaces at Gary Works, and that will start in February.

With the maintenance work currently expected to be completed in approximately 30 days.

The restart date for this furnace will be determined by our steel making needs after the maintenance work is completed.

At our Fairfield Works, based on customer order rates, we have sufficient inventories of [both] slabs and [rounds] to serve the current needs of our flat-rolled and tubular customers, and will idle the blast furnace until orders rates recover.

The timing of demand improvements in the flat-rolled and tubular markets will determine the duration of this outage.

We are also adjusting the operating levels at several of our finishing and tubular operations.

We currently expect to idle a tin line at our East Chicago facility, and will fill customer orders from the five other tin lines we have at Gary Works and our Midwest facility, and we will adjust the operating levels at our Fairfield flat-rolled finishing operations consistent with the Fairfield blast-furnace outage.

We are also adjusting operating levels at our tubular operations as declining rate counts reduce demand for OCTG projects.

We currently expect to idle the seamless pipe mills at our Lorraine Works, and consolidate seamless pipe production to our Fairfield tubular operations.

We will also adjust seamless pipe operations at Fairfield and welded pipe operations at Lone Star, also in line with customer needs.

Customer order rates will determine the size and duration of any adjustments that we make at our tubular operations.

The actions we take in response to shorter term market conditions will not distract us from important long-term strategic initiatives that are underway.

Our change to a commercial entity oriented management structure is in place and we're focused on creating value by providing innovative and differentiated solutions to our customers, as we strive to become trusted business partners and not just sellers of steel.

The implementation of a reliability-centered maintenance program is underway, and will drive value creation through improving our safety performance and increasing the consistency and reliability of our operations.

This will enable us to be much more effective in our production planning and facility loading and improve our quality and delivery performance, as well as providing the foundation for achieving operational excellence.

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 2015.

Our Carnegie Way progress so far has exceeded our expectations in this multi-year journey.

We expect to continue to generate benefits from our transformation, which focuses on creating value through sustainable improvements in our business model and earnings power.

We anticipate that the global economy in 2015 will expand at a moderate rate, with the US economic growth of approximately 3% and European economic growth of approximately 1%.

Steel demand tracks directionally with GDP, and our review is that we will continue to see low single digit growth rates in each region, which is broadly consistent with World Steel Association projections.

We expect that depressed oil prices will have a negative impact on our tubular segment.

Although this could also be a headwind for our flat-rolled segment, we are encouraged by the potential that improved consumer spending could to provide to our flat-rolled demand.

We may continue to experience high levels of imports, which we believe in many cases are unfairly traded.

Moreover, our earnings from USSK are likely to be negatively affected by foreign exchange rates, particularly the strengthening of the US dollar.

We believe that value creation comes from a sustained improving earnings power across the business cycle, and to achieve our ultimate goal of delivering economic profit, we cannot be deterred by short-term volatility in our markets.

Focusing on short-term fluctuations in a volatile environment is contrary to the foundations of the Carnegie Way transformation.

Consistent with this strategy, we will provide quantitative annual earnings guidance, as we believe it provides all of our stakeholders with a more informed view of our earnings potential as compared to a short-term quarter-to-quarter perspective.

We are focused on creating economic profit throughout the business cycle.

Our balance sheet and liquidity are stronger and our healthy cash flows gives us the strategic flexibility to continue to improve our performance under this set of market conditions.

We are confident that the Carnegie Way will continue to deliver meaningful improvements, helping us to somewhat offset headwinds throughout 2015.

With our strong balance sheet and continued Carnegie Way improvement, we are in a much better position to respond quickly to challenging market conditions.

And our improved earnings power will enable us to be more profitable during these market conditions than we have ever been in the past.

We proved in 2014 that we can respond to challenging headwinds.

As we entered 2015 with this volatile market, we face significant challenges from dramatically lower oil prices, lower steel prices, and the impact of the stronger US dollar and global over capacity on imports and in our operations.

But, we expect our Carnegie Way journey to continue to generate additional benefits in 2015, including healthy cash flows, strong liquidity, and sustaining our improved balance sheet.

Based on all of the factors described above, we expect full-year EBITDA for 2015 of between $1.1 billion and $1.4 billion.

Thank you, Mario.

Katie, can you please queue the line for questions?

(Operator Instructions)

Tony Rizzuto, Cowen and Company.

Thank you very much.

Hi, Mario, David, and Dan.

How are you guys?

Good morning, Tony.

So, a couple questions here.

First of all, just trying to -- first of all, one of the things we noted when we looked at your fourth quarter flat-rolled performance, and I was very pleasantly surprised, your volumes were down sharply sequentially, production was down 20%, shipments were down 18%, the cost per ton was only up just $10 per ton.

So, is that sustainable?

Because, as we look forward, as you indicated, there's a lots of pressures out there and it seems as if the Carnegie Way benefits clearly coming through but I thought that was an extraordinary performance?

Perhaps a little bit more color on that number?

Well, the performance is a direct consequence of all the efforts the folks are placing into the non-financial indicators and all the KPI's that are comprised in performing those operations, Tony.

And the majority of what has been put in place definitely is a sustainable condition, which will be enhanced as we move forward with the reliability centered maintenance.

That does have an impact on our operations on every single day.

So, there is a lot more work to do when it comes to operational improvement that will translate into cost reductions, but that is giving you a glimpse of the opportunities that we have ahead of us, and also an idea of the improvements that we can expect to have out of the efforts that are being put in place.

Could you help us understand the assumptions a little bit further that go into your plan for 2015 and EBITDA guidance?

Just, if you can give us an idea of the kind of tubular shipment levels, with all the moving parts and idlings and shutdowns?

And also, if you can discuss a little bit about what kind of base hot rolled coil and maybe tubular pricing assumptions that you are making as well?

That would be very helpful from a modeling perspective.

Yes, I'm sure would be very, very interesting for you to have all that, Tony.

But unfortunately that crystal ball is not going to be provided.

What I believe should be perceived from all this is that we are also providing a lot more flexibility to our operations because nobody really knows where this is going to end.

When you have oil prices falling by half in such a short period of time, and you've seen that we are creating a condition to better accommodate the situation so that we can maintain the focus on all of the elements that are crucial for the mid-to long-term, that is really the important factor here.

Tony, I guess what I would add is, I guess from our perspective, it is probably very inappropriate for us to tell our competitors what we think pricing in the market should be.

So that's really one of the main reasons that you really can't go there in that type of discussion for us.

Luke Folta, Jefferies.

Good morning.

Good morning, Luke.

I don't mean to push too hard on this, but if you're going to provide full-year guidance, how are we supposed to have much conviction on that without some sense of what steel price forecast -- at least some sort of range that you're assuming in the upside and downside scenarios?

Yes, Luke, I guess when we look at it from our perspective, I said, we can't tell our competitors what we think prices should be.

But if I look and -- we are looking at -- there have been 10 updated 2015 estimates posted in the last couple of weeks, and if we look, 2 of those fall below our range, 4 of them fall within our reach and 4 actually fall above.

That tells us we are not taking some contrarian position here.

That would tell us that our assumptions are very much a of mine with the general market expectations that the people are using.

Well, yes and no.

Because, there's a difference between what changes in your earnings between what drives -- what steel prices will do to your earnings versus internal initiatives like additional cost cuts and the impacts from these outages and things like that.

Luke, at the end of the day, our results are sum total of all those moving parts.

And to try and isolate any one piece of it can actually be very misleading in trying to put the equation together, and we cannot go through extreme detail of our business plan in public for the benefit of our competitors.

Because it's certainly not for the benefit of our stockholders.

Right, I guess what I'm saying -- it would at least allow us to, if we wanted to change our own assumption for what the steel price could be to at least understand the rest of how you're thinking about your business, but don't mean to beat the horse totally to death there.

I think Mario gave some pretty fulsome description of all the operating actions we are taking in response to these conditions, so all of that is really comprehended in our guidance.

We see what's going on.

We think, I said, we think were not out of line with the consensus view of the world.

We are taking some pretty extreme actions in the face of some very tough conditions to start the year, but as we look back to 2014, we started 2014 with extreme headwinds in our first half and still delivered a very solid year, and that's what gives us the perspective that we are comfortable we can do this.

Okay.

Thanks for that.

And, if I could just on tubular.

Can you talk about just what the order book looks like and how sharply we've seen orders fall off with the pullback in oil prices here, and in terms of what you are expecting in terms of the shape of recovery?

I would think that shipments probably fall in the first quarter, maybe you're looking at a second-quarter type trough, with maybe some recovery making it in the second half?

Is that the right way to think about it?

I think, generally, yes.

If you look at the falling rate counts, if you look at what customers and the distributors and service centers will do in terms of inventory adjustments, it has been very intense so far, and I think that they will also accommodate their situation based on how much lower prices can go.

So, it is a very, very volatile thing.

And, it has been very tense decline so far.

Sal Tharani, Goldman Sachs.

Good morning.

Good morning, Sal.

I wanted to ask you a couple of things.

First, when you look talk about adjusted EBITDA, are you going to adjust the [adding] cost of there?

Because generally in the past, you have not.

I'm not talking about the restructuring costs where you permanently shutdown the plants, but in terms of the idling.

Because idling costs historically have been very costly for your Company.

Sal, I think if you look at the back of our slide deck, we have reconciliation tables that go back for several years.

I think you can see the type of items we typically adjust out.

But, temporary idling, those are clearly current period costs that belong in there.

We would not be billing that.

We would be adjusting out -- if we have -- for example, we've had non-Cap write-offs on the permanent shutdown of assets.

Those kinds of things we typically adjust, but the temporary fluctuations in operating rates certainly would not be an adjustment, no.

Great.

That's what I thought, because that has been your history.

On CapEx side Dave, what's the $200 million increase driving from 2014 to 2015?

We're moving forward on some of the bigger projects.

Certainly, the [EF] project is moving forward.

So, there's those types of things that start to gain some momentum and the spending starts on those.

We've also taken the opportunity to look at projects we can -- shorter-term projects, high-return projects that we can implement quickly, and we're trying to ramp up our efforts on that because there's much less risk and there's better opportunity for a quick return.

Very high ROI's on those projects, and we are trying to get our people into position to do much more of those type of projects, which are smaller but can add up.

One more question on the pricing.

You had mentioned that Carnegie Way, besides on the cost improvement, you're moving towards what's going on in the commercial side.

One thing which surprises us is that you're price realization, if I compared to the last quarter, or even from last year fourth quarter, has been pretty significantly better than what the market price was.

I look at -- if I look at the [SPB or PLAX] price HRC, they fall almost $45 year-over-year or even quarter over quarter, and your price was only a couple of bucks less than -- in fourth quarter versus third quarter.

I'm just wondering, is it part of your strategy, like you said, don't make steel just for filling the blast furnace, but on the value added product?

Is that what we should see going forward, also?

Yes, Sal, you should see that continue.

Okay, great.

Thank you very much.

Sure.

Matt Murphy, UBS.

Good morning.

Good morning, Matt.

I guess given your focus on looking through the quarters to the longer-term, I'm just wondering how you look at the current market?

How you make your longer-term decisions on capacity as we look more and more globally over-supplied and volatile?

So, I'm just wondering how you're using current markets to evaluate your long-term capacity decisions?

Are you assuming healthier markets as a benchmark there, or do you look at a soft market as a time to capture investment opportunities?

Matt, since the beginning of the journey, I believe you have heard me say that we do not believe the markets in general will be helping us to better position the performance.

The effect of volatility was going to exist, was always present in the way that we think about the future.

So, two elements were there.

The first one was definitely we need to figure out how to be more flexible to accommodate to cycles that are very volatile.

Sometimes very, very short, and we need to better be able to respond to that.

And the second one, through the creation of the commercial entities now, is to have a much more profound and clear view of where we should be playing and to what level.

So this is a continuous assessment that we keep making, and we are making slow tweaks, as you can see, towards the abilities of being able to profitably go through these cycles.

It doesn't change, in general terms, the strategy that we set forth for the future.

Okay, thanks.

Then maybe just one modeling on the European business.

What percent of costs in revenues would be in Euro?

Our segment detail in the footnotes of the Q's and K's -- it is going to obviously -- the relationship will change based on whether the markets here get stronger or weaker in relation to markets there.

So, that's pretty much the detail in the 10-Q footnotes, 10-K footnotes, will probably get you close to what you are looking for.

Okay, thanks.

Nathan Littlewood, Credit Suisse.

Good morning, guys.

Congrats on the result.

Just had a couple of questions for you, the first on this whole Carnegie Way transformation.

I guess what I'm interested in is whether a [$500 to $550] HRC price environment perhaps generates a reason to maybe accelerate some of the Carnegie Way initiatives that may have already been on the cards?

And, do we perhaps see the business emerge here as a cleaner, leaner, meaner entity as a result of what's going on in the markets at the moment?

Thanks for the question, Nathan.

Certainly, anything that can expedite and accelerate our ability to create improvements is going to be seized.

And the important thing, though, is as you do this, you need to make sure that the execution cadence is such that what you do is very well done.

And not all of the things that we deal with can be sped up without some sacrifice to the quality of what's done.

So, the most important thing is that whatever we do is going to have to have to be done very well.

The sense of urgency though certainly grows.

And I couple that with the fact that after a year of the efforts in the Carnegie Way, our organization is getting stronger, better prepared, the alignment grows, and their ability to execute certainly gets better.

I like the leaner, meaner concept because that should be a very visible outcome when we get further down in the journey.

That make sense, thanks, Mario.

The other question just on pricing.

Avoiding the subject of precisely what your expectations are, I guess I was hoping we could talk a little bit about some of the factors which will determine pricing?

Clearly, one of the surprises over the last couple of years has been a very, very large spread between International and US prices, and of course that's coming down a little bit of late.

I guess some of the reasons for that spread having been as high as it has been have been to do with trade cases, which you have obviously been very involved in, and also the degree of import penetration.

Late last year we heard -- hearing a lot about the inability to effectively move imported steel on trucks and trains because there were just too many back logs.

There was record inventories accumulating at ports and that sort of thing.

So, can you just talk a little bit how you see those two dynamics clean out over the course of this year?

So, your strategy I guess with respect to trade cases, and also is a getting easier, do you think, to move imported steel around the country in light of perhaps what's happened in the oil markets recently?

Well, I would offer to you that I feel very good about our improved ability to deal with trade cases.

That's really important.

Internally, we've made a more robust effort to be able to analyze quicker, assess quicker, and be better prepared because that pressure is not letting up.

If you look at the market share that imports have been garnering inside of our country, it is meaningful, it is significant, and we really have enough evidence to give us the feeling that a lot of it is unfair trade.

So we're going to even increase our efforts and see how much quicker we can move to create a case with validity that we can move forward.

The other part of it is the overall context, that it certainly do effect prices, and I believe that the service-level that domestic producers, the closer connectivity to the customers and the ability to respond to their own needs, that is going to be unmatched by any importer.

I believe that what we are doing is creating a much better quality of service that has value that certainly will support whatever price differentiation we are going to see.

Evan Kurtz, Morgan Stanley.

Good morning, Evan.

It is actually Evan.

Thanks.

Good results, guys.

Just a couple of questions here.

One on project Carnegie, I was a little surprised to see the carryover number at $150 million.

It's such a large number for 2014, and I know a good portion of that was backend loaded in the year.

I was just wondering if there's any sort of cushion there?

And when you think about 2015, Carnegie Way, did you capture a lot of the low hanging fruit in 2014?

Do you think you could see a number near the same magnitude in 2015?

And I guess what's baked in the guidance?

If you can give us any color on that would be great.

Evan, starting with the carryover number.

Since we have [2014 as the new base year], there's some gives and takes there.

Certainly in the first part of 2014, we had benefits that were related to our [caning] operations.

Those were actually a negative carryover because they won't be repeated in 2015.

Benefits we had like (inaudible) up through August, when we end up [whatever] those plans -- those won't repeat.

So, there is some negative offsets that aren't going to carryover that go into that blended number.

But that blended number, that number is our -- it's based on the projects we have out there.

It is not -- we are not trying to manipulate that number at all.

But there is some give-and-take.

We are not going to -- as we said, we are not going to give guidance on Carnegie Way benefits, but we do say we have thousands of projects in process and thousands more in the pipeline and some will generate more benefits than others, but it is really a wide-ranging -- thousands are not -- (Multiple speakers) -- Literally, that is the real number that's going on.

So, we have mobilized a lot more people.

We continue to mobilize more people and train more people.

We said we completed the first year of a multi-year event.

The pace will be what it is, but certainly our guidance does comprehend the expectations of what we will accomplish.

Great.

Maybe just following up on something Sal asked on CapEx.

Out of that $650 million can give us a little bit of a breakdown about at least what is growth versus maintenance, and what sort of maintenance number we should think about, going forward?

I wouldn't consider real growth as a source of the CapEx at this point.

It is really about more effectiveness, more efficiency and more diversification to the products and services.

That's where it's really more focused on.

On the maintenance part, maybe not maintenance CapEx but maintenance expense in general.

Right now our view is that maintenance expense in 2015 is going to be fairly similar to 2014.

Not any kind of difference we think we would call out.

Okay.

One more if I may, just on coal cost this year.

What sort of savings do you think you will get from lower met coal?

We look at our blends, we look at our transportation, we look at our freight, we look at it as an all in number, and based on what we've given in prior years, we expect to be down roughly $8 a ton on our coal costs.

David Gagliano, BMO.

Hi.

Thanks for taking my questions.

I just have a couple follow-ups.

First of all, on the 2015 outlook.

I was wondering if you can quantify the idling costs that are included in the $1.1 billion to $1.4 billion guidance for 2015?

That's my first question.

Actually at this point, no, because we've given advance notice as we are required to give on our expectation that we have idling of a certain level -- if they require layoffs -- but, really how big the idling is and how deep it goes will really be determined by the status of the markets two months out.

So, that's something we really don't -- would be able to quantify at this point.

Because, as I said, that's something that will be determined by the markets two months from now.

Okay and I -- then are there any numbers included?

Any idling costs included in the guidance for 2015?

Certainly, because we know we going to take action, so yes, we do have that built in.

We certainly wouldn't ignore that because we know we are taking actions, we've given our employees notice we expect to take actions.

Okay.

On a related note, are you including any assumptions for restarts on the tubular side within your 2015 targets?

We are keeping the flexibility intact so that we can respond in a very short notice, Dave.

That you can take that to the bank.

It is the market turns, we are ready.

Okay, but does the range, the $1.1 billion to $1.4 billion include or exclude restart assumptions?

It includes the flexibility to do that.

Okay.

(laughter)

That's a good answer.

Let me ask you one last question.

What about the strong tubular margins per ton in the fourth quarter?

Can you give us a little more color on what was behind that?

That was a very impressive number, and I'm just wondering what little more color on what drove the margins, there?

The flow-through of declining order rates and pricing takes longer in tubular because you generally have longer lead times and pricing is more quarterly, so that's why you didn't see that drop in the fourth quarter, and that's the guidance we gave on our third-quarter call.

We did see an improvement in mix.

We did more alloys seamless pipe because that's where demand stayed strongest, so there's definitely a good mix benefit for us in the quarter.

Timna Tanners, Bank of America/Merrill Lynch.

Good morning, guys.

Wanted to just ask how you fared in the annual negotiations for contract customers and update us on your contract mix into 2015, please?

I think we fared well.

They've responded very well.

I think the discussions were over value to a very large degree, and where is it that ourselves and themselves can benefit from a more profound level of collaboration.

This has been the tone, and I think it sets a pretty good reference for what we should expect out of the newly created commercial entities that will be really focused much more on this kind of value creation with them.

I don't think we're seeing any dramatic change in our mix, and our strategy on the type of different contracts we employ.

Okay, and you break that out in the presentation, so that's still intact, yes?

Those charts are in the back of the presentation, yes.

Okay.

Another question I wanted to ask is just -- I understand that you don't want to tell us about your HRC assumption, but it is helpful to think about maybe it being in a range of where recent estimates have been, but then on volumes into 2015, you've taken a leadership role on cutting back some production.

We haven't seen other mills necessarily do that, and a lot of this is because of the imports?

So, if import stay high because of the strong dollar, are you prepared to respond with keeping mills off-line and ceding market share to imports?

Or how are you thinking about managing your production longer-term if imports stay high?

The stronger dollar certainly doesn't favor a consideration that imports could be less, and that's exactly one of the reasons as to why flexibility is so important.

And, I think we are demonstrating that we are prepared to deal with those conditions as effectively as can be done.

Brian Yu, Citi.

Great, thanks and good quarter, guys.

My first question, I think you guys mentioned the [yeah] project on more than a couple of occasions.

Would you have a CapEx budget for that, and is that essentially certain it will be built?

We have full approval to complete the project, and we would just estimate the project is in the range of $200 million.

We've seen some pretty lofty projections but we are not building a mini-mill, we're just building an [electric] furnace inside of our facility.

So, $200 million is not a bad range for where this project should come out.

Okay, and what is the annual capability of that furnace?

About 1.5 million tons.

Okay, got it.

Then secondly, is just on the Carnegie Way, so embedded in your EBITDA look for this year, that includes the $150 million in carryover, but anything that gets announced throughout the year would be additive to that number?

Is that correct?

Yes, very much the same we did this year, yes.

Okay, got it.

Thanks.

Thank you.

Phil Gibbs, KeyBanc Capital Markets.

Good morning.

Good morning, Phil.

Just wanted some clarification on the production curves that you are taking.

So, Fairfield is idle, Granite City sounds like an indefinite outage until the order book picks up on one of the blast furnaces, and then Gary likely number eight is also an outage for a bit of time?

Actually, Phil, Granite City is the big outage for the caster replacement.

The furnace in Gary is actually number six, and like you said, when we complete the work there, then the markets will tell us when we light it back up.

And, the Fairfield outage is based on when we will -- when we have [slabs] and routes on the ground right now.

Same thing, the order book would tell us when do we need to bring that back online so that we continue to serve the customers effectively.

So, those are the three pieces.

Granite City being the longest one because the caster project will take four months or so to complete, and while we have one caster off, we can only run one furnace and one steel shop.

Okay.

And how are you guys viewing net working capital for this year?

As far as what you are anticipating it to be, as far as a use or a source?

I haven't seen any significant changes in operating rates year-over-year.

We expect it to be reasonably neutral, and we're still certainly focused on Carnegie Way projects that can deliver improvements in our working capital management, so that definitely something that is in the pipeline for us.

Absent any of that, we would not see anything to cause it to be significantly higher or lower, but our focus will be on the things we can find, improvements to improve the efficiency of our working capital management.

Okay.

Then on the tax benefit side, I know that you had some carryovers from some tax management actions that you did as a Company over the last year or two.

Is there any of that that we are likely to see come forth in 2015?

There shouldn't be any material amount left over from that, no.

So, that's largely done at this point?

Yes.

Fortunately, the earnings in 2014 were good enough to really take care of most of that.

Other than that, our tax rate is generally a little bit below statutory because we get [excess depletion allowance] from our mining operations but other than any discrete items that might come off, that's the only difference that really makes us different from statutory.

Okay.

Then just lastly here if I could.

The total pension expense this year $244 million, is the majority of that non-cash?

We have some cash guidance in the back of the deck, there.

Last year for pension OPEB excluding (inaudible) contributions and voluntary pension contributions, we had about $400 million go out the door, and our projection for this year is that number drops to $300 million.

Matt Vittorioso, Barclays.

Thanks for taking my question, and great job on the cost side.

Maybe help us think about maybe specific to the flat-rolled segment, how we should think about fixed versus variable cost, given all the action that you've taken?

As we model 2015, integrated steel is still a pretty fixed cost business, but you guys have taken a bunch out.

Can help us quantify that at all?

I don't know off the top of my head if we can.

But I think to your point, certainly, when you look at our fourth quarter as a great example to see that kind of operating income per ton in the low shipment environment.

Certainly our fixed cost position has been improved significantly, and a lot of the Carnegie Way effort is really fixed -- directed towards fixed costs because our -- we're focused on things we can control the best we can.

So, I would say that when you look at our Carnegie Way benefits, that that is clearly a big improvement in our fixed cost structure.

Is there any maybe big picture guidance that you would guide people to as far as running of a blast furnace two-thirds fixed, a third variable?

Or anything that you said in the past that might be helpful on that point?

No, I don't think we've ever tried to break it out that way.

Okay.

Then just digging a little bit deeper on the flat-rolled price realizations.

They've held pretty steady over the past three quarters despite the broader generic steel price having come down pretty meaningfully.

What, specifically -- is it a different contract mix or contract type that's allowing you to withstand the drop in generic steel prices?

And, as we think about 2015, understanding that you don't want to provide guidance, but it seems like historically you've been realizing roughly $100 over the quoted price of hot rolled coil.

Is that relationship going to break down in 2015 based on some change to your business?

The pursuit of value, that won't change.

Having more flexibility and closeness to customers to properly address what is good for both, that is going to continue, and we will see what else that will deliver.

Jorge Beristain, Deutsche Bank.

Good morning, guys, and great quarter.

My question, I guess, here is what is your general assumption for your guidance for 2015 as it relates to market volumes for the entire US market?

Do you see the in demand growing 3%, 4%, 5%, that's my first question?

I think, as we made out in the description, we expect the US economic growth about 3% but that you'll normally translate into single -- a low single growth rate on steel consumption.

That's generally our expectation.

And within that are you baking in the assumption that imports are holding the line as they ended in 2014?

Or are you already assuming further losses in the US market to import penetration?

I think our expectation is that imports are going to be a tough competitor for the time being.

Maybe a question for Mario, because I know he's been doing a lot of -- spending a lot of time in Washington.

But, is there a ratio of imports penetration to the US market that starts to set alarm bells off in Washington, and is that number 35% or 40%?

Can you talk a little bit about what you're hearing in Washington?

Well, the alarm has been sounding quite hard, and we have the hammer on it all the time, Jorge.

We are going to increase that noise and that sound.

But there is no doubt about it.

You have TPP efforts going on, and there is a lot embedded in it that poises a condition that is not favorable.

All that we want is a level playing field and there is no question that that message is beginning to come across.

We are asking for more clarity on the part of -- the broader industry is feeling the same pain.

So we are maintaining the leadership position that we have created in order to bring forth the real effect that will help us have an opportunity to revisit the way in which the law is prescribed today.

And we need to show that the injury standards that are place today definitely are not applicable nor appropriate for the level of trade that is taking place in this globalized environment.

Charles Bradford, Bradford Research.

Good morning.

Good morning, Chuck.

The income from investees last year was almost $1 a share.

Was that in cash, and what can we expect for this year?

Chuck, the income from investees, that represents our share of our joint ventures income.

Certainly, when you look at our footnotes where we break it out by how it fits into each segment, it is virtually all in the flat roll segment because that's where all our big JVs are.

And within that, the two biggest ones are obviously PRO-TEC and the UPI JV on the West Coast.

Automotive markets have been very strong so PRO-TEC is doing very well, and in addition -- with the addition of the CA line of PRO-TEC, PRO-TEC's overall size has increased.

So, that makes a difference, and then the mining JVs we have, the small interest we have in some of the [cliff] mines add some value.

UPI themselves, you wouldn't say it was Carnegie Way (inaudible) but UPI themselves have done a very good job of working on their cost structure and their performance, and we're getting the benefits of that too.

So, those would be the big pieces feeding that line PRO-TEC, UPI, and mining.

But, certainly the strong automotive business, PRO-TEC does very well.

Posco has been telling people in Korea that you all have sold the united spiral pipe to Evraz, and they expect to recover their cost, is that accurate?

We don't want -- we don't get into negotiations under progress.

If they want to, they can, but I would say that from our perspective whatever happens with that asset, there will be really don't to material impact on us either way.

One last area, the labor contract is up this year.

In your profit-sharing, do you recover losses earlier in the year before the profit-sharing cuts in, or is it just discrete each quarter at 7.5%?

Our represented employees get their profit share quarterly, and it is a sliding scale based on how much money we make in that quarter.

But there's no offset or crossover.

It is quarter by quarter calculation for them, but it is a sliding scale based on profitability.

Aldo Mazzaferro, Macquarie.

Good morning, Mario, how are you?

Good morning, Aldo.

I just had two quick questions.

First one is on the tax rate.

Should we assume about 35% end tax rate?

Is that what you are suggesting when you made the comment that you had nothing left on the carry forwards?

And then second question is when you announced the [coke-oven] change in the last couple weeks, you commented that it represented the culmination of some of the changes in your raw materials strategy.

And I'm wondering if you can just update us on the changes in that raw material strategy as you see them now?

On the tax piece, we will expect -- we'd expect to come in slightly below statutory because we do get an excess depletion allowance that helps us there.

But nothing dramatic.

Maybe we come in 30% range, somewhere in that line.

I think on the [coke batteries] in Granite City, basically when we look at our coke needs, we're doing a better job of using coke, more efficient use of coke.

We are looking at a switch of taking a blast furnace out of the equation in 2017.

We just look and see we don't need this coke, and it is certainly a benefit to not maintain coke facilities you don't need.

It takes money, it takes maintenance, so to the extent, there's no upside for us to be long coke, I guess is the way we look at it.

So, nothing on your strategy on iron ore change then?

No.

No.

It will keep flexible in terms of what we do with the footprint going forward.

Right, you're no longer going to be buying iron ore from Cliff's, right?

Going forward, or is that likely to continue?

The last contract we inherited when we acquired [stelco] did expire, so we do not have any more contractual obligations with those guys.

Gordon Johnson, Axiom Capital Management.

Thanks for taking my call and congrats on a good quarter, guys.

Thanks, Gordon.

Just a couple of questions.

First, previously you guys have stated that your flat roll division is breakeven at roughly $620 per short ton--

We never said that.

People have said that, we have never said that.

Okay.

I guess are you guys willing to provide it what price levels your division is breakeven, now?

Can you give me 50 other market assumptions to work from on all the other moving parts?

Okay, maybe I can ask it a bit differently.

You guys are saying that maybe this year is going to be similar to last year with respect to how it started out and some of the headwinds.

Assuming that prices stay flat from here for both oil and steel, can we assume, given similar to last year, at some point, you can potentially lose money in either the first or second quarter?

We are not giving segment by segment quarterly guidance.

We think that totally defeats the purpose.

It's totally inconsistent with how we run the business.

We can point back to historical periods and say in the fourth quarter if average prices would've $82 lower we would have broken even.

We have a very heavy focus through the Carnegie Way making sure that our breakeven points keep improving.

That's part of the Carnegie Way in earnest.

Okay.

With respect to I guess the OCTG division end market, it seems like imports from Korea are really starting to pile up here.

Is there any -- do you guys see any changes in the original ruling by the US?

Because it seems like, I guess, globally that really may be seen as wrong.

Do you see any potential changes there over the near-term?

We don't see any changes.

Their behavior, I think just validates immediately that they have designed the business to come and attack our markets when they don't consume any meaningful portions of what they make in there, nor do they export to other countries in any meaningful way.

It is all targeted toward the United States, and even after the determination of fees on them, their goal is really solely focused on keeping the market share.

I would now like to turn call over to Dan Lesnak.

Please go ahead.

Thank you.

Before we end, Mario has a final comment that we would like to give him the opportunity to give.

Before we sign off, I just would like to acknowledge the effective work of our employees and their extraordinary efforts to improve our Company while remaining fully committed to our core values.

Slowly but surely, all of the initiatives being pursued will make us stronger, and better position to serve our customers and will result in a better and safer work place for all of our employees.

Thank you so much for staying with us for this call.

All right, we would like the thank all of you for joining us.

Thank you for your interest in the Company, and we look forward to getting back to you in April to update -- to give you updates on our progress.

Thank you.

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