美國鋼鐵 (X) 2015 Q1 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by and welcome to the United States Steel Corporation 2015 first-quarter earnings call and webcast.

(Operator Instructions)

As a reminder, this 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, Tom.

Good morning, and thank all of you for joining us for United States Steel Corporation's first-quarter 2015 earnings conference call and webcast.

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

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 Executive Vice President and CFO, Dave Burritt.

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

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

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent annual report on Form 10-K and updated on our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

Now to start the call, I will turn it over to our CFO, Dave Burritt.

Thank you, Dan.

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

Turning to slide 3. We reported an operating loss in the first quarter of $21 million at the segment level.

EBITDA, adjusted to exclude the restructuring charges associated with the permanent shutdown of our Gary Works and Granite City Works coke making facilities, was $110 million for the first quarter.

We faced extremely difficult conditions in the first quarter with high levels of imports and supply chain inventories and rapidly falling spot prices and rig counts significantly impacting volumes at both our flat-rolled and tubular segments.

The continuing strengthening of the US dollar, particularly in relation to the euro, helped keep import pressure high in North America and negatively impacted our European segment results.

While we are taking aggressive actions in the near term to mitigate the downside resulting from the difficult market conditions, our results over the last 12 months reflect the earnings leverage we have when market conditions begin to improve.

We remain focused on the execution of projects supporting our Carnegie Way transformation that improve our earnings power.

Turning to cash and liquidity on slide 4. We have a strong cash balance and enough liquidity to keep us well-positioned to deal with the currently difficult conditions.

We generated $136 million in cash from operations in the first quarter and have generated over $1 billion of cash in the last 12 months.

We remain focused on cash management and continue to build on the working capital gains we made last year.

A strong cash position, substantial liquidity and an improved balance sheet keep us positioned to invest in high return projects including projects that we refer to as quick wins, which are smaller in size and have very short implementation periods.

Our strong cash position also supports our strategic initiative to increase our funding for the research, innovation and technology needed to develop the steel solutions that will create value for both our customers and our stockholders.

Dan will now provide additional details about our segment results.

Thank you, Dave.

On slide 5, first quarter results for our flat-rolled segment decreased significantly compared to fourth quarter primarily due to lower shipments including air segment shipments to our tubular segment.

Our flat-rolled segments results continue to be adversely impacted by the massive volume of steel imports that accelerated during the first quarter, many of which we believe were unfairly traded.

Average realized prices have decreased due to the adverse effect of these imports which have served to dramatically reduce spot market prices and indices and have negatively impacted pricing on both spot and certain contract volumes.

The decline in results also reflects the inefficiencies resulting from reduced production levels at all of our facilities.

On slide 6, first quarter results for our tubular segment decreased significantly compared to fourth quarter primarily due to lower shipments.

Shipments were adversely impacted by reduced drilling activity caused by low crude oil prices and a significant amount of tubular import volumes.

Inefficiencies from reduced operating levels at all of our tubular facilities also negatively affected first-quarter results.

For our European segment, results were comparable to the fourth quarter.

With the positive effect of increases in shipments and reduction in raw materials costs offset by negative foreign currency effects and a slight decrease in average realized euro-based prices.

Now, I'll turn the call back to Dave for some additional comments on our Carnegie Way transformation and the favorable impacts that continue to grow.

Thanks, Dan.

Turning to slide 8. On our earnings call at the end of January, we disclosed that we would have $150 million in Carnegie Way benefits in 2015 as compared to 2014 as the base year.

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 of these projects.

Including the benefits from projects we implemented during the first quarter, our new total for 2015 Carnegie Way benefits for 2015 is $340 million.

A few examples of projects implemented in the first quarter include: process improvements increase the recovery of off gases in the steel shop at USSK for reuse as fuel for our boilers, not only reducing our purchases of natural gas and coal but also lowering total CO2 emissions.

Process improvements for tracking and management of couplings inventories at our tubular operations resulting in lower inventory levels and reduced coupling purchases.

Process improvements for management of interplant shipments in the flat-rolled segment resulting in lower freight costs and more efficient inventory planning and working capital management.

There are thousands of projects that aggregate deliver substantial benefits that are getting us to the impressive results we have achieved so far and I would once again like to emphasize that these are not targets or objectives and they are not speculative.

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

We are spending cash wisely implementing Carnegie Way projects that create value and require less expenditures.

Our pace of progress on the Carnegie Way transformation continues to exceed our expectations and the continuing benefits will improve our capability to earn the right to grow and then drive sustainable profitable growth over the long term as we deal with the cyclicality and volatility of the global steel industry.

Now turn to slide 9 for an update on our Carnegie Way transformation process.

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.

The Carnegie Way transformation is the way we work to create value for our stockholders by improving our margins across the business cycle through sustainable improvements to our cost structure, achieving operational excellence at all of our facilities and providing our customers with differentiated and value-creating solutions.

We are in the second full year of what we see as a multi-year process but as our current results reflect, we are not where we need to be yet.

We are making real progress and we are creating value by producing better margins than we have in similarly difficult conditions in the past and the continuation of this progress will lead us to sustainable margins that will deliver economic profit throughout the business cycle.

Today, equity markets are too heavily influenced by a short-term focus which can be a true impediment to real and sustainable value creation by deterring and discouraging the investments in and commitment to innovation, technology and product and development that will drive profitability over the long term.

We're pursuing a value creation strategy that will benefit the true long-term investors that provide the sustainable capital base for our company.

These are the people that own our company and are the people we work for and we will make our strategic decisions based on what we believe are in their best interests and not for the benefit of those that invest in short-term market volatility.

With the Carnegie Way, we achieved economic profit in 2014 and created commercial entities to get closer to our customers.

We launched operational excellence strategies with note-worthy improvements in CapEx management and delivery performance and are holding our leadership team to high levels of personal and professional accountability.

No doubt we have a lot more work to do and we will not be deterred by short-term volatility.

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

Thank you, Dave.

We've taken aggressive and decisive actions to address the extremely challenging conditions we are currently facing in North America.

Some of these are very difficult decisions that have a significant impact on our employees and their families and we do not take these lightly.

But these are some of the actions that are necessary for us to remain well-positioned to respond when the market conditions improve.

We have reduced operating rates at all of our facilities in North America and we'll continue to make the adjustments necessary to serve our customers in the most cost-effective manner without sacrificing quality, delivery and service that our customers rely on.

And most importantly, we will do this without compromising our commitment to the safety of our employees.

In this regard, while we continue to make improvements in our safety processes and performance, we are still not satisfied and will keep working toward our goal of zero incidents and injuries.

Our order rates have been significantly impacted by high levels of imports into the North American market that have continued unabated, resulting in operating levels that have caused us to lay off a significant number of our employees and will likely result in the number of layoffs increasing going forward.

We are attacking every aspect of our cost structure and exercising every opportunity that we have to eliminate, reduce and defer costs.

We have many cost levers that we can pull in response to a downturn in market conditions.

And we are pulling them as quickly and as hard as we can.

We estimate that the impact of these short-term actions will reduce costs over the balance of the year by at least $200 million.

I would like to emphasize that these are the result of short-term actions that will reverse as we eventually return to normal operating levels and bring our people back to work.

These cost reductions are in addition to the sustainable improvements to our business model resulting from our Carnegie Way transformations that Dave discussed a few minutes ago.

Unfortunately, we have also had to resort to issuing more notices over the last few months which will help us with the flexibility we need to continue to adjust our operating levels to match our customers' needs.

While these [more] notices cover a large number of employees and facilities, the actual number of employees laid off and the operating levels at our facilities will be determined by market conditions.

We're also taking actions to reduce our corporate and support function costs.

We currently have three blast furnaces idle at our steel producing facilities.

One of Fairfield, one at Granite City and one at Gary.

We will run the other eight blast furnaces at levels that will provide the steel we need to meet our customers' requirements and we remain ready to respond as order rates improves.

We continue to operate finishing facilities at all of our flat-rolled plants and are producing energy tubular products for our customers at all of our tubular facilities with some facilities running at significantly reduced operating rates.

While we are taking these short-term actions, we continue to aggressively pursue the long-term strategic initiatives that are critical to the ultimate success of our transformation and the creation of value for all of our stakeholders.

Our commercial entities are firmly in place and are actively engaged with our customers to find the differentiated steel solutions that will drive higher margins for both of us and our customers and transition us from merely being just another vendor to being a trusted business partner.

We continue to make the investment to implement our Carnegie Way driven reliability-centered maintenance program at all of our facilities.

This will result in more consistent, efficient, cost-effective and safe operating conditions as we are focused on achieving operational excellence at not just our production facilities but in every aspect of our business model.

Now before we take your questions, I would like to give a brief summary of what we are seeing our markets and our guidance for 2015.

The automotive market continues to be a very good market for us and we expect it to remain strong throughout the year.

We expect to see continued growth in construction including increased demand for construction equipment.

Recent service center data, particularly flat-rolled inventory levels and material on order levels, suggest that order rates should start to improve during the second quarter.

Excluding the energy sector, steel consumption in North America is generally good but extremely high levels of imports, many of which we believe are unfairly traded, continue to negatively impact order rates for domestic steel producers.

In the energy markets, rig counts continue to decline and the high levels of import tons that continue to arrive suggest that a recovery in domestic order rates will be difficult until late in the year at best.

We continue to expect slight growth in steel consumption in Europe with better growth rates in the central European region.

If you turn now to slide 12 and we'll take a look at our outlook.

We have entered 2015 in a very volatile market and facing significant headwinds from dramatically lower oil prices, lower steel prices, a stronger US dollar and significant import pressure.

As we progressed through the first quarter, these headwinds became much stronger.

Spot prices for flat-rolled products have decreased at an accelerated pace reaching levels well below market expectations at the beginning of the year, and imports have remained at historically high levels.

The pace and magnitude of the drop in both oil prices and drilling rig counts has resulted in decreased steel demand for both finished tubular products and substrate supplied by our flat-rolled segment for the production of tubular products.

Lower order rates for both flat-rolled and tubular products have resulted in lower utilization rates and increased operational inefficiencies at all of our facilities in North America.

We expect lower overall steel consumption levels to extend the time needed to rebalance supply chain inventory levels in both flat-rolled and tubular markets we serve.

We have taken aggressive actions to reduce costs and adjust our operating levels in the near-term but cannot fully offset these increased headwinds.

Taking into account all the significantly negative changes we have seen in our markets over the last three months, we now expect our full-year 2015 adjusted EBITDA to be between $700 million and $900 million.

We are taking fast action for not only cost reduction but also for the increased opportunities that a more nimble cost structure enable us.

We are on a long-term journey.

We're making progress and we will continue to do so.

Thank you, Mario.

Tom, can you please queue the line for questions?

(Operator Instructions)

Luke Folta, Jefferies.

First question I have is just in regards to how we should think about some of the moving parts into the second quarter?

And I know you stepped away from providing specific guidance on a quarterly basis, but there's free material price pressure in the first half of this year.

You've got the lagging contracts and that's going to impact selling prices.

You've also been very aggressive on the cost reduction side and idled some facilities.

So I was just hoping that you could provide some high-level color in terms of how we should think about Q2 versus Q1?

The full-year guidance is interesting, but without some level of context it isn't as useful as I think it could be with some color around that.

Well Luke, I think you're exactly right about prices.

Clearly, when you look at our contract structures and we have that chart in the appendix there, we will see some significant decreases in our average realized prices in flat-rolled quarter-over-quarter.

And I think as you look at what's going on in the markets, I don't think there's an expectation you're going to get a volume offset for that.

On the tubular markets, the rig counts just continue to fall.

All the way down into the low 900s now.

That's resulted in making the supply chain inventory situation worse there because consumption rates are dropping so fast.

So I think you're going to see the continued deterioration in tubular markets for some time also.

Okay.

It sounds like you're saying all else equal, you think Q2 lower than Q1, but then nice recovery in the second half largely about pricing?

Yes, you should think of it as the normal flow through when you look at the contract prices that are there for us.

But there are signs that some inventory levels on the flat-rolled side are beginning to dwindle.

We're beginning to see an order intake pickup and there seems to be inflection as far as the pricing is concerned also.

Okay.

Secondly, on tubular, the shipment declines in the first quarter were a bit more extreme than expected.

Clearly, we were expecting a fall off given the rate count.

But, I recall you pointing out that January, February shipments were generally okay.

So as we looked through the remainder of the year, I guess my thoughts on where we might see a bottom in terms of timing and just magnitude in shipments?

It feels like it's maybe moved up a bit.

As you look out, you're talking you think it's going to be well into the back half of year before we see a pickup in shipments.

How do you think about the progression of shipments in tubular from here?

Do we stay at this level for the next couple of quarters or do you see that sort of continuing to decline?

Will I think the decline in the tubular is continuing.

Certainly, in the second quarter, Luke.

I think will be seeing close to very very low bottom at that point and then we're just going to have to see how much CapEx is going to begin to flow back.

And the other thing is going to be how imports are going to keep playing a role in there too.

Tony Rizzuto, Cowen and Company.

I also want to drill down on the guidance and specifically, we're trying to get a better handle on how to think about unit cost progression.

I look back at the results in the fourth quarter in the flat-rolled segment, we were very impressed that even with a nearly 20% decline sequentially in volumes, the calculated unit costs were only up $10 per ton.

And in the first quarter, and certainly I applaud you for operating with all the challenges you are at 60% operating weight, but with volumes down 13% sequentially, unit cost blew out up $100 per ton.

So can you help us understand a little bit about the moving parts and the impact on unit costs and how we should be thinking about that as you are also aggressively working on Carnegie Way going forward?

How should we think about that coming together?

I think Tony, on the unit cost, the lower your operating rates go the stronger the inefficiencies get.

They just get to be a bigger headwind on that four year basis.

I think the other thing that probably is in that first quarter versus fourth-quarter progression is, you do have a normal seasonal impact, negative impact, Q1 versus Q4 on your mining operations and that would be not only our mining operations but also we think about our investees, our investment in the mining JVs, that flows through also.

And then there's also some -- as we are moving towards layoffs we has some accruals in there that address the coming layoffs that are going to be hitting us.

So those are probably some of the cost pieces that make that absorption look worse than, much worse than it did in the fourth quarter.

And the absolute total cost for a little bit down, but with volumes being down that far, the cost absorption just really takes over.

Okay.

So if I understand you correctly, some of those items were certainly as you are repositioning the workforce and resizing it, if you will, and some seasonal.

And also we note that the AISI operating rates seemed to have picked up here in the last couple of weeks.

Would that be indicative of what you guys are seeing in your trends in your order books?

So from an operating or capacity utilization standpoint, how should we think about that for you?

I think that's true in the flat-rolled side, Tony.

If you look at inventory they came down a little bit and I think order intake we're seeing that beginning to grow.

But on the tubular side, there is still a very significant amount of inventory in place.

I would suggest around 9 to 10 months.

And imports are still coming in, so you've got to make that distinction.

And again, that's going to impact the substrate pull from flat-rolled as well continue?

Very definitely, Tony.

We have a significant presence in the energy business and the flat-rolled segment is the sole supplier to the energy division.

Okay.

I'll turn it over and look to get back in the queue.

Evan Kurtz, Morgan Stanley.

Just wanted to walk you through some simple math on the slide.

It seems like if you take Q1 as a starting point, annualized EBITDA would be somewhere around $440 million.

And then, if you add to that additional Carnegie, that's another $190 million.

And then, short-term benefits at $200 million.

You get a little bit to the above the midpoint of your guidance range.

So that's how you're thinking about it.

Can you maybe talk a little bit about what -- I guess the unknowns in that equation are volume trajectories and pricing projectories in energy for the rest of the year.

Could you talk a little bit about what might get you to the high-end of your guidance range versus the low-end?

I think Evan, you have the moving parts.

The question's going to be -- your three biggest factors are going to be prices and volumes, and probably the biggest couple of big factors of all would be import levels, and how fast the supply chain inventories get normalized.

So I think when you look that range of outcomes for us, there's a range of those three pieces, when do prices move, how much, how soon, how long does it last?

When do the supply chain inventories really get absorbed and the order rates start showing up and really as the import situation moves, does it get better?

So I think there's a range of outcomes on all those that when you put them all together give us a range of numbers that we're looking at here.

Of it.

Maybe one other one if I may, on an update on the trade case?

It seems like it's been a pretty tough beginning of the year.

It seems like the industry's been harmed given everyone's results have been so such a huge step down from Q4 to Q1.

Are we close to some filing, you think, at this point?

Evan, what I can tell you it's not a question of if.

It's a question of when.

And make no mistake, we are going to continue to fight against illegal dump.

Period.

Okay.

Well, we'll stay tuned then.

Alright, thanks.

Brett Levy, Jefferies.

To follow up on your answer to Tony, it sounds like it may take an act of Congress.

Typically the ITC does not consider currency moves in support of their dumping margins.

Can you talk with a little bit more granularity about the steps you're in and typically it takes two quarters of losses before its most effective to get the optimum dumping margins.

Can you talk a little bit about your strategy?

A little bit what you're doing within the ITC, within Congress?

Just talk about your strategy.

It's clearly something that's necessary and we just, everybody on the call really wants to know what are the details of what you're doing?

Let me put it to you this way, the cases that are filed, they are only not complex to put together, but they are a one point in time battle that takes place against a certain country or a certain company.

What we have done though, in the bigger strategy, we have proposed trade language that we hope will be a part of the ongoing debate on TPA.

That language very much clarifies the true definition of injury.

It is ingrained into acts were we can implement and enforce that law.

And that is the ultimate solution to the situation.

In reality, I think the debate around TPA has provided us with a window of opportunity where we can implement what I consider to be the ultimate solution to dumping in the country.

That is the most critical part of it.

So it's an ongoing affair, but now I think we have a better moment to try to do something at this point in time that may become the ultimate solution.

And the other thing is we do have on our website where we posted our Q&A's, we have one in there that's a pretty good description of how the process works and how and what our approach is.

So that's probably a pretty good reference for everybody in that Q&A document that is on page 5. On page 5 of that document that's out on our website right now.

Question 5 on the document.

David Gagliano, BMO Capital Markets.

I did want to hone in again on the full-year guidance now that it's been revised.

Three months ago we were at $1.1 billion to $1.4 billion, and back then there wasn't much visibility obviously, in terms of the underlying price assumptions behind the guidance.

And I think that was a bit of a frustrating point for some of us on that call.

So now that we've had the cut in expectations, I'm going to ask the same question.

Again, what is the pricing framework if you give us a sense around it?

For example, your expectation of second-half hot roll coil prices that flow through the $700 million to $900 million?

And also, what's your framework around the tubular business for the second half?

Thanks.

I think for us to talk about prices, where we think price is going to go, and when our competitors are on the line, our CRU trust guys will shoot us.

So that's just not realistic to ask that question.

We can't have that discussion in public.

It's against the law.

But I will say, that we look at indices, we look at part projections, we look at the same productions everybody else is looking at.

And I think if you go back to January, most of the expectations were that CRU pricing levels for the year were going to be probably $50 or $60 higher than those same indices are projecting now.

So I think that's the magnitude of change that we're picking up now.

But I think that's just from the observable market indices that are out there.

We look at all of those that we can.

We base our decisions on that.

We don't have some unique view of the world when we're putting together those projections.

Okay.

Just as a follow-up, on the $190 million Carnegie benefits, how much of that actually flowed through the Q1 results?

The $190 million incremental, sorry.

How much of that flows through the Q1?

That's from stuff that was done during the course.

It's usually that's much more of a future impact because the current quarter we do those things, you don't get a lot of immediate impact.

Okay.

Most of that would definitely show up in the next three quarters.

Okay, and then just the last question.

I know you can't give us a number, but are you embedding some kind of price improvement in the second half in your expectations?

We just say we think market conditions could do better.

Market conditions are going to be a combination of prices, volumes, imports, those things.

Okay.

Thanks.

Timna Tanners, Bank of America.

I just wanted to -- (technical difficulties)

We lost you Timna.

You can hear me now right?

I think you explained really well the cost into the first quarter, but it does seem like the contract structure that you gave on page 18, it's a trailing 12 months.

So if we were to see that now it would be changed I imagine because of OCTG dropping off?

So does that explain why your prices only fell $7 a ton quarter-over-quarter?

Can you talk a little bit more about how to think about the price trajectory?

I know you have the contract structure the way it is but it seems like it's been slow to pass through the sharp drop in prices.

Just looking for a little bit more color about the timing and how to think about that.

I think the biggest piece -- You do see the contract so you can get a good grip on how that flows.

If you look at these lower volume certainly, we did much less spot, which would typically be much lower price.

We didn't have as much of that flowing into our mix.

From that standpoint you have a little stronger mix on your average realized prices.

If you look at that same chart from last quarter, that rolling 12 months, you will see that our spot percentage dropped 7% just in one quarter.

That's a pretty significant change in mix that's going to be, that's impacting that as averaged realized prices.

But without a doubt, when you think about the trajectory of CRU month by month and quarter by quarter, the adjustable contracts are going to see their effects much heavier now than going forward than they did in the first quarter.

Okay and maybe you turned away some business that was pretty low-priced?

It just seems like a small decline.

Very definitely, Timna.

We always have that that's something that we learn more about and we are focused on and that's exactly what happened here.

My other question is just a clarification.

I think you said pretty clearly in the discussion, but you said the war notices don't necessarily mean that you closed facilities, but it gives you that flexibility.

In light of the fact they imports are already falling off irrespective of all this discussion about a trade case and prices seem to be recovering, I just was wondering how to think about how quickly you could change your trajectory or how quickly you could restart some of this capacity?

How do we think about, if we had a view that things were on the recovery, how quickly could US Steel respond?

Thank you.

Well Timna, I can't give you a specific number, but I can tell that if you look at the recovery, at whatever rate it comes back, we're going to be there to meet it.

That's the kind of flexibility that we have put in place.

Yes, Timna.

We have three furnaces that we said are off right now.

One at Granite City will be down for a longer period because of the Castor project until that's completed.

But the furnace at Gary and the furnace at Fairfield, they could come online immediately.

We have the flexibility to bring that on.

So there's really only a very small piece of our capacity that's out for an extended period because of the Castor project at Granite City.

Nathan Littlewood, Credit Suisse.

I just had some question on labor one-offs associated with some of these unfortunate redundancies you're having to put through.

If we add up all of the employees you've already laid-off plus all of the people that you've got on war notice at the moment, the total is about 9,000, which is --

That's correct.

Which is about 40% of your title North American workforce.

Just wondering if you might be able to tell us what allowances existed in the March quarter for some of these redundancies and are there any metrics or rules of thumb you could give us for thinking about that in the future?

Nathan, in our 10-Q which will be filed later today, there is some disclosure in the 10-Q on those costs.

I don't have them in front of me, but they are in the Q so you'll be able to get a good look at those.

Okay, great.

Thanks, Dan.

I will check that out.

The other question I had was just on the tubular business.

Again, if we look at the asset idlings that have been announced to date, they seem, I guess until at least recently, they were mainly in the welded pot.

Less so in the seamless and it wasn't until recently we saw some announcements on the connections business.

So, is there -- as you look at the tubular portfolio, there's obviously a difference across all of these assets in terms of their margins and profitability.

Is there a certain amount of high grading going on of the tubular portfolio?

And is it perhaps that the recount data for example, overstates the impact to the earnings potential of that business, and that what we're really being left with once this is downsized a little bit, is perhaps a slightly higher grade or higher margin core?

Well, the basic strategy as we talked about before, really is leading towards an enhanced type of product mix that we're going to with the generation of the premium connections that we'll be launching several of them this year.

So that is a correct assessment, Nathan.

The part though is that if you look at the way in which prices of oil sell, the rate at which CapExes on the part of our customers were curtailed or to a very large degree stopped, and the dollar stronger in the amount of imports, it has impacted pretty much all the way through.

So we have idle facilities that were in the ERW arena a few months ago but we have significantly curtailed production on the other parts of that business, too.

So the operating levels of some of these facilities are incredibly low.

And that's what has led for us to be able to have this view that for a long period of time throughout this year, the recovery is not going to be there and that's why the war notices were put in place.

Curt Woodworth, Nomura.

In addition to the project Carnegie benefits of $340 million, there's obviously a lot of other fixed cost reduction that you are trying to achieve either through Granite City or the idling of the blast furnaces, as well as potential headcount reduction.

Can you help us quantify the amount of additional fixed cost reduction you're targeting this year or what would be embedded in your guidance range?

The fixed part's really more in the Carnegie.

The other pieces really that $200 million plus that we disclosed today from layoffs and idlings and things like that, those more shorter-term operating changes, those cost reductions are that $200 million plus that we have on that slide today.

Fixed costs are really more of a Carnegie long-term improvement in the business model.

So the $190 million has an assumption for headcount reduction for the remainder of the year?

The $190 million would have an assumption related headcount in the reduction to the extent that they are permanent headcount reductions.

Anything that is a temporary would be in a part of that $200 million.

Okay.

And then a question just on trade case dynamics and how your thinking about it.

It seems like a lot of the discussion in the market has been on cold rolled and coated filings, but less so on the hot rolled market.

So I'm just wondering, do you believe that the overall market in terms of the sheet market can improve if, for example, you put a cold rolled or coated trade case on, what would prevent a company or a country from just shifting, say, to hot rolled production and then exporting that in lieu of coated into the US?

Do you feel like you need a more blanket solution to the whole problem?

Well, Curt, first and foremost, the trade cases that we work on, they're all over.

They are not confined just to flat-rolled.

They are significant in the tubular side also.

When you talk about a permanent solution, I refer back to the work we're doing trying to seize the moment with the discussions around TPA.

That really is the blanket solution.

We need a legislative relief that is sustainable.

And that's why we've worked very hard and we offered Congress the proper language that clarifies definition of injury.

That is part of the company bills that are being debated today and if that goes into place, then the whole scenario is going to change quite significantly.

Matt Murphy, UBS.

Just a question on energy costs and whether you're seeing any benefits or the potential to lock-in lower cost natural gas prices to a certain extent?

And also wondering with respect to your mining operations, are you seeing much help from current oil prices?

Well, we normally do apply a hedging strategy going forward to a portion of the energy that we need from a gas perspective.

And certainly, our teams are diligently always looking at it in order to try to expand the periods of the hedging.

The iron ore operation though, we're being as flexible again as we need to be.

If you look at the adjustments that we made to the steel production side, we're aligning that with the mining operations.

And again, there is flexibility there, so that we can recover whenever these markets change.

But we're trying to align the whole value chain to the current market conditions.

Brian Yu, Citi.

On the first quarter, what was the idle and outage costs?

And then, as we think about the ongoing costs associated Q2, Q3 -- or let's just say on an ongoing base assuming that these three blast fire furnaces stay idle, what would be those quarterly costs?

We haven't carved those out specifically.

In fact, I think we've learn from history when we got into that discussion back in 2009 trying to be helpful, it created a lot more confusion than it helped.

So I mean, with the inefficiencies, the cost absorption, they're all just absorbed in that.

So the tons, the volumes, are going to be the most important factor.

Whether you have a line off your a blast furnace off there, that's not the big driver.

Like I said, we learned from our mistakes in the past, that wasn't a disclosure that turned out to be very helpful to anybody.

Okay.

How about trying to ask it a little bit of a different way.

You operate at 60% utilization rate.

If you are able to maximize utilization of the facilities that you have currently running, what utilization rate do you get up to?

If you go back and you look at similar conditions that we've faced in the past, and you do the base analysis on the differences in input costs like coal and energy and all that, and prices, if you look at the portion of it that we can really control, we are better than we've been in those situations before.

And that is just going to continue.

In this journey where we're taking costs out, improving the efficiencies on a regular basis, as soon as this market turns, you're going to see that the earnings power is going to have grown quite significantly.

Alright.

Great.

Thanks.

Good luck.

Gordon Johnson, Wolfe Research.

With respect to the EBITDA guidance for the full-year, it seems like there's a heavy weighting to the back half.

Can you give some clarity on how much of this is volume versus ASP versus cost reduction related?

And then I have a follow-up.

It's a combination of all three.

because depending on what volumes do, will dictate we do on the cost side, will dictate what happens on the price side.

So we will react differently depending on which direction each of those three pieces moves.

Certainly, we're going to push as hard as we can on the cost side.

But what happens with pricing will influence our decisions on what we do as far as what orders we take, we don't, what configuration we go to.

Same thing, if we see a better trajectory in order rates, that certainly would influence what our pricing expectations would be.

Okay.

That's helpful.

I mean it really is -- there are really three moving parts that interact with each other so there's not a static piece for any one of them.

The one thing that is real too, Gordon, is the fact that some of the Carnegie Way improvements that are directly related to operational efficiencies.

The higher the utilization that you have, it's exponentially higher the number of dollars that you're going to get.

So that by itself you will see translated in bigger dollars if we can get more volume into the operations.

That's helpful.

And then, with respect to the trade case, clearly we've seen a significant fall in iron ore prices.

The dollar's high.

Do you think right now is a good time to potentially file a trade case, given it seems like some of the market dynamics are really what's driving the imports versus unfair trading?

When you look at the margins of the Chinese steel mills, they still remain fairly positive across the board.

Do you think now's a good time or do -- (technical difficulty).

Anytime that we can conclude GML, this is a good time to do that.

What we know is that it's happening, it's there.

Some of these new factories that you mentioned just put a little more complication in the analysis.

But as soon as we nail the case, it goes, regardless.

And it really is a product by product assessment.

It's not whether a company's making, a Chinese company's, making money total.

It's what they're doing with a particular product and how their pricing that particular product.

Yes.

Regardless of all those additional factors, illegal dumping is ongoing and that has got to be stopped.

Phil Gibbs, KeyBanc.

Just curious on key tack and that idling and really what would bring that back, given the fact that with your future operational footprint you may not need those tons and is there any future desire if Canada is restructured to reenter that business either in part or in full?

The flexibility is complete over there, Phil.

We mentioned in the past that there is eventually an opportunity for DRI.

There is eventually an opportunity for even pig iron and bringing it back on is not a very difficult affair.

So we have it, it's there, it's good quality, the operations are excellent and it's a flexible tool that we have at our disposal here to use as the market needs.

And then, any comments on Canada as far as willingness to get back into that business either in part or in full if it's restructured?

Well, as you know, it's deconsolidated.

They are going through their motions over there in order to resolve the situation and we'll see how that goes.

We'll keep our eye on it.

Okay.

And then just as a follow-up if I could?

Is the second half exit rate in EBITDA indicative of current pricing conditions, or some improvement in pricing conditions?

I.e., what we're seeing on the futures curve?

Thanks.

I don't think you can look at a single quarter and use that as a full indication, given the fact that some of the variables flow through and then, you really need probably a longer period of time to see where that's going.

Michael Gambardella, JPMorgan.

Just have a follow-up question on the trade cases.

It's clear that there's a lot of imports around and it's probably going to be clear that they're causing some injury eventually.

But, is it even difficult to really say that they were unfairly traded, and to prove that when for most of 2014, US sheet prices were about 40% or 50% higher than Chinese or foreign prices?

US prices aren't one of the criteria for the trade laws.

The trade laws are what they're doing in their markets and what they're doing in relation to their costs.

The US prices aren't part of the trade laws.

Right.

I understand, but you have the price premium in the US at record highs, above $200 for most of the year.

And it shouldn't be any surprise that imports are high now because of that premium.

I'm just saying is the delay in these cases on flat-rolled because it's your running into difficulty proving that they're unfairly traded last year?

No.

No.

I mean if you look at it, we had 3 million tons roughly, about 1.5 years of imports.

It's up to 47 million right now, and you take a portion of it being illegally dumped in here, it's a big number.

Okay.

So you can prove that the vast majority of them are illegally dumped, even though prices in the US were at such a big premium for all last year versus foreign price?

Sure.

There will be some imports coming in because of price arbitrage that are fairly traded, but those aren't the issues.

The unfairly traded ones are the issue.

Okay.

All right.

Thank a lot.

Justine Fisher, Goldman Sachs.

The question I have is on the impact of potential trade cases as opposed to the process.

And after the trade cases in OCTG were brought last year, I think a lot of us looked at the market data as far as the tonnage coming in et cetera, and I think people expected to see a massive improvement in pricing or a massive drop-off in volumes.

And we didn't really see that.

So my first question to you is, what do we need to see out of a trade case decision in order to have a meaningful impact on the OCTG trade given that the levees that were decided on last year, and some of them were against you in some of the heavy importing countries, didn't seem to have that big an impact on the market?

Well, that's why I mentioned that we have been offered legislative change on the part of the definition of injury.

That really is what is the ultimate solution.

And by the way, some of the cases that were won last year, the margins were very inappropriate.

Which proves the determination of some of those nations and companies to come after this market regardless.

They have other purposes, other reasons to create those businesses over there.

I'll remind you, when the case in South Korea, on the OCTG case, we had barely a 15% margin that barely covers anything.

And by the way, they produced 1 million tons of product, of which they consumed none, and 98% of that comes into the United States.

Okay.

So, it's really this moment, with this new language that is tied to the TPA process, could be a game changer.

Okay.

Thanks.

And then my second question is just about the issue of market share.

I think that when we have seen your announcements [Tacabas] we have all viewed that is positive as far as bringing the market overall back into supply demand balance.

But do you feel as though you have lost the market share on the flat-rolled site as a result given that there may be some other mills that's continued to produce at lower costs or higher levels?

I know you mentioned that you could bring back capacity fairly quickly, so maybe it's not kind of a long-term issue.

But do you feel as though you've ceded any in the interim?

The only loss of market share that we've had has been to imports, Justine.

That's the area where we lost it.

Okay, great.

Thanks very much.

Jorge Beristain, Deutsche Bank.

Good morning, I just wanted to drill down a little more deeply into the cost issue again, given that realized pricing was roughly flat quarter on quarter and the big drop off in your EBITDA was due to that $100 change in unit costs.

You did mention it was due to fixed cost or lack of fixed cost dilution, but then you also mentioned earlier that there was some reservations that you were making in terms of the Warn notices that you put out and as well probably some layoff costs.

I was wondering if you could just quantify of that $100 sequential change we saw in cost, about how much of that was due to fixed cost or lack of fixed cost solution and how much was due to one offs?

I don't have those details.

Like I said, in the Q there is a quantification of the layoff impact.

So, I mean that you should be able to figure out how much of that $100 is related to those.

But I don't have that detailed breakdown of the fixed and all the components with me right now.

Aldo Mazzaferro, Macquarie.

I think you just didn't answer the question I was going ask.

There has to be something in your numbers that caused over $100 a ton profit decline on an $8 ton decline in pricing.

And just backing into it, if it's all volume that would argue that more than 100% of your costs are fixed.

So I wonder if you could just tell us if there were changes in your import costs, raw materials, or how much you took as accruals for layoffs, or anything else that may have sequentially gone up or down in the cost structure?

Thanks.

On the cost side, where it went up.

Like I said, the layoff numbers that are in the Q were a cost that went up.

And the seasonal impacts of the mining operations in the mining JVs would be a negative cost issue quarter-over-quarter.

So those would be two decent-sized items in addition to the fixed costs absorption piece of that.

And then Dan, can you also explain what the tax benefit related to?

Is there an offset somewhere in the cost that reflect those higher depletion expenses?

What was that benefit due to?

The big factor that moves us off the statutory tax rate is our excess depletion allowance that we get related to mining operations and unfortunately, the closer our income is to break even, the much bigger impact that has on that calculated tax rate.

Okay.

And could I ask one separate question on strategy, Mario, going forward at Fairfield?

When you build that EIF up and run it, are you going to be making long products with that EIF like tube rounds?

Or are you going to go after flat-rolled production?

No, it's mostly rounds for the energy business, Aldo

So you won't be making flat-rolled at that location anymore?

The flexibility is there.

We can supply Fairfield rolling operations with slabs from other places, so we're very very flexible in that regard.

David Lipschitz, CLSA.

Just to follow-up on Aldo's question about the tax.

So, in the second quarter would we expect as big a tax benefit?

I don't have a second quarter projection on tax.

It's based on your annual assumptions and like I said, the biggest factor is that excess depletion allowance.

And if you look at 10-K, that's a pretty big number.

It just depends on really what our operating results turn out to be on how that affects our blended tax position at the end of the quarter.

Let's just say it was flat quarter-over-quarter.

Would it be the same number?

I don't know.

I haven't seen that calculation.

Okay, Thank you.

Thanks.

We appreciate all the questions.

Mario, your final remark here for us?

Sure.

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

We know some of the short-term actions that we take impact our team, but these actions are necessary to create a stronger company.

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

Thank you, Mario.

We appreciate everybody joining us today and we look forward to giving you another update at the end of July.

Thank you.

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