美國鋼鐵 (X) 2015 Q2 法說會逐字稿

Welcome to the United States Steel Corporation 2015 second-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, Dan.

Good morning, and thank all of you for participating in the United States Steel Corporation's second-quarter 2015 earnings conference call and webcast.

For those of you participating by phone, the slides that are included on the webcast are also available under the investor section of our website at www.ussteel.com, and there is 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 will be happy to take your questions.

Before we begin, I must caution you that today's conference call contains forward-looking statements, and the 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: The aggressive actions we have taken to get our cost structure in line with our low utilization levels started to be reflected in our results in the second quarter, and our Flat-Rolled segment successfully offset the impact of a significant decrease in average realized prices.

We reported an operating loss in the second quarter of $104 million at the segment level.

EBITDA, adjusted to exclude restructuring charges, was $20 million for the second quarter, resulting in first-half adjusted EBITDA of $130 million.

We continue to face extremely difficult conditions in the second quarter, with high levels of imports and supply chain inventories, and low spot prices and rig counts, through most of the quarter, but later in the quarter we did see market conditions for our Flat-Rolled segment start to improve, as supply chain inventories began to rebalance and spot prices started to increase.

Turning to cash and liquidity on slide 4: We generated $79 million in cash from operations in the second quarter, under some very challenging conditions, and we remain focused on cash management and continue to build on the working capital gains we made last year.

Earlier this week, we completed a new $1.5-billion asset-backed five-year revolving credit agreement that makes more effective use of our inventory and receivables to support fuller availability under this facility on a more consistent basis.

This new facility replaces the $875-million inventory-backed facility, and the $625-million accounts-receivable facility that were both scheduled to mature in July 2016.

We currently have no outstanding borrowings against this facility.

With a strong cash and liquidity position of almost $2.7 billion, we are well positioned to deal with the current difficult conditions, and make the investments we need to execute on our long-term value-creation strategy, including investments in our facilities, and increased 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.

Our Flat-Rolled operating margin improved as a combination of our aggressive actions to get our operating costs aligned with our load utilization levels, and our increasing realization of Carnegie Way benefits resulted in a significant decrease in costs, and we were able to more than offset a $73-per-ton decrease in our average selling prices.

Our Flat-Rolled results improved in the second quarter, despite the adverse impact of significant and increasing volumes of unfairly traded sheet imports, in addition to elevated import activity caused by the continuing strength of the US dollar, which served to drastically depress both spot and contract prices in the second quarter.

The second-quarter results for our Tubular segment decreased significantly as compared to first quarter, primarily due to considerably lower shipments.

Shipments continue to be adversely impacted by reduced drilling activity caused by low crude oil prices and the near-record levels of tubular imports, much of which we believe are unfairly traded.

The decrease in results is also attributable to operating inefficiencies, as our aggressive cost-cutting efforts could not offset the effects of operating at less than 15% of our production capabilities.

On slide 7, for our European segment, results remained positive but decreased compared to the first quarter.

Planned maintenance outages in the second quarter resulted in reduced shipments, and higher repairs and maintenance costs.

These negative effects were partially offset by a slight increase in average realized euro-based prices, and a reduction in raw materials costs.

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: Including the benefits from projects we implemented during the second quarter, our new total for Carnegie Way benefits for 2015 is $590 million as compared with 2014 as the base year.

The large increase in 2015 Carnegie Way benefits is the result of the completion of almost 800 projects in the second quarter, and reflects the tremendous efforts of all of our employees, particularly in the areas of manufacturing and procurement, where we have our greatest opportunities for improvement.

We are increasing our capabilities, and training more of our employees on our Carnegie Way methodologies to support our growing pipeline of projects and improve the pace of project completion.

This process remains a powerful driver of new Carnegie Way projects, as our employees gain better insight into the potential sources of new opportunities.

The acceleration of the Carnegie Way transformation has been a key factor in helping to offset the headwinds that have had a substantial impact on our Business.

The pipeline of projects is strong, and we're focused on creating a cost structure that will position us to be profitable [through the business] cycles.

We can see that we're making progress on our cost structure improvements, and making more money now than we have in the past, under similar market conditions.

We compared our second-quarter 2015 results to our second-quarter 2009 results, removing the price and volume impacts, and focusing solely on costs.

After adjusting for changes in our major raw material costs, including iron ore, coal, coke, scrap, and natural gas, which are market-based costs that are observable to investors, as well as adjusting for changes in depreciation and pension and OPEB costs, which we disclose, a majority of the remaining costs are costs that we have a more direct control over.

In 2015, these costs decreased by more than $75 per ton for our Flat-Rolled segment, $25 per ton for our Tubular segment, and $50 per ton for our European segment, as compared with our costs in the second quarter of 2009.

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.

We still have many opportunities ahead of us.

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

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-created solutions.

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

A more nimble, assertive and proactive culture continues to emerge as we determine the specific improvement targets required for manufacturing costs, support costs and commercial priorities based on best-in-class industry standards, and the most effective operational footprint to meet our customers' needs.

Numerous opportunities exist to expand our portfolio of differentiated solutions for our customers, and are being derived through investments in people, innovation, technology and facility improvements.

An example of the progress we're making in this area is our recent acquisition of the remaining 50% interest in Double Eagle Steel Coating.

Double Eagle's 700,000-ton-per-year electrolytic galvanizing line has become part of our Great Lakes Works' operational footprint.

Operating Double Eagle as a wholly owned US Steel facility will meaningfully improve our ability to develop and commercialize proprietary advanced high-strength steels, including coated generation 3 grades.

We remain focused on providing our automotive customers with high-quality, lightweight products to meet increased safety and fuel economy standards, and keep steel as their material of choice.

We are also building the capabilities we will need to be successful in Phase 2 of our Carnegie Way transformation: driving profitable growth.

We will create differentiation through higher value-added products, focused customer solutions, and process changes that positively impact economic profitability.

[We are] collaborating with our commercial and manufacturing entities to develop innovation and technology road maps.

These road maps will be specific to customer requirements, and will help identify and maximize our differentiated and proprietary customer solutions portfolio, and will continue to be refined and expanded as our commercial entities mature and their capabilities are fully established.

We are staying on our planned and disciplined course of creating value, and will not be deterred by short-term market conditions.

We will take the appropriate short-term actions without straying from our long-term goals.

Value is not created or destroyed in any one quarter.

It is created through sustainable improvements in our business model.

Step by deliberate step, day by day, we make progress.

It will take time, but we are confident that our strategy, and the process we have developed to implement that strategy, will create value for our stockholders, our customers, our employees and our stakeholders.

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

Thank you, Dave.

Good morning, everyone.

We have taken aggressive actions to get our operating costs aligned with our lower utilization rates.

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, and we're pulling them appropriately, but as quickly and as hard as we can.

Last quarter, we reported that we had taken aggressive short-term actions to reduce costs.

We realized approximately $75 million in cost reductions from these actions in the second quarter, and we expect to realize at least $175 million more in the second half of the year.

I would like to emphasize that these are the results of short-term actions that will most likely 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 transformation that Dave discussed a few minutes ago.

We continue to operate our facilities in line with our order book, and are well positioned to respond to our customers' requirements.

We are making good progress on the EAF project at Fairfield Works, and remain on target for a startup in the second half of 2016.

The installation of the new caster at Granite City will be completed in August, and we will let our order book tell us when it's time to restart the second blast furnace at that plant.

We had temporarily restarted the blast furnace at Fairfield in early June, in order to support the rounds requirements of our Tubular segment.

We now expect to idle that blast furnace in the middle of August.

We will continue to support our Flat-Rolled customers in the southern market, either directly out of Fairfield or from our other Flat-Rolled facilities.

All of our other blast furnaces are currently running at levels appropriate to support our order book.

While energy markets remain challenging, we are operating our facilities in a manner to ensure we meet our customer needs.

While we continue to make operating adjustments to stay aligned with current market conditions, we also continue to 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.

The introduction of commercial entities this year provides an organizational design that drives customer focus, provides visibility into value creation, and enhances accountability.

The commercial entities are aligned with the end markets for our goods and services, and will create value by developing differentiated solutions that will make us trusted business partners, and not just another steel vendor.

This structure will enable us to allocate resources to the products and markets required to win in both North America and European steel markets.

Only then will we have the ability to develop long-term relationships and solutions that drive sustainable profit.

We continue to make the investments 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.

We started the deployment of the reliability-centered maintenance program at some of our larger and most critical facilities, and are starting to see tangible results.

At our steel shop at Gary Works, we have seen a 30% improvement in our unplanned maintenance and operations delay rate since the third quarter of 2014, and a very strong downward trend on tons lost and costs incurred over that time period.

We are encouraged by the success we have had so far.

Now, before we take your questions, I would like to give a brief summary of what we are seeing in our markets, an update on trade-related activity, 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 also expect growth in demand in the appliance and construction markets as compared to last year.

In the energy markets, low rig counts, and high levels of import tons and supply chain inventories, will continue to be strong headwinds against an improvement in domestic order rates.

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

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.

For generations, US Steel has been the industry leader in confronting unfair trade practices in this market, whether advancing legislative change, or seeking revisions to policies and practices of the governing authorities or filing trade cases, we remain vigilant in our efforts to ensure that there is a level playing field for American industry in this market.

The Trade Adjustment Assistance, or TAA bill, signed into law at the end of June, is a solid start in our efforts to revise our trade laws to better reflect the original Congressional intent, and provide the necessary tools to counter illegal imports.

The changes included in the TAA bill will benefit US Steel and other domestic steel producers by allowing for more rigorous investigations of dumping and subsidies at the US Department of Commerce, and by clarifying the legal standard applied in trade cases by the US International Trade Commission.

Specifically, the passage of the TAA bill clarifies the injury standard in dumping and countervailing duties cases, the interpretation and enforcement of which have been weakened and have become a less effective tool to counter unfair 21st Century trade practices mastered by foreign companies and governments.

In order to obtain the relief of anti-dumping or countervailing duties when faced with unfairly traded imports, the US industry generally must show that such imports cause or threaten material injury.

The injury analysis tended to focus on domestic industries' operating income.

The new injury language adds additional factors to the list; namely, the ability to service debt and return on assets while also clarifying that the term profits includes gross profits, operating profits and net profits, all key economic factors that are necessary to have a realistic understanding of the effects of subsidized or dumped imports in our industry.

As the primary proponent and author of the injury standard clarification, US Steel also added specific language to inform the decision-makers that injury could be found even when a domestic industry is profitable.

This is a good start, and we will continue our efforts to achieve the level playing field that all US manufacturing, not just the steel industry, deserves.

In tandem with our efforts to modernize the trade remedies and enforcement laws, when appropriate, we also confront and take action against unfair trade practices.

As you'll recall, on June 3, a trade case was filed covering corrosion-resistant products, on which the ITC recently voted unanimously that there was reasonable evidence to support the claims permitting the case to proceed.

And yesterday we were joined by other major US steel producers in filing petitions charging that unfairly traded imports of certain cold-rolled steel flat products from Brazil, China, India, Japan, South Korea, Netherlands, Russia and the United Kingdom are causing material injury to the domestic industry.

The cold-rolled steel petitions allege that producers in each of the eight countries are dumping cold-rolled steel in the US market at substantial margins, and that foreign producers in Brazil, China, India, South Korea and Russia benefit from numerous countervailable subsidies provided by their governments.

This action was filed in response to large and increasing volumes of low-price imports of cold-rolled steel from the subject countries.

Since 2012, they have injured US producers.

We are constantly monitoring the market, and assessing the need for, and viability of, possible trade actions across all products.

Now turning to our outlook on slide 12: While prices in supply chain inventories may not have improved as quickly as many people had anticipated, we have pulled enough cost levers to hold our ground.

The three main factors that drive our results are prices, volumes and costs; and when prices and volumes are challenged, we need to deliver on costs, the piece of the equation that we control.

We currently expect commercial conditions to improve in the second half of 2015 from the conditions we experienced in the first half, as supply chain inventories continue to rebalance, primarily in our Flat-Rolled markets.

Based on increasing benefits from our Carnegie Way transformation and our aggressive efforts to reduce operating costs to align them with our utilization levels, we expect to be within our full-year adjusted EBITDA guidance range of $700 million to $900 million.

While we continue to find additional short-term cost reductions, and generate additional Carnegie Way benefits, if the current pace of commercial improvement in our markets does not increase, we would expect to be near the low end of the range.

Consistent with our Carnegie Way transformation process, we are focused on converting as much of the short-term cost reductions as possible into permanent improvements in our cost structure.

We are on a long-term journey.

We are making progress, and we will continue to do so.

Thank you, Mario.

Dan, can you please queue the line for questions?

(Operator Instructions)

Our first question comes from the line of Luke Folta from Jefferiies.

Good morning, guys.

I guess to touch on the guidance a bit, I want to understand, you are saying basically that if the commercial situation remains as it is today, you think you can still get to the low end of the $700 million range?

And if I take a look at what that implies for the second half, it is something around $570 million of EBITDA versus around $130 million in the first half.

And you called out $175 million of incremental cost savings that you can get in the second half versus the second quarter run rates, given the temporary things that you have done, and that still leaves a pretty good amount of earnings that would be -- improvement that would be required to hit the range for the second half.

So I'm just trying to reconcile what other moving parts are we missing in terms of getting to that number if the market doesn't improve?

Remember, we also the Carnegie Way benefits for the year have now increased by $250 million to $590 million.

And that is based just on the projects that are done.

That $590 million number will also continue to grow as we complete projects in the second half.

The $250 million increase in Carnegie Way benefits plus more plus the $175 million, that is a pretty, pretty substantial cost profile change in the second half of the year for us.

We are assuming spot prices have started to increase, supply chain inventories have started to get better.

We're saying if the slow pace that is going on continues, that is how we get to those numbers.

Okay, so you still need improvement to get to the low end of the range and market conditions just at a slower pace?

We don't need an accelerated improvement, we just need the improvement to continue and we need to do more on the cost side.

Okay, that's really helpful.

I guess as a follow-up, can you give us some [extrication] in terms in what you're thinking for shipments for North American Flat-Rolled and the tubular business was pretty nasty in the second quarter, I guess as to be expected.

Just your thought process on when we start to see some recovery in buying patterns in OCTG and what's your expectations for the second half?

We do see that it's going to evolve and get a little better, not significant changes, but we expect that it's going to begin to improve now in the third quarter.

That's on both North American Flat-Rolled and OCTG?

Yes, both.

Okay.

I will turn it over; thank you.

The next question comes from Evan Kurtz from Morgan Stanley.

Good morning, guys.

First off, congrats on the cost work.

I didn't think I'd ever see a day where US Steel ran at 58% operating rates and actually put out positive EBITDA, so obviously it is starting to work.

But I was hoping to follow on that and get a sense of where you are today on operating rates on Flat-Rolled and how you see some of these mill restarts impacting operating rates in the third quarter?

Evan, we are seeing some improvement.

We expect as the volumes grow, certainly the offer rates are going to keep up with them.

We still have, at this point, the one furnace off at Granite City, we are taking one down at Fairfield, so we're keeping in line with the order book.

So probably not a dramatic increase in operating rates, but they should start moving up.

I think the other thing we talked about, the cost improvements and the operating rates, we have always had very significant leverage to increase volumes.

And when you think about the magnitude of the costs we have taken out over the last couple of years, that benefit from volumes just gets even stronger and certainly incremental volumes now add more to our numbers than they would have in the past.

That's helpful.

One follow-up, if I may, on iron ore.

I know Keetac has been down for a little while here.

And Fairfield, I guess is going off again and will eventually be permanently off, at least as far as iron ore consumption goes at the end of next year, so how do you think about that asset going forward?

Are you starting to position that as a third-party provider at some point?

Maybe an update there would be helpful.

Certainly the fact that we're going to stay longer in our production position as to benefit from that additional characteristic we didn't have before.

Okay.

Would you consider DRI or some way to access an electric arc furnace markets as well or are you primarily focused on maybe using that to feed blast furnaces only?

No, we certainly are considering that other possibility, Evan, for sure.

Okay, great, guys.

I'll hand it over.

Thanks.

We have a question from Phil Gibbs from KeyBank Capital.

Your line is open.

Good morning.

I had a question just on the Carnegie Way benefits in the second half relative to the first half.

I know you had given a pretty wholesome number now for the full year.

How much of that should we think about being more second-half weighted?

I know you had given some good color on the shorter term cash cost piece, but what on that piece specifically?

That $250 million increase is based on all the projects that were completed in the second quarter, so we would've picked up some benefit from some of those projects in the second quarter but you would expect the majority of that $250 million shows up in the second half.

Okay, so that $250 million is more of an annualized?

That's the full-year impact (multiple speakers) second quarter, so if you think about this as kind of a mid-quarter convention, maybe that implies $50 million realized in 2Q and then $100 million realized in each of the next quarters.

That does notinclude the benefit of projects we will complete between now and the end of the year.

That would be in addition to that number as we give our next update.

So the $250 million, essentially, is what you completed then in this past quarter, benefits of those moving forward.

Got it.

Benefits in this year from those projects, yes.

Okay.

And then on the [sidernet] working capital in terms of the inventory positioning, is there still some work to do there in terms of getting a little bit of benefit out of that, given some of the [reefs] we have seen in steel prices and in raws?

That is correct.

There is additional value to be captured there, too.

And I would add besides the Carnegie Way benefits we talked about, we do have Carnegie Way projects that are specifically focused on cash, working capital, those type of things, so we are also looking for ways to improve our work capital efficiency and push our cash balances higher.

Thanks so much.

Thanks, Phil.

Our next question comes from Matt Murphy from UBS.

Hi, Mario.

A question on the short-term cost reductions.

You mentioned they are likely to reverse, but you're going to be trying to hang on to what cost savings you can.

I'm just wondering if you can be any more specific on how much of that might be retainable and what it might entail?

Does it mean exiting certain businesses or is it just day-to-day practices?

In that regard, it is mostly day-to-day practices.

There were plenty of things that we were able not to have to order because we had enough, given the new rate of operations.

There are many things like that that we are able to tackle.

We've addressed more than 3,000 different items as we started looking at the short-term, so we were able to contain those expenses.

The work that takes place from this point on is to assess what really should be the next level of consumption in use of those things that we should put in place.

How can it be sustainable?

I suspect there will be improvement to the rate of consumption going forward.

But potentially the majority of these short-term costs, they would reverse back whenever we get back to higher operating rates.

Okay, thanks.

Sure.

Our next question comes from Brett Levy from CRT capital.

Is there a headcount number?

You have noted a vast number of projects that goes into that $250 million, are there some big pieces of that that have been disclosed and headcount amounts or anything else that we can point to as what a big piece of that $250 million will be?

Well, the fact is 800 projects make up the $250 million.

So, no, there is not any big, big home-run hitter there.

It is just a lot of -- training a lot more people to be able to do a lot more projects.

A lot of them are small projects but, for the most part, these are really operational improvements and efficiencies.

Headcount is not a big driver of Carnegie Way benefits.

Our headcount is in a pretty good spot.

Carnegie Way benefits aren't being driven on the backs of our employees.

It's really driven by a better process, more efficiencies, really finding where waste was and eliminating waste.

It's not about cutting heads.

All right.

And then back to the trade case piece of the puzzle, both you and some of your counterparts in the steel industry have said these trade cases have teeth.

Obviously the Congress has passed some rules.

I think the headwinds to the trade case are going to be where the US dollar is and what the price internationally for some of the steel is they are trying to get into our markets.

I'm not asking you to try the trade case in a public forum, but if you could give us some of the reasons that you are optimistic about this cold-rolled case and the potential hot rolled, the stainless and plate cases -- not as relevant to you guys, but the general reasons to be optimistic for the trade cases that are --

I'll give you a very simple example.

If you look at the number of subsidies that are being given by the different countries, it's not one or two.

Some of those countries have more than 40 dimensions of subsidies that are given to the foreign steel companies.

This dimension of analysis makes the ITC and the Department of Commerce much more capable of addressing the definition of injury.

The other particular very important point in this, it's no longer just focused on past practices and past harm that has been delivered to all of us.

It addresses the fact they can analyze these conditions and identify that certain levels of behavior will lead to significant injury and that will be reason enough for them to act and provide the proper response.

The situation has really changed in this regard.

We have now two recent cases that have been filed.

It's not a simple thing when you have the ITC unanimously support and validate that there is enough in there for them to proceed with the case.

And therefore, we remain vigilant and our actions should have a lot more traction, should be a lot quicker to get responses.

And therefore, the level of the playing field should have a better track going forward.

And I want to remind everybody that I've been saying it's not a matter of ifs anymore.

It's a matter of when, when these analyses lead to the conclusion that, yes, we do have a solid case and we move forward.

This is not over.

We have a question from Jorge Beristain from Deutsche Bank.

Good morning, Mario.

And again, congratulations on achieving at least a slight positive EBITDA against this historically low utilization.

I guess my question has to do with market shares.

And it would seem the current problems as well as the blast furnace or integrated model is facing is not simply imports, but are you facing market share losses to the electric arc furnace competitors in the US?

It would seem they have much stronger sequential volumes.

And is that because clients are starting to grow concerned about your financial situation or are you just simply stepping away from business?

If you could just qualify what you think is happening in the market and, therefore, do you expect a bounceback maybe in the second half as pricing also recovers?

If you could just talk about that?

I can guarantee you there is absolutely no issue between ourselves and our customers.

Our support to them is highly appreciated and continues to improve.

And we are not in the market for volume.

We are not out here to pursue that.

We are pursuing value.

Our commercial entities are definitely focused in sorting out where is it that value resides?

How we can strengthen our positions over there, and the continued analysis of Carnegie Way improvements as we go into the journey.

There may be a situation where, right now, we should not get some businesses, but as we improve our base of competitiveness, those markets can easily come back because we want it.

That is the difference.

Could you also shed a little bit of light as to what is happening in Europe?

We've also noted some trade case action there.

You said that the volume should be up slightly, it's in low single digits, I thought.

Could you talk about is there a risk in Europe that we start to see an evolution of the imports which get pushed away from the US market, just ricochet to Europe, and then we start to see some weakness there in the second half?

The over capacity around the world is a reality that impacts everybody.

It probably impacts America because we remain the most open country in the world.

But what is taking place here is not going unnoticed in other parts of the world.

The pressure of dumped material into all of these countries is certainly increasing.

The Europeans are noticing what is happening in here.

They are seeing the quality of how we are bringing forth trade cases, the validity of it, and they are seeing the impact that is already happening over there.

I think Europeans are beginning to realize the globalized environment can only work fairly well if the rule of law is the one that prevails over the interactions that take place.

They cannot go and ignore it or they are going to be impacted just like we are being.

That is a reality that is going on.

We participate with the European community in all of these analyses and you will probably see an increase on the amount of cases that are going to be filed by the European Union against pretty much the same players that we are fighting over here.

Our next question is from Tony Rizzuto from Cowen and Company.

Good morning, everyone.

It is very good to see the structural changes you are driving throughout in this challenging environment and a question about that.

I notice that your Flat-Rolled price realization, although it was down $73 sequentially, it actually held up better than we thought.

And I was wondering, given the various lags that you have, how much further erosion should we expect in the third quarter?

Tony, that chart we have in the back of the deck that breaks down, we have the pricing structures.

Certainly, when you look at second quarter, CRU versus first, the quarterly deductible we'll have on a step-down.

The ultimate impact on our average lowest prices is really going to depend on how we do on the spot business and the monthly business moving up, and I think it's probably too soon to tell, but you will see the quarterly contracts step down again, yes.

On the tubular side, realizations were also higher despite what we are seeing in Pipe Logic in some of the other consultants.

Is part of that the mix that you are still producing, a little bit higher value added mix there?

It really is all mix.

And unfortunately it doesn't take much of a mix shift at only 92,000 tons to skew those numbers pretty quickly.

Right.

I was wondering also, just to move over to the labor contract a little bit, I was wondering if you could describe the tenor of the labor discussions?

And I wanted to know, do you think the existing contract gives you the kind of flexibility you need as you continue to drive this transformation?

Our relationship with our partners in the union is really good.

If you look at what has been accomplished through the Carnegie Way transformation, it is a great partnership with them.

All of our people are in the process of being trained.

They are contributing with their ideas.

They are working together like never before.

We've been working very hard with our supervisors to make sure they become the supporters and sponsors of all of the great qualities that our people have; listen to their ideas, structure the processes.

The relationship is really good.

And the negotiations are the negotiations.

There is a proper process established and it's taking its course.

We have a question from Timna Tanners from Bank of America Merrill Lynch.

Good morning.

I wanted to follow up on Tony's question because I have been studying this page 18 and it does say 12 months ended June 30, so if it were to be updated for the most recent environment, I imagine it might be skewed away from spot a little bit more.

I just wanted to understand, since the OCTG market is not at its best, so I just wanted to understand, if we were to see a $50 per ton increase, hypothetically, or the $40 per ton you proposed recently, would it show up right away in some of the spot business or is there a lot of spot business to see impacted or would we really see the thrust of any price increase now more fourth quarter?

If you see price increases in the near-term, we still have plenty of spot business.

If you look quarter to quarter, that spot number has moved a little bit up and down but not drastically.

So it's probably not too far off our current spot volumes.

And certainly then with just a one-month lag, the monthly contracts would start picking up there, benefits too.

We have a fair amount of volume that would get some benefits quickly.

Certainly the more momentum we can get on prices sooner will help those quarterly contracts 4Q if we can get some better momentum.

Okay.

So along those same lines, you have 10 months of OCTG inventory, but the inventories on Flat-Rolled have been coming down nicely.

What is your timing for expecting better market balance to be able to affect some of these price hikes that have been announced?

We think it's there now and we think the last price I can put out there has gained some traction.

I don't think anybody sees the full $40, but it's gained traction and that is why we put it out there was we were seeing the spike in inventories and the balance moving in the right direction and we felt it was supportive.

Okay, and, if I could, one last one.

If you could provide us an update on what is happening with the US/ Canada situation.

I have been confused trying to follow that situation with more write-downs, but also still the promise of maybe a payment from them in light of your situation.

So I'm just wondering if you could give us an overview of what the status of that is?

Thank you.

That's a long process, Timna.

If you remember, all of the events that took place early on and it's been over a year now that that has been taking place.

The situations change and you have to continually monitor, do the revisions, assess what the reality of the numbers were and what they are, and that is what the adjustments you saw, that's where it came from.

There is still a little bit more to go, but I think we are over half of the process already, and sooner we should begin to see how that's going to end up.

We have a question from the line of Brian Yu from Citi.

Your line is open.

I want to go back to the guidance.

I think, Mario, you emphasized the word pace.

And I just wanted to make sure I understand that the low-end guidance assumes we get this steady pace improvement, so if we've seen steel prices move up by $20, utilization rates up 2 to 3 percentage points over the last two, three months, does this imply that -- the low end guidance suggests HRC prices perhaps getting closer to $500 and utilization rates into the higher mid-70%s by year end?

That's the pace we are talking about exactly.

That is what we are trying to tell everybody, yes.

Got it.

And then second one, just on Carnegie, I recognize that there is a bunch of projects.

But maybe if I could try to tackle it from another way, is there a way to try to get a sense, what is the new dollar-per- ton type savings broken down into?

Is most of it coming from raw material input, energy, repair maintenance, maybe labor is not a big component of it.

Anything that is market based, like raw materials or energy, is not part of those because that's not a permanent change in the structure.

We are talking about -- it's mostly process driven.

Some of it is supply-chain driven where we are establishing better long-term relationships, but if it's market based on materials and things like that, that is not part of that number, because we wouldn't claim to be able to sustain that permanently.

You'll also find that there are projects that definitely improve our yields and our throughputs and definitely the yield advantage is a driving factor in a lot of areas, too.

I guess that was more the crux of the question is your raw materials are using less now, certain raw materials, than you were before embarking on project Carnegie.

If we get better yields and that reduces our material usage, that would be a benefit.

But just the market price of materials, we would never pick that up as a benefit.

Would you be able to break that down into those particular categories, better yields and raw materials, using less energy, doing less repair and maintenance than before?

I think on the table, we show what's coming from supply chain.

We show what's coming from manufacturing.

I think that's as much detail as we want to get into, because we still don't want to tell all of our competitors exactly how we're doing this, because we think we are making better progress than most anybody else is.

Got it.

All right.

Thank you.

The next question comes from Gordon Johnson from Wolfe Research.

Mario, I have a question, just looking at history and the current trend.

When we look back to the early 2000s and we look at Bethlehem Steel, they had a similar cost-cutting program intact back then, there was significant protectionist measures implemented during that time and the company still faced severe pressure.

So can you let us know what is different now versus back then with respect to your business?

And secondly, with respect to the guidance, when I look at from 2002 to 2014, the average 2H versus 1H increase in HRC prices is down 4%.

And I look at your reported EBITDA and that number is down 61%, 2H versus 1H, yet you're guiding adjusted EBITDA of over 400%, 2H versus 1H.

Can you help us understand what you're seeing that is going to get you to that guidance?

Thank you.

That's a pretty loaded question, actually.

If you go back to the environment back 15 years ago, I think the difference is that the way -- and over the past 15 years, the way the cases were judged, they didn't have the kind of base that we've just created.

So therefore, from this point on, I think the effectiveness of trade cases, with the exception of what happened with the 201, I believe back in 2004 or something like that, the effectiveness and validity of the way in which commerce and ITC will operate is going to be significantly higher.

The timelines will be faster and more incisive.

I think that's the difference.

I am not familiar with the way in which those organizations tackled costs in those days.

I just can tell you that I do not believe there is a best or better structured, disciplined approach to improvement in a way that you truly address what is sustainable better than what we are doing and we generated $0.5 billion in value last year.

We just generated $0.5 billion in value in half of this year and we are not done.

So I think, without having the specific quantitative comparable facts that you would like to see, I can tell you what you are seeing from an outcome tells you a story of the value-creation power that the current Carnegie Way approach is poised to deliver.

We have a question from the line of Michael Gambardella from JPMorgan.

Yes, good morning.

And congratulations on the performance given the utilization rates.

That is quite an achievement in regards to what historically has happened.

But if I can manage a question on the guidance.

I want to make sure I understand the numbers that you are looking at and talking about.

The Company has an adjusted EBITDA in the first half of $130 million.

I think you are saying that you can get an incremental $175 million in cost savings in the second half, so that would basically bring you up to $305 million.

And if we assume that Europe would do flat with the first half, just an assumption, and the same thing, just the underlying of the Flat-Rolled and that the tubular business breaks even in the back half of the year, doesn't lose money.

That would assume, to get to the bottom end of your guidance, the $700 million, that you are expecting Flat-Rolled to post about a $50 per ton improvement in the second half.

And obviously you can't get that all in in the first quarter or the third quarter of the second half, so you would have to scale it up.

Are those the right numbers to be thinking about?

I just want to make sure we have the same numbers.

The big missing piece in your discussion is the huge increase in Carnegie Way benefits and the additional Carnegie Way benefits we will deliver in the second half.

That's the big piece.

The cost piece is the biggest piece of what is going on here.

You talk about the $175 million, but Carnegie Way benefits went up $250 million, and they will go higher.

We will complete several hundred more projects easily and drive that number higher.

The total Carnegie Way benefits -- basically what we have accomplished so far is $590 million.

The full-year number will certainly be higher than that.

Right, but I thought I heard you say the incremental Carnegie Way benefits in the back half of the year will be $175 million.

$175 million is the short-term piece that is separate from the Carnegie Way.

You need to add those two numbers together.

So what is the total number again that you are expecting for the back half of the year?

Carnegie Way benefits, just from what we already did, should deliver over $200 million.

Short-term activity should deliver over $175 million, plus we will have additional Carnegie Way benefits generated that aren't part of those numbers yet.

So I'm just looking incrementally for the back half of the year, okay, because we are assuming that the first half is already embedded in the results.

Going forward, I just want to see, incrementally, to try to get an idea how you're getting to the $700 million to $900 million.

Incrementally, you have $175 million of Carnegie Way, what you call short-term benefits?

No, no, short-term is not Carnegie Way.

There are two different categories, Mike.

Short-term is not Carnegie Way.

Short-term is short-term.

Carnegie Way is a different bucket and it's a much bigger bucket.

Okay, so what are you looking at on the back half for cost benefits then?

Right now we've disclosed that Carnegie Way benefits will be at least $250 million higher than we said before.

Short-term will be $175 million accomplished, and there will be more Carnegie Way benefits generated that will add on to those two numbers.

So you are looking at $175 million plus $200 million?

Plus the benefit from all the projects we will complete in the second half of the year that are not part of those numbers yet, yes.

Is that about $200 million incremental besides the $175 million?

Mike, call me later.

We are going around in circles here, okay?

We have a question from Aldo Mazzaferro from Macquarie.

Good morning.

I wanted to talk about Fairfield just for a minute, Mario, your strategy there to go to the EAF from a blast furnace, that's going to require a significantly lower headcount to become an efficient operator, I think, of an EAF versus a blast furnace.

I am wondering, how are you going to deal with the redirection of the people?

Is there going to be some kind of early retirement options or can they be all reassigned to other sections?

And is this part of your discussion, do you think, with the labor for the upcoming contract?

Certainly there will be changes, Aldo, and there is a very well- structured process by which the approach is going to be taken.

And, of course, there is very clear conversations taking place with the union as this event unfolds.

So can you tell me, Mario, how many people are at that site now?

I was looking on your website.

I think you used to disclose employees by sites.

I couldn't find it anymore.

Must be Project Carnegie.

I would suggest about 1,500.

Yes, about 1,500 at that plant.

Our last question comes from the line of Matthew Fields from Bank of America.

Your line is open.

Hey, guys.

I actually am a little confused about the breakout to the $700 million of the low-end guidance as well.

We have $130 million of EBITDA for the first half; $175 million of short-term structural cost savings?

Short-term actions, not structural.

Carnegie Way is structural improvements.

Short-term, is that annualized or is that just in the back half?

That is the second-half impact.

So that is a $350 annual number?

No, that is the second-half impact.

These could -- as we ramp up the higher levels, some of these costs will flow back in.

Like when we bring people back to work, when we have to go down to higher levels, the maintenance (inaudible) high levels, and some of those will flow back in.

So that is a six-month event.

That's all we're talking about right now.

That is a six-month impact.

Okay.

And then you've got $250 million of Carnegie Way savings?

Additional from where we were last quarter, yes.

And that's annualized or just in the second half?

That's the full year -- the total Carnegie benefits for the year are now $590 million.

So that's an increase --

$590 million.

That $250 million increase, we would have realized some of that in the second quarter, but most all of that would be in the second half.

And that totals [55-whatever].

That totals $550 million.

Did we lose Matt?

We do have to wrap up.

Mario, do you want to make a final comment here?

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 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.

I would like to thank everybody for joining us.

We certainly appreciate your interest and we will be back next quarter with another update.

Thank you.

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