美國鋼鐵 (X) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation's 2015 fourth quarter and full year earnings call and webcast.

(Operator Instructions)

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

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

Please go ahead.

Thank you, Kevin.

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

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.

There's also a question-and-answer 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 their 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 the slide deck posted on our website and included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

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

Thank you, Dan.

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

Turning to slide 3, we faced significant price and volume headwinds, particularly in the second half of the year.

We finished 2015 with adjusted EBITDA of $202 million, despite a $6 billion decrease in revenues from 2014.

Our Flat Rolled segment produced $155 million of EBITDA while operating at only a 60% utilization rate, our lowest full-year utilization rate since 2009, as high levels of imports had a significant impact on both prices and volumes.

We had another solid performance from our European segment, with EBITDA at $162 million in a year when the euro-based selling prices and the US dollar to euro exchange rate both moved against us.

Our Tubular segment had a loss for the year, as our aggressive cost cutting efforts could not offset a large drop in volumes as oil prices and rig counts fell dramatically and supply chain inventories increased as imported pipe continued to rise.

Turning to cash and liquidity on slide 4, we continued to generate cash from operations throughout the year, finishing the year at $359 million.

We repaid approximately $380 million of debt in 2015; and although down from the end of 2014, our cash and liquidity remains strong.

Maintaining strong cash and liquidity is a competitive advantage for us during a trough in the business cycle, particularly when the timing of a recovery remains uncertain.

Accurately forecasting future changes in market conditions is very difficult in this industry, so we have to be more agile and responsive to economic circumstances.

We do not know how long the industry recession will last, but we know we are managing our business to maintain a strong cash position and to be prepared to respond quickly when the recovery begins.

We said last quarter that we will be disciplined on our capital allocation strategies and decisions and will continue to make the investments that support our long-term strategy, but we will do so in a manner and at a pace that is appropriate, based on our ability to generate cash.

Projects related to the safety of our employees are always our first priority, but we took a hard look at both infrastructure and growth projects, including smaller high return projects that return benefits and cash quickly, and we have set our 2016 capital spending plan at $350 million.

This is down significantly from the $500 million we spent in 2015, a year we entered with much better industry conditions than we are facing now.

In addition, we expect other cash payments, like interest expense, pension and dividends, to be about $350 million.

In 2014 and 2015, we improved our working capital position, particularly as it relates to receivables and payables, and we believe we still have opportunities to improve in those areas this year.

We also believe we have significant opportunities to improve our inventory management, as we have improved our sales and operations planning process.

We currently expect to generate approximately $500 million in cash this year from the improvements we are making in our working capital management.

While working capital and capital spending are the two areas that can have the biggest impact on our cash and liquidity position, we are working to identify and maximize cash benefits in all areas.

We are working to strengthen our balance sheet and we are constantly evaluating all potential options to improve our position so that we are prepared to act quickly when the right opportunity presents itself.

Our Carnegie Way methodology keeps all possibilities on the table.

Dan will now cover Carnegie Way benefits for 2015 and our starting point for 2016.

Thank you, Dave.

Including benefits from projects completed during the fourth quarter, our full year benefits in 2015, as compared to 2014 as a base year, were $815 million, an increase from the $575 million of benefits we generated in 2014, and reflects both the tremendous effort from all of our employees, as well as our increasing capabilities as we train more of our employees on how to identify opportunities and then establish, manage and complete value-creating projects.

2015 is now our base year for measuring our progress, and we are starting 2016 with $250 million in Carnegie Way benefits from projects that we implemented throughout 2015.

As we have for the last two years, we will provide an updated 2016 Carnegie Way benefits number each quarter, as we continue to implement new projects and generate additional benefits throughout 2016.

Our pipeline in projects is strong and our employees are making substantial and sustainable improvements to our business model.

Turning to slide 6, in an adverse market conditions, the real progress we are making can sometimes be difficult to see in our results.

Using our Flat Rolled segment as an example, this bridge chart illustrates that our Flat Rolled EBITDA decreased by $1 billion as compared with 2014, while we dealt with impacts from lower prices and volumes of almost $3.4 billion.

While we did have favorable effects from raw materials, prices and volumes, we would have had an EBITDA loss without the Carnegie Way benefits generated from improving our controllable costs throughout the year.

A $61.00 per ton improvement in controllable costs over a one-year period is certainly not typical in our industry.

And for your reference, we've included in the appendix of this presentation a slide that illustrates the equally impressive progress we made in 2015 in both our Tubular and European segments.

Now I'll return the call back over to Dave to cover the strategic aspects of our transformation.

Thanks, Dan.

As reminder, the value creation strategy of the Carnegie Way has two phases.

First, earning the right to grow by delivering economic profit, meaning real earnings in excess of weighted average cost of capital, across the business cycle and remaining profitable at the trough of the cycle; and second, driving sustainable, profitable growth.

Our strategy has not changed as we deal with the very challenging conditions the steel industry is currently facing.

While we exceeded our own expectations by delivering economic profit in 2014, the significant headwinds of 2015 remind us that we are still in phase 1 of our transformation.

A year ago, we created our commercial entities, a more accountable structure focused on enabling better customer solutions.

We have realigned our operating structure to get us closer to our customers, provide visibility into value creation, and enhance personal and professional accountability.

We recently announced the next step to provide greater accountability within the commercial entities in our North American Flat Rolled operations.

Our commercial entity leaders now have direct control over plant operations and related personnel at the facilities that service the majority of their customers.

We believe this change will allow us to make better, faster decisions about our operations and improve accountability, as our commercial entity leaders oversee how we design, market and sell our products.

With responsibility for the manufacturing operations, each commercial entity leader is fully responsible and accountable for delivering results and creating value.

Our customers are critical to the success of our transformation.

We have already had successful experiences with customer collaboration across our commercial entities and we will continue to transform our customer relationships with a focus on providing industry-leading, quality, superior on-time delivery performance and innovative product and process solutions.

Our structured approach using the Carnegie Way value creation methodology gives us the confidence we can continue to make progress and create value for our customers.

And when we create value for our customers, we create value for all our stakeholders, from our stockholders to our suppliers to our employees to the communities where we do business.

As we make difficult decisions to earn the right to grow, we are improving our processes and our operations.

We are making the right investments in our facilities at the right time.

We are focusing our research and development spending to provide strong support for our product development and process enhancements.

We have a team that is now more deeply focused on global quality and manufacturing processes, leading standard work practices and process health across all of our Flat Rolled, Tubular and European operations.

We are creating a more reliable and agile operating base that lowers our break-even point and improves our ability to adapt quickly to changing market conditions, while providing superior quality and delivery performance for our customers.

We remain focused on what we control and will be ready to drive profitable growth when the industry improves.

The Carnegie Way enables us to review every part of our Business in an innovative way to see how we can become more efficient and better serve our customers.

Now I will turn the call over to Mario to discuss our operations, markets and outlook.

Thank you, Dave, and good morning to all.

We made several difficult decisions in 2015 in response to conditions in the markets we serve, including the permanent shutdown of our steelmaking operations at Fairfield Works and the temporary idling of Granite City Works and our Keetac mining operations.

We also had a significant number of layoffs at other facilities that are operating at reduced rates.

These decisions have significant impacts on our employees, their families and the communities we operate in, and we do not take them lightly.

Our markets continue to be adversely impacted by high levels of imports, many who believe are unfairly traded, and we look forward to having our trade rules enforced effectively and seeing the improved and sustainable order rates that will allow us to bring our facilities back online and put our employees back to work, making some of the highest quality and environmentally friendly steel in the world.

In our Flat Rolled segment, we are currently operating the steelmaking on finishing facilities at our Gary, Great Lakes, and Mon Valley works.

The operating efficiencies we are realizing from higher utilization rates at these facilities are greater than the fixed and remaining variable costs we continue to incur at Granite City Works.

We also continue to operate certain finishing facilities at our Fairfield, Granite City and Fairless Hills locations.

We have a similar situation at our mining operations, as the increased efficiencies at Minntach give us our lowest pellet costs for our current steel making requirements.

Our Tubular operations are facing very difficult market conditions, as low and volatile oil prices have resulted in a continuing decrease in drilling activity and rig counts and supply chain inventories remain high.

We are making the products our customers need, but the operating levels in our facilities remain at the lowest levels we have seen since 2009.

Our European operations are facing import pressures similar to those we have been facing in the US, negatively impacting both prices and volumes.

We will operate our facilities in line with our order book and are well positioned to respond to our customers' requirements as market conditions improve.

Before I discuss what we're seeing in the various markets we serve, I would like to remind you that we have reached a tentative agreement with the United Steelworkers on a successor three-year collective bargaining agreement governing represented employees our operations in the United States.

We currently expect voting on this tentative agreement will be completely early next week and we look forward to moving forward with our employees, who have been an integral part of our Carnegie Way achievements.

Out of respect for our employees, we are not going to discuss the terms of the tentative agreement until they have had the opportunity to cast their votes.

Now I would like to give a brief summary of what we are seeing in our markets and our guidance for 2016.

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 compared with last year.

The industrial equipment market is mixed, with a slight improvement in demand for construction equipment, steady demand in the rail car markets, and weakness in mining equipment.

In the energy markets, low oil prices and rig counts remain a significant headwind.

At this time, we do not see any catalysts, other than increasing oil prices, that would drive significant improvements in Tubular demand and pricing with impacts to both our Tubular and Flat Rolled segments.

We continue to expect slight growth in the automotive, appliance and construction markets in Europe as compared to last year, but tin mill products may be facing increasing challenges from imports.

Turning to our guidance for 2016, at current market conditions, which includes spot prices, import volumes, and supply chain inventory levels, we expect 2016 adjusted EBITDA to be near breakeven.

Our price realizations will reflect the full effect of both spot and contract transactions, due to the dramatic decreasing prices which began more than a year ago, fueled by high levels of unfairly traded imports.

We expect to offset a significant amount of these commercial headwinds by continuing to reduce our costs, generating additional Carnegie Way benefits, and realizing operating efficiencies from our current operating configuration.

As overall market conditions improve, we expect our adjusted EBITDA to increase consistent with the pace and magnitude of the improvement in market conditions.

Also, as Dave mentioned earlier, we expect to generate approximately $500 million of cash from working capital improvements in 2016 and already have $250 million of Carnegie Way carryover benefits.

Thank you, Mario.

Kevin, can you please queue the line for questions?

(Operator Instructions)

The first question is from the line of David Gagliano, BMO Capital Markets.

Please go ahead.

Thanks for taking my questions.

I did want to drill down a bit more in terms of the future initiatives to preserve cash.

In an environment, or in a situation where this environment remains in place for a while, I was wondering if you could give us a bit more detail about the next steps that are under consideration in order to preserve cash.

For example, should we expect more potential asset closures?

Are you considering tapping the capital markets?

And if so, preference for debt versus equity?

Are you considering asset sales, et cetera, et cetera?

Dave, this is Dan.

The first and biggest piece that we directly control is the working capital improvements.

Based on a more efficient facility configuration, based on the improvements we've made through RCM on facility reliability -- that's where we see the big opportunity to get about $500 million out of, really, a structural improvement in our inventory position.

So certainly that's the biggest piece we control and that's where we know that we can get some solid progress there.

On all the other pieces, we are really deeply involved in making sure we understand what all our options are and the best move to make.

But we also need to make sure that we do that at the right time, because anything we decide to do can have some impacts.

Currently, our capital structure right now includes debt that has very much investment-grade covenants.

So the decision to move away from that is a very major decision.

But we are assessing the options right now.

We want to be ready to move quickly when the time is right.

I think as we look at our cash position, particularly the benefits we expect to get from cash from working capital, we think we are in a position to be deliberate and make the right decision at the right time.

This is Dave.

Maybe I can just add a little color to that, reinforcing what we said in our opening remarks.

And leveraging the sell side consensus numbers of EBITDA, I think we're around $300 million.

If you think about working capital of $500 million improvement -- and those are, in effect, Carnegie Way projects -- we're focused heavily on inventory management as well as receivables and payables.

We also have CapEx spend of $350 million; debt service, pension and dividends, $350 million.

So if you're looking at the $300 million that you guys have put out, that would mean that we would be favorable cash, just doing the math.

If market conditions wouldn't improve at all, that means there would be a cash burn of about $200 million.

So, based upon where you see the markets going, or where we see the markets going, we're going to adapt to whatever economic circumstances are out there.

And our Carnegie Way is, we say everything is on the table.

And so we're going to look at opportunities.

You know we don't talk about financing.

We don't talk about M&A.

We're not going to talk about divestitures.

We do look at all aspects of our business, and we have some intelligent choices to make if conditions get worse or if conditions get better.

We have to see how things play out throughout the year.

And I understand that and I appreciate that.

And that's actually the number we came up with, too: breakeven EBITDA and maybe you burn $200 million, because of the working capital benefit.

But really what I'm getting at is contingency planning beyond that.

In case this environment somehow magically stays in place beyond the next 12 months, I think the working capital improvements may potentially fade.

There's risk that, that cash burn potentially increases significantly and then there is concern about liquidity, in my opinion.

And so I'm just wondering what the timing is, when those contingency plans start to get --.

That's interesting way to ask the same question.

But we'll just say again, everything is on the table.

We're going to be watching this.

We're managing cash extraordinary closely.

We look at it daily.

We have rolling forecasts.

We're on it, we got this.

We're going to adapt to whatever the economic circumstances are.

And we'll have the trigger points that will tell us what we need to do.

We're still in great cash position -- paid off $300 million worth of debt and we've still got $2.4 billion worth of liquidity.

So we feel extraordinarily comfortable where we are today.

But living in this paranoid world of steel, we certainly have to adapt what's ever there.

We're not going to tell you what the next steps are, but you can understand that we're on it and we've got it.

Thank you.

And our next question's from the line of Matthew Murphy, UBS.

Please go ahead.

Thanks for some of that color around the cash side of things.

Two more questions on that: the $350 million in CapEx -- pretty low number.

Just wondering, does that have any maintenance spend?

And how would that differ from what you had in 2015 or 2014?

I'm also wondering if there is any cash restructuring costs this year?

Yes, Matt.

That CapEx number -- we said, certainly anything that's safety-related has priority and gets done.

There's no negotiation on it.

Safety first.

And when we look at that number, there's an infrastructure component and there's a growth component.

And they're probably pretty balanced, actually, at that level.

Certainly, we have with, unfortunately, some facilities shut down and some facilities idled, we have less infrastructure demands than we would normally have.

But that number is a pretty balanced number between infrastructure and growth-type projects.

And any cash restructuring costs in there?

Really, no.

When we talk about Carnegie Way benefits, those are really net of any cash.

But for the most part, where we're generating benefits by finding efficiencies and improving production processes -- those really don't involve a lot of investments.

So from that standpoint, unless we get into some big facility footprint changes, it's not a lot of cash out the door related to the Carnegie Way activities.

Okay.

Thank you.

And the next question is from the line of Michael Gambardella, JPMorgan.

Please go ahead.

Yes, good morning.

I have a question regarding your guidance of the near breakeven, given the current market conditions.

I just want to make it clear: what are you assuming for the contract pricing changes for this year?

I think most all of our contracts, the majority have rolled over.

So that's built into our assumptions.

Certainly, the farther you go up the value chain on the value add products, the less direct correlation there is -- so the big change we saw in spot.

But certainly they were all impacted to various levels.

We do still have some contracts that roll over, a fair amount in maybe the April 1 time frame.

Based on where we are today, we had to make our assessment on where we expect those.

But certainly, all of our contracts that rolled over did roll over at lower prices by varying degrees, depending on what type of product you're looking at.

And that's embedded in the guidance, you're saying?

Absolutely, yes.

Okay.

Second question, just in terms of the import trade cases that are rolling off as we see preliminary results coming up: with the exception of China, which has gotten slammed, a number of the other countries, the numbers are coming in a bit light, and we're still waiting on some of the anti-dumping preliminary decisions.

But from what you've seen so far, and what you and the rest of the domestic industry and your attorneys had thought would be the dumping duties, what's the big difference between what you had anticipated -- you not just being US Steel, but the entire US industry and their legal team -- and what has actually been rolling off on some of these other countries?

Well, Mike, as you properly stated, it's the combination of the two fronts that will determine the true impact, the number of imports that we're going to see coming.

As a matter of fact, you've seen that we have agreed to extend the dates for final determination so that we can have the investigators at the Commerce Department properly do their job and have the conditions to assess what the agreements actually should be.

And we're going to have a few more preliminary determinations coming forward in the next few weeks.

Then, hopefully by May, we should be able to have the ultimate determinations delivered.

And our expectation is that it's going to be more meaningful than what we've seen with some of those players.

As you see, one of the biggest heavy hitters over there is China.

And in that particular case, we've been prevailing quite significantly.

It's a complicated process.

And Commerce has limited resources at this time.

So we have to make sure that they do have all the proper information and that they don't succumb to the devious approaches in the way in which some of the other countries and companies have articulated their answers.

So I think that what we see is that we do have the condition to come out in the end with very meaningful margins on all of the major fronts that we have engaged, and that should have a meaningful impact coming into the second half of this year.

Next question is from Timna Tanners, Bank of America.

Please go ahead.

Good morning, everyone.

Good morning, Timna.

I wanted to ask two questions.

One is, clearly the guidance was helpful.

I appreciate all the inputs that you gave us around that.

Just wanted to get a little sense of sensitivity.

So if prices go up from the current levels that you assume, I think we can do the math around that.

But if prices -- if the last price hike, for example -- doesn't stick, how do we think about how you might adjust your production levels?

Should we assume that you have some ability to pull back a little bit, so maybe the downside leverage would be a little less?

If you could give some color on that.

Well, the flexibility is a centerpiece into much of the work that we've been doing.

If you look at the realignment of the footprint, the reconfiguration, the realignment between the commercial activities with the logistics and planning and all that, we do have now less facilities, which increases the flexibility in how we react to market conditions.

So you really should consider that if there is a need, we're going to be prepared to adjust to the order book we get.

Okay.

Got you.

And then just wondering if you could help us with any further costs that you might need to incur in this market environment?

I know AK said that they would need to make a decision on Ashland maybe by the end of the year.

So would there be any exit costs?

Would you have to make a decision on Granite City?

Are the Fairfield costs behind you?

Thanks.

Yes, Timna.

The Fairfield costs are behind us.

That was accomplished last year on the Flat Rolled section piece of Fairfield.

Granite City is temporary idling.

So right now, it's really cost absorption that we're dealing with there.

The fixed costs from that plant are still on our books.

But it's a temporary idling.

And there are some trailing variables that don't go away quickly.

So we need to absorb those costs, but there's no other unique costs or any new costs that we see beyond that.

Okay.

Thank you.

Our next question is from the line of Matt Vittorioso, Barclays.

Please go ahead.

Good morning.

Just a couple of quick questions on your liquidity.

Obviously, a very strong position today.

Could you just discuss real quickly on your asset-backed revolver-- is there any risk of while you reduce your working capital and reduce inventory -- the question being, do you expect to have full access to that revolver through 2016 and 2017?

Does reducing working capital get to a point where you start to impact your availability on that asset-backed revolver?

Or is there a fairly sizable cushion there?

We do have some excess collateral now.

A lot depends on how working capital moves in relation to the receivables.

So we do have some excess capacity now.

We can cut working capital and still maintain the availability from where we are right now.

At some point, you would cross the line, but I don't know that we could speculate on when we get to that point.

Okay.

Could you provide any color on your ability to incur additional secured debt beyond your revolver?

What does the credit agreement for that revolver say as far as incurring additional secured debt?

There's a consolidated net tangible assets measurement there in the revolver.

There's also one on our senior notes.

So those would be the limiting factor.

Right now, our thought process is that when we look at all the moving parts, that we could be somewhere in the range of $1 billion.

Of additional secured debt?

Yes.

Okay.

And then last question, more of an accounting question.

And I know we've discussed this with AK Steel.

But within your 2015 results, you guys say that you used 80% LIFO with your inventory accounting.

In the 2015 results, can you tell us how much LIFO income, or what the change in the LIFO reserve was for the 2015 period?

We never made any comment on any percentage of LIFO.

And LIFO's not a cost we break out.

That's just part of doing business.

That's part of our cost structure.

And there will be maybe some color in the 10-K, as we get there.

But beyond what we know for our 10-K, we're not going to go any farther than that.

But you do use LIFO.

So in a deflationary environment, we should assume that there is LIFO income, yes?

There could be.

You wouldn't expect to be an expense in that environment, no.

Certainly.

Okay.

Thank you.

Our next question is from the line of Justine Fisher, Goldman Sachs.

Please go ahead.

Good morning.

My first question is on the interplay of the EBITDA and working capital and guidance.

So obviously, if current market conditions persist, then EBITDA, you got it to breakeven; and $500 million in working capital, if current market conditions persist.

But if we expect prices to improve -- and maybe from Dave's question initially -- if you hit $350 million of EBITDA, that maybe that implies market conditions improve, should we assume then that the working capital benefit could decline?

I know that there are Carnegie Way benefits in there, but also, as prices tend to increase, it tends to use up some working capital.

I know it's not as simple as this.

But should we assume that either it's somewhere between zero of EBITDA and $500 million of cash and working capital, or $500 million of EBITDA and zero of cash and working capital, or somewhere in between, but that there should be an offset in working capital if we expect EBITDA to be above breakeven because of higher pricing?

Justine, your normal working capital fluctuations that happen with changing business levels will still be there.

The biggest piece of that $500 million you're talking about is really what we expect to be a structural improvement by better inventory management opportunities from more efficient operating configurations and better facility performance, based on the work we've done on the reliability center maintenance.

So a big piece of that we view as a structural improvement in working capital.

But you certainly would still have normal working capital changes that follow volumes up and down.

If we're having some market capital increase from increasing volumes of prices, I think that's going to be net favorable in everybody's eyes.

Okay.

Thank you.

And the next question is on your comment previously about the covenants in your existing bonds.

And clearly, they do give the Company a lot more room than maybe a new deal in a tougher market.

Does that mean that the Company might prefer to just draw on the revolver to meet the bond maturities, as opposed to going out and putting in a bond deal that had much tighter covenants?

Or do the banks take issue with using revolver capacity to repay unsecured debt?

We have that option to use the revolver if we want to.

But I think as Dave said, we're looking at all our options.

And the conditions we would see for new debt is certainly one of the factors we'd consider.

But like I said, we're being very deliberate, and we think, based on our projections, we have a little bit of time to make sure we make the right decision.

But those are all possibilities, absolutely.

Okay.

Thanks.

And then I just have one last accounting question, too.

You had mentioned that between dividend and interest and pension, that was a $350 million amount.

And so interest is, I think LTM, it was $250 million.

And your dividend is about $30 million.

So that makes pension much lower than we had expected.

Is that your net pension amount or is that just the contribution?

Can you give us a number for the cash pension contribution for 2016, please?

We have no mandatory to our defined benefit pension plan.

We didn't make a voluntary in 2015.

That number of about $350 million includes some debt service, some small maturities of environmental revenue bonds.

When we get our new labor contract ratified, we're going to have a remeasurement of our pension overhead plans as a result of that.

Normally we'd have guidance in the deck on that, but we need to defer on that guidance until we get the contract ratified.

We didn't see it to make sense to give guidance based on numbers that can really change within about a week or so.

But we will give you some color on that once we have a labor contract.

But it's currently, the pension OPEB numbers are an improvement from last year.

It's just a question of how much.

And we don't want to speculate on how much until we have a real accurate measurement.

Thank you.

Next question is from Phil Gibbs, KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Good morning.

Just had a couple questions.

First, on the order book right now for the various sheet products, and what you're seeing there in terms of maybe some incremental tightness, where we're seeing some lead times move out on some of the downstream products, and wondering if what you're seeing is more of a reflection of demand or supply, or both?

I think it's both, Phil.

Our lead times are being a bit longer.

The capacity utilization that we are forecasting is better than what we've seen throughout the last quarter.

And I see that what is taking place is pretty sustainable at this point in time.

Okay.

And then secondarily, I know you had those shorter-term cost benefits outside of Carnegie and trying to think about how those may or may not come back into the fold and do into 2016.

Now those were all built into our projection and our guidance projection for 2016.

So there's nothing new to add to that at this point.

But certainly, if you think of, if we get the opportunity and the markets allow us to bring facilities back online, we bring our employees back to work, so costs would follow them.

But that would be tied to an improvement in the business.

Okay.

So for those to come back into the fold, we would probably need to see some capacity restarted.

Is that a good way to look at it?

Yes, it is.

Okay.

Thanks so much.

Appreciate it.

Next question is Chris Terry, Deutsche Bank.

Please go ahead.

Just wanted to talk about Europe a little bit.

What are your plans there on the operational side?

And is there potential to idle at all there?

Or how are you looking at that business?

That business is running extremely well, Chris.

They are under pressure -- the overall European segment is under pressure, pretty similar to what we see happening here in the United States from imports.

But the order book is very solid, the operations are solid, especially with the customers that we have around the [V floor].

They're also forecasting pretty solid business environment going into the rest of the year.

So I do not expect -- we have no perception that there's going to be a need for reduction in adjustment in the operating capacity over there.

Okay.

Thanks very much.

And just a question trying to break down the cost benefits you might get in 2016.

Can you quantify at all how your annual coking coal contracts work?

And percentages that you might be picking up into 2016?

Chris, you're referring to our US operations?

Yes, that's right.

We are still in the process of finalizing some [ore] contract.

But where we stand now, our best assessment is that we expect our coal cost to be down about $10.00 a ton in 2016 versus 2015.

Okay.

Thanks very much.

And anything else on the cost side that you wanted to holler that you think you can get in 2016 you haven't already talked about?

I think the other thing is, we do expect maintenance to be down.

We've certainly said, with some facilities down, we're not doing maintenance there.

Probably somewhere in the range of $50 million.

Okay.

Thanks very much.

Next question, Brian Yu, Citi.

Please go ahead.

Thanks.

Good morning.

There was a question earlier about the contract business and the pricing adjustments.

And I was wondering, with some of the resets that you saw, did the economics still make sense where you would continue to service the same customers you did last year?

Or were there instances where maybe you decided otherwise?

We're not signing contracts that don't improve the bottom line.

The contracts we have are good contracts for us and we're going to keep on taking care of our customers.

Okay.

I was wondering, because I think in the guidance it said that you're expecting lower utilization rates.

In 2015, you averaged about 60% in Flat Rolled, which is below the industry.

So I was trying to figure out if that was somehow tied maybe where the contracts had reset to a level, or customers have asking a certain level that it didn't make sense for you guys.

It's tied more to spot market.

We did more spot market business in the first half of last year.

So our overall spot business is probably more last year than this year, right at our current look.

Okay.

And then just on the utilization rates, as we think about -- what's the best way to phrase it -- what's going to drive an improvement in utilization rates?

Is it market prices going up?

If demand improves and prices don't necessarily improve enough, would you be more interested in servicing spot markets, or does it really have to be a combination of both?

Because you have been very disciplined in how you put product into the marketplace thus far.

Well, Brian, when you compare with 2014, you've got to remember -- or sorry, with 2015 -- you've got to remember that we're entering 2016 with two full facilities that are either shut down or idle.

And there has been a significant repositioning of where we are going to support our customers from.

So the order book that we are seeing is already showing good signs that we're going to operate the remaining facilities -- as I commented at the beginning of the call, it's going to take us to higher capacity utilization of the currently operating facilities, and that significantly drives our ability to capture efficiencies.

It's much more difficult for you to run at 60% capacity with five or six facilities.

And now we have less, and the focus and the ability to plan and the ability to minimize changeovers where it's not necessary, more continuous stability in the overall flow pattern will deliver significant improvements during the course of 2016.

Next question is from the line of Evan Kurtz, Morgan Stanley.

Please go ahead.

Good morning, guys.

Most of my questions have been asked, but I just wanted to clarify one thing.

In the guidance for flat EBITDA at current prices, I just wanted to know exactly what you meant by current prices?

Is that the price where you're booking?

The price where you're shipping?

How do we compare that to the indices we see out there?

I can't remember.

It's more than just current prices.

It's current conditions, which include prices, certainly.

We're pointing to the market factors that you guys can observe, so it's based on what's observable to you guys on where general pricing assessments are, imports.

We were trying to give you context on things that you can see and work from.

I hate to build too much into this, but some price indices -- like crude, for example, they're based off of shipment, some are more on booking and give you where prices are if you were to place an order today.

Since budgets are moving so quickly right now -- at least over the last month or so -- I'm just trying to get a baseline for how we should think about that, because that could make a pretty big difference one way or another.

It's based on what we see today.

So I think things that are more current would be more relevant.

So anything that has a lag on it is probably not as relevant.

Great.

Okay.

Thanks, guys.

Matthew Fields, Bank of America.

Please go ahead.

If you guys could take a Mulligan or have a do-over or something and you got to wipe the slate clean with contracts and get out from all of your debt, what would the ideal US Steel footprint look like?

What would the Company look like?

I think you've heard me comment, the pursuit of flexibility is a significant component of it.

And I think we've been demonstrating a pretty good ability, no matter how hard it is, to make some of these difficult decisions.

I think we've been moving pretty diligently in that regard.

Our ability going into this next year to begin to benefit more in earnest of the fact that the commercial entities now have planted their feet inside of their customers, it's not any more about filling blast furnaces but pursuing value.

It is our full commitment to a real research and development that has already begun to yield.

We have a couple dozen new products that came out in the second half of last year.

There's more to come.

And I think that will dictate exactly what we're going to be looking like.

It's more flexible, more efficient, more consistent, more evaluated with the products, and an ability to react to the market, up or down, in a much more speedy manner.

The other thing is, we've worked very hard in order to establish an environment where trade laws are fully applied and we get a fair environment in front of us.

We look at our simple strategy.

We're working to earn the right to grow and find ways to make money, even when the markets are difficult.

But if you look at the improvements that are being put in place, it's not going to require us to go back to the full volume to deliver even better results, which is the aim and the purpose of this, without any question.

The question is from the line of Charles Bradford, Bradford Research.

Please go ahead.

Good morning.

First question is about your cash: you've got $755 million on the books.

Is any of that stranded overseas?

No.

We have full access to all of our cash, based on the way we're structured.

In Canada, there are some rulings coming up on the bankruptcy of USSC.

Do you have any further liability if those rulings were to go against you?

Right now, Chuck, we have our claims.

And whatever the process results, we will get some portion of our claims.

We do have -- our number on our book that's been reserved down to $180 million.

So to the extent we get less, we would have a non-cash charge; to the extent we get more, that would be some benefit.

Anything we get will be cash positive.

It will be new cash coming in the door.

In regard to your Tubular business, a few years ago there was a lot of talk about maybe selling it.

Of course, that would have been a pretty good time.

Is that business set up as a legal entity so that it could be partnered or sold?

The Canadian business?

No, the Tubular.

The Tubular business.

It is not.

It is a piece of the Company.

Certainly, you're also looking at what your options are.

So if we had some thought that there was value, we'd have to get to the right structure.

But currently it is just part of the corporation.

Final question.

A few years ago, you used to talk about iron ore costs at $65 per pellet.

Your competitors have all brought down their costs.

Can you give us a new number?

That was a cost, this was a full cost including all freight to get it down to the mills?

Understood.

We talked about some Carnegie Way projects over the year that we did that did reduce our pellet costs.

We've made progress and will continue to make progress.

Certainly with Keetac idled, Minntac's operating at a better efficiency.

So that helps maintain better costs.

But we have projects to reduce pellet costs.

We have.

I don't think we have a new number to throw out there at this point.

But we've made progress on our costs, just as everybody else has, and hopefully, maybe more.

Thank you.

Next question is from the line of Tony Rizzuto, Cowen and Company.

Please go ahead.

Thanks very much.

Good morning, everyone.

Just have a couple questions.

On the cap spending, you mentioned the $350 million.

And I think I heard you guys say that it's about 50% sustaining, 50% growth.

What are the major growth programs that you have in there?

And then secondly, how sustainable would that be?

And then a question -- just how you feel about your ability to maintain?

Do you think you've been able to maintain and grow your market share with automotive?

Or do you think that some of that business that maybe you walked away from was that less profitable business?

I'm just generally curious, because we've been hearing comments from some of the ES fuel makers and they seem to be making some inroads, further inroads, into business with OEMs.

I'm just curious as to how you see your competitive position with major customers.

Our competitive position, Tony, is, we're comfortable with it.

Many of the new products that we are launching are geared up to more value-added projects.

And you look over time, there has been penetration in automotive, not just from the [AFs], but there has been penetration from other materials also.

And we look at the competition in that light.

And we look at our facilities and where we're investing and what is it that makes sense for us to go pursue.

Right now, we're operating at a good level.

The negotiations we've had have reopened doors that basically were not there for us to participate in most advanced products as early as a couple of years ago.

And when we talk about what is to come in the model years of 2018, 2019, 2020, I think we're positioning ourselves extremely well.

Because different than just listening to a customer specify a certain requirement, right now we have restructured our organization so that we are working closely with them in order to help them with their designs and models in order for us to offer them what we believe is the best solution that adds more value to them and adds more value to us.

So this is a pretty fluid environment that we are in.

We're very focused into improving the mix that we have.

The market share is a consequence of where we want to play, rather than just look at total volumes and pursue a tonnage as a reference of market share.

It's more value than anything else.

And Tony, going back to your question on CapEx projects, we are been very diligent and conservative in this environment.

So there aren't any big, large projects.

It's a lot of smaller projects.

But they're projects that have much less risk to implement and return benefits much faster.

I would think we would agree, this is not the environment to kick off big massive projects, and we really aren't going that right now.

They are smaller, more executable projects with less risk.

How long can you keep that cap spending at these levels?

There's some flexibility on whether, if we had to, whether we'd cut back on growth.

You need to maintain your safety.

You need to maintain your infrastructure.

We'll have to see how the market plays out.

It's all going to be dictated by our ability to generate cash.

Thank you very much.

Thank you.

And final question today is from the line of Chris Olin, Rosenblatt Securities.

Please go ahead.

Thanks for taking my call.

Just a quick question on the guidance.

In terms of how I should think about the sequential movement, the contracts have rolled over lower, you probably booked some lower priced spot quotes in January.

Should I assume that the EBIT results will be significantly weaker in the first quarter and gradually improve as the seasonality comes back?

Or how do I think about it from quarter to quarter?

Chris, we got away from quarter to quarter because from our perspective the valuation is based on broader periods.

Nobody is valuing the Company on one quarter of results.

So we think the forward year is more relevant.

That's more of a basis for valuation.

You're always going to have quarter-to-quarter flows for a lot of reasons, not just commercial.

But we're staying with a broader look that we think really is consistent with how people value the Company.

Okay.

That's fair.

Thanks.

Thanks, Chris, and thanks, everybody.

Mario, final comment?

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

We know some of the actions that we take impact our team.

But these actions are necessary to help us get through these challenging times and create a stronger Company.

Slowly but surely, all of the initiatives we are pursuing will deliver value by making us stronger and better-positioned to serve our customers, and it will result in a better and safe work place for all of our employees.

Thank you, Mario.

I'd like to thank everybody for joining us and we look forward to talking to you again in April.

Thank you.

Thank you.

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