美國鋼鐵 (X) 2016 Q1 法說會逐字稿

Operator Welcome to the United States Steel Corporation 2016 first quarter earnings conference call and webcast.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Greg.

Good morning, everyone, and thank you for participating with us this morning.

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

As we noted in our press release announcing this call, we've revised the format of the call.

We posted our slide presentation and our prepared remarks under the Investor section of our website when we released our earnings after the market closed yesterday to provide everyone with a better opportunity to prepare for the call.

We will not be repeating the presentation and the remarks on this morning's call.

We will begin with some brief introductory comments from Mario and then proceed directly to the question-and-answer sessions.

Before we begin, I must caution 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 the release in the slide deck posted on our website and included on 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 we will start the call.

I will turn it over to our CEO, Mario Longhi.

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

We continue to make progress in our transformation efforts.

This is thanks, in large part, to our employees' commitment to change through the Carnegie Way.

While we have been facing difficult conditions for some time, our employees have remained focused on addressing the things they control, and their accomplishments have been impressive and significantly improved our business model and increased our earnings power.

The same can be said about our employees when it comes to safety.

Long injury-free streaks at the plant level are becoming the norm rather than the exception.

And we keep finding that extra level of effort and desire to get better every year, and that remains the case this year.

Our focus has been and will remain on the long-term health and stability of this Company, no matter what the market conditions, but transformation of this scale often requires difficult but necessary choices and we understand the impact of some of these decisions have on all of our stakeholders, especially our employees and their families.

We are continuing our fight against unfair trade around the world.

Unfairly traded steel imports remain at high levels.

And we believe that market distorting practices by foreign governments and steel companies are driving the current import level, not market demand.

These illegal foreign practices have been devastating our industry, our employees and some of our communities.

Last year, we successfully advocated for the passage of the level of the playing field act in the Trade Adjustment Assistance Bill.

This represents the first time in decades that US trade laws were revised and clarified to align with the original Congressional intent.

The interpretation and enforcement of these new laws has already been reflected in preliminary determinations in the three major trade cases we elected to pursue with other steel companies in 2015.

Yesterday, we announced another step in our efforts to have the rule of law enforced.

We filed a complaint with the US International Trade Commission to initiate an investigation under Section 337 of the Tariff Act of 1930 against the largest Chinese steel producers and their distributors.

The 337 complaint alleges illegal, unfair methods of competition and seeks the exclusion of all unfairly traded Chinese steel products from the US market.

I would like to emphasize that the remedy under Section 337 is not a tariff.

It is an exclusion of the products from the US market.

Our complaint alleges three causes of action: the illegal conspiracy to fix prices, the theft of trade secrets, and the circumvention of trade duties by false labeling.

We have said that we will use every tool available to fight for fair trade.

And with yesterday's filing, we continue to the work we have pursued through countervailing and anti-dumping cases and pushing for increased enforcement of existing loss.

Since this is pending litigation, we are not going to provide any further comments of the specifics of our complaint at this time.

Thank you, Mario.

I would like to point out that we have added a section to the Q&A document we posted to our website last night regarding Section 337.

And that the ITC website also had the Q&A document covering these investigations and would suggest everybody spend some time to review those.

I think it will be very helpful for you.

So at this time, Greg, would you please queue the line for questions?

(Operator Instructions)

Your first question comes from the line of Evan Kurtz from Morgan Stanley.

Please go ahead.

Hi.

Good morning, guys.

Good morning, Evan.

My first question is just on the guidance.

Prices are moving so quickly right now.

I was just wondering if you can help us kind of nail down where HRC prices were, when you kind of formulated the $400 million at current market conditions.

Is it -- can I use today's price and think about it that way, or is it a couple weeks ago, it was pretty significantly different, so any help there would be appreciated.

It's based on conditions, actually yesterday because the release went out yesterday.

So it's based on all of the market conditions you could observe out there yesterday.

Okay.

Great.

And then a question on iron ore.

I know you have a bunch of capacity off-line.

And I know in the past, you've kind of hinted that you might be looking to sell some third-party iron ore.

I know the Mittal contract is coming up at the end of this year.

Is that something that you're pursuing at this point?

Something that we would certainly be open to if the real opportunity came about.

It's not that we haven't done it in the past, but we certainly do have additional capacity if there is an opportunity to make best use of it, we would.

But no active discussions or anything at this point?

We won't comment on any specific customer or supplier activity.

We never do.

Maybe just one final one on Gary.

There's been a lot of news recently about unplanned outages.

It sounds like everything is back to normal there.

But just wanted to get a full update of how operations are along there?

Operations are normal.

They're stable.

Europe has concluded a couple of planned maintenance that they needed to do.

We had a little bit of an issue at Gary a while back.

But the old furnaces are back and running and the downstream lines are ship-shape.

Everything is going okay.

The only thing I would add is that we do have -- number 8 is actually on a scheduled maintenance outage right now, but 14 is back up and running.

We had some minor repairs there.

Your next question comes from the line of David Gagliano from BMO Capital Markets.

Please go ahead.

All right.

Great.

Thanks for taking my questions.

And actually, thank you for the details on both the slides and the supplementals.

I think it's really helpful and I think it lets us all each cut to the chase on these calls.

So thanks again for putting in all of that effort.

Thank you, Dave.

Cutting to the chase.

A couple of numbers questions.

First of all, can you talk a little bit about what's behind the expected shift from a pension expense to a pension benefit?

And also am I reading correctly that the $400 million EBITDA guide includes the expected pension benefit of $60 million?

It does include that, Dave.

And what happens -- and there's some -- there will be some details in the Q that explains it because it's a little bit complicated.

But what I would point out is, to help you with your modeling, is total pension expense for the year will be $93 million.

So we do have a $60 million credit below the segment line.

So within this segment, you would actually need to pick up $153 million in expense.

Okay.

And, I'm sorry, can you -- what's behind the shift from -- it starts being an expense and now it's shifting to a benefit.

What --

It has to do with the performance of the plan assets.

It has to do with the discount rates, but --

Okay.

Okay.

Got it.

And other changes we made.

All right.

So then -- okay.

And just one quick follow-up.

This may actually be related.

I'm not sure, but on the income statement for the first quarter, there's a $45 million benefit for earnings from investees.

That number had historically been running closer to $9 million, maybe $10 million on a quarterly basis.

So I'm wondering what's behind the big jump this quarter, and what's in the assumptions moving forward for that particular number embedded in the full-year guidance?

Thanks.

The big piece that drove that number in the first quarter was actually from our mining JV interests.

There were some pellet sales out of the JVs that are driving that number.

So, I don't know you would assume those are our run rate, but there were sales in the first quarter that were behind that number.

Okay.

What's embedded in the expectations for the year, for that?

There's -- no, we gave our projections based on the total corporate outlook.

There's nothing specific to that line just to focus on.

Okay.

All right.

All right.

Thanks very much.

Thanks.

Your next question comes from the line of Matthew Korn from Barclays.

Please go ahead.

Good morning, Matthew.

Good morning, Mario, everybody.

Thanks again for taking my questions, too.

Let me ask, Mario, what's the risk, would you say, given the political environment today that the EU and the other WTO member states will go along with the designation of China's market economy later this year?

What would be the effect then on the core trade determination you've seen today, through today, and the other attempts you're making for trade protection be it a 337 or 201?

Well, we've always been very clear.

For you to achieve market economy status, you have to fulfill some obligations and you have to have performed consistently over the past period of time, which in the case that we're talking about here, I see no evidence that, that has happened.

So it should be a fairly simple assessment based on the factual reference that China would not be entitled to that period.

All right.

Got it.

Let me switch over to this then.

You addressed in your fact sheet some of the speculation on the divestiture of your tubular business.

I'm just interested where there's the run in the oil prices up from the bottom here to date.

Has that developed any optimism, if you can see, among steel consumers' energy business, like Franklin Iron?

Along the same lines, where else could your inventories, in your view, compared to, say, six months ago?

Well, we've been diligently addressing the significant downturn that we've seen in the energy of business, and we continue to do so.

We don't sit on expectations -- when prices were heading down to $25 and now prices are a little bit above $40, we're still very focused on addressing what we can control.

We're still serving our customers well.

There have been some orders that have come in to fill some voids in the product mix that the customers need.

But inventories have remained high because the consumption has reduced so much.

When you're only running about one-fourth of the number of rigs that we had a little over a year ago and the consumption has significantly dropped.

So even though inventories have been -- come down, there's still around ten months.

So it will take awhile before this whole situation repositions.

And we always said that we would remain open to looking at whatever alternatives that would present themselves that would meaningfully generate shareholder value.

So we always remain open to looking at those.

Your next question comes from the line of Tony Rizzuto from Cowen and Company.

Please go ahead.

Thank you, gentleman, and thanks for taking my questions.

I echo Dave's thoughts about all of the detail you provided.

Very helpful.

Thanks, Tony.

You're welcome.

Thank you.

The shipment volumes, I have a question about that.

With your current configuration in the Flat Rolled segment and imports declining, do you expect you'll be able to regain some market share?

Well, we are -- we have been supplying the customers with whatever they needed, and we've re-positioned the footprint in order to better adequate to the current market conditions, Tony.

But we remain also ready to increase our supply as soon as the market, from a volume perspective, demonstrates some real sustainability.

We are not going to hastily move into bringing more capacity online, unless we see that there is real sustainable increase in the market demand.

Mario, would you need to see the trade cases fully play out for that to -- for you to make that decision to restart or is it more market driven in the case of Granite City, et cetera?

No, we don't need to wait for anything.

These are parallel situations that we address accordingly.

Okay.

And the other question I had, safety, just I hope I'm not confusing this with any other company.

But I think I saw a pretty significant improvement sequentially in year on year.

Is that, in many respects, Carnegie Way and your RCM implementation and --?

No question.

And are we seeing acceleration?

No question about it, Tony.

I mean, the -- if you recall, when we first started the Carnegie Way journey, we looked at the platform that had been built on safety and we expanded significantly on it.

Safety is deeply embedded into the Carnegie Way processes today, and Carnegie Way has now contributed to the way in which our safety methodologies and philosophies get executed on.

We've enhanced our ability to get to root cause analysis in the very same way that we do with any other issue, being it reliability issue, a maintenance issue, a quality issue.

And a lot of it resides on the more profound engagement of all of our people, making them more capable to come up with problem definitions and drawing solutions that come out of the creation of a great charter that is very well clarified and structured has significantly helped us make progress.

Okay.

And just a quick follow-up on the volume question.

Should we expect a seasonal bump in 2Q on sequential linked-quarter basis in Flat Rolled volumes?

I don't know how to clarify anything more than you have clarity, Tony.

What we've stated is at the ready, whenever you know, being closer to the customers, we will be watching to make sure that we're always there to fulfill whatever their need.

Your next question comes from the line of Gordon Johnson from Axiom Capital.

Please go ahead.

Thanks for taking my questions.

Good morning, Gordon.

Hey, guys.

So I've got a question on the guidance, and specifically, CISA reported that in the first quarter of this year, in aggregate, its member mills saw profits fall by 659%, which is a record.

So the question is given China consumes 50% of the world's steel, copper, aluminum, iron ore, could it be that their ability to stimulate is over now, as the companies that consume all of these goods, as the cost of these goods go up, it essentially ends their ability to make profit?

If that's the case, do you see the recent move in prices as temporary?

No, I think we wouldn't speculate on that.

But I think, you know, if these regions learn what market economies are, this situation of analysis of value creation should be a permanent factor in how they make decisions.

And so, you know, this is the reason why we look at some of the markets that were in there flooded with imports that we believe are not necessarily traded lawfully.

It -- if they don't decide they are not going to let market economy rules prevail, we have to address whatever rules that we have available to us to make sure that they don't contaminate markets that do operate by market conditions.

That's helpful.

But I guess extending on that question, it's come to light that there's been two days in the past month where, specifically for iron ore, futures volumes in one day were greater than the total amount of iron ore imported into China in the whole of 2015.

So I guess just extending on that question, there's been some speculation that the recent rise in steel prices, iron ore, copper, et cetera, in China has been due to speculation in the futures market affecting spot prices.

So I guess with respect to the outlook, do you see, if that is true and prices in China revert -- reverse down, do you see any risk to the guidance for 2016?

No.

Remember Gordon, our outlook is based on conditions as of yesterday.

So I think, to your point, if you think market conditions are going up or down later in the year, then you should be adjusted off of the outlook we put together because it is based solely on conditions as of yesterday.

So any change -- we're not speculating on future changes or marketing conditions.

But certainly you guys can make those adjustments in your models from the base point we're giving you.

Okay.

That's helpful.

And then just one last one.

With respect to your pellet capacity, could you speak to -- is your cost to make pellets in the United States below some your competitors?

And maybe if you could speak specifically to Cliffs.

And also what is your current spare capacity of pellets, and how long would it take to ramp that capacity up, if, indeed, you were to win some of the contracts?

Thank you.

Well, we believe that we are the low-cost producer.

We've seen the cost of the past year or so.

Our folks over there have been doing an extremely fine job in improving on a base that was already low.

So it's remarkable what they've been doing.

We're very proud of what they have been accomplishing.

I don't think they're done.

They have more to do still.

And we do have spare capacity, as you know, Keetac is pretty much down at this point.

But our ability to restart is -- we can do it very, very quickly.

So that's not an issue if the need is there.

Your next question comes from the line of Michael Gambardella from JPMorgan.

Please go ahead.

Good morning, Mike.

Good morning.

I have a question.

Are you currently or considering doing, what I would call, tolling of your iron ore to have it processed from the iron ore into hot rolled coil and then put through your finishing operations which you still have operating, say, at Granite City, and so forth, in a way to not only minimize cost and maximize your returns, but also to kind of keep supply discipline in the US market?

Well, as I always say, Mike, you know, we look at all of the potential opportunities that could constitute a business case that would make sense for US Steel.

So if something like that would be relevant, we would certainly consider it.

But is it something you're doing right now?

No, it's not something we're doing right now.

Okay.

All right.

Thanks a lot, Mario.

Sure.

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

Please go ahead.

Good morning, everyone.

Good morning, Timna.

I wanted to ask a couple things just to clarify and make sure I understand some of the developments lately.

One was in the past you had talked about if prices were to revert and rebound as they are, that you would need to rebuild working capital.

And you also mentioned the past that some of the cost cuts were temporary.

But it seems like you're all still going to generate a lot of working capital, cash from working capital and some of these cost cuts seem to not be temporary.

So I was just wondered if you could understand if that's the case and what might have changed to create that environment.

Sure, Timna.

The working capital changes we're talking about are really getting our inventories in line with where they need to be.

So to the extent that the only thing that would really interfere with that if there's a big ramp up in volumes, which, the net effect would be very good.

But the big working capital changes we're talking about it really the inventories, so that's where that's coming from and we control that.

As far as costs, when we talk about Carnegie Way benefits, those are the sustainable changes.

As we've done short-term things in the past, we call those out as a different category.

So the fact that Carnegie Way benefits are sustainable improvements, anything else we talked about would be related to temporary up and down fluctuations of the business, temporary layoffs and things like that.

Okay.

The other thing I wanted to drill down on if we could, and I didn't get a chance to compare the slide that shows your contract versus spot exposure with the last several quarters, but as I look at it, it looks like you have more and more spot or spot-based exposure, and that's a big contradiction with what I'm hearing from market sources, which is that there's not a lot of spot tons available from any of the integrateds.

So can you help clarify, are those spot tons just going to the tubular market, or is that widely available on the spot market?

At your current configuration, what do you have available?

And then what does -- I know you alluded to this, but I'm hearing the market is really, really tight.

I still don't understand how that equates to the market conditions that you need to restart Granite City.

Thanks.

Well, you know, if you look at lead times on, I believe Cold Rolled are up to nine weeks right now.

So it's certainly tight out there.

And we do have some flexibility.

But, again, as I said, we need to see a more sustainable volume demand coming into the market before we would restart it.

But we would do it if that was the case.

No question.

Okay.

And then on your configuration, how that's changed or if that's the spot tons of tubular or if they're actually available on the market?

No, they're across the board.

It's whatever the customers is looking for.

The demand in the energy market is pretty bad.

So certainly from our perspective, spot tons, like I said, we're looking for the best ones we can get.

So, like I said, it wouldn't be focused on any one particular market.

It's just really where the customers need it.

Okay.

Thanks.

Your next question comes from the line of Justine Fisher from Goldman Sachs.

Please go ahead.

Good morning.

Good morning, Justine.

The first question I have is on the capital structure.

I know that in the Q&A and the comments on the slides, you guys mentioned you're very focused, obviously, on the 2017 maturity and the refinancing.

But with the rally that we've seen in the steel market and the rally that we've seen in the bond market and even in the equity market, what's the Company waiting for?

What is US Steel waiting for, in order to pull the trigger given what we've already seen happen?

And would the Company be willing to use equity to help refinance maturities?

The analysis is very broad.

We've always said that we would prepare to do it at the time that it's convenient for us.

Not anybody else's input would make a difference in the moment in which we will pull that trigger.

But we're ready to do it at the right moment.

Okay.

And then the second question is just back on to the sustainability of demand that you guys would look for in order to ramp capacity.

Would you -- so obviously, you've have to look at demand in the US.

But to what extent do you evaluate demand in China?

Because I think some people would argue that the rally that we've seen in the Ferrous Complex globally was initially driven by restocking in China.

When you look that's -- the sustainability of demand, is it just the US, or do you look at the sustainability of the demand in China as well and how that might follow on to the US market?

Because even though I think energy has reduced some demand on some hot rolled side for substrate, my takeaway from steel company comments over the last few quarters is that demand on the flat rolled side in the US has not actually really been that bad to begin with.

We always look at the global demand, Justine.

But we need to put the fudge factor of the interface with imports in terms of the trade cases.

And they will certainly play a meaningful role in how much the overall global demand and the movement of material around the world would impact us as the domestic market continues to evolve.

Demand in many of the sectors here, as you know, has not been bad.

You look at automotive, the white lines, they've been fairly steady and good.

Some of the other ones are not.

Like you go to mining, for example, and the energy business in general, it's been fairly weak.

So those domestic conditions both here and in Europe are observed with attention.

But we do look at what's happening in the outer world and what are the thresholds based on the curtains that we're trying to put in place to make sure that the fair trade prevails for the most part.

Okay.

Thanks.

Would the Company consider using equity to -- sorry.

I just did one of the -- first question, the answer to the first question.

Would the Company consider equity in terms of managing the balance sheet?

We would if that was the right decision to make.

Your next question comes from the line of Jorge Bernstein from Deutsche Bank.

Please go ahead.

Good morning, guys.

I agree as well that the disclosure that you provided last night, extremely helpful, and best-in-class, by the way.

Thank you.

Thank you.

My question is on the base case that you guys are using for HRC spot, can you just -- you said earlier that it's up to the market to make their determination.

Can you just give us a sort of number that you would be using as the base case for HRC spot?

Well, I think if you look at where it was, the prices are generally in the low $500s.

Okay.

My second question is just on the Section 337 complaint, I mean, it does clearly target China.

But broadly speaking, Chinese imports have already massively declined and appear to be a de minimus amount into the US market at this point.

I'm just trying to understand, is this more of a psychological filing that you're doing because incrementally, it doesn't seem that there's much more market share to be gained by fully blocking China out of the market, if you could comment on that.

Jorge, if you look at the three causes we've alleged, transshipping is clearly one of them.

And what appears to be coming in from China, we think is a much different number than what is actually really coming in from China.

It's just that tons are being labeled from other countries.

So that's really what that third cause of action is in that case.

That's a great point.

Okay, and then lastly, if -- maybe for Mario, if you could comment a little bit on the layoffs we've seen certainly that the non-unionized employees bearing a big brunt of the layoffs recently, a 25% headcount reduction.

Can you comment what the agreements are with the unions in terms of sharing of job losses or layoffs, or is there some kind of a ring fencing where the unionized workers are not going to be expected to share the same amount of headcount reductions?

No.

That's not the case.

You know, we have achieved an agreement with the union in our contract that's in place.

It's working.

Our relationship with them is strong.

They have -- all of our people have a significant participation in all of our Carnegie Way efforts.

And what we're doing with support services is basically adequate that structure to the current footprint that we have within the Company.

So it's just about balancing the overall structure in a way that it makes sense and is appropriate.

It's -- you know, there have been layoffs.

They have hit just about everybody, union and non-union.

It's not this latest move that you saw, even though it was more concentrated on non-represented.

But at the same time, some of the represented people have suffered the same.

Your next question comes from the line of Matthew Fields from Bank of America Merrill Lynch.

Please go ahead.

Hey, guys.

I just wanted to echo Justine's comment that -- about sort of why wait.

I mean, it seems when you talk about bringing capacity back online, you keep saying that you're waiting to see if the market is sustainable, if these prices are sustainable.

I mean, the capital markets are with you right now.

And it seems like it would be most convenient to do some sort of capital raise when the markets are with you in both steel and the capital markets, rather than waiting to see if one is not sustainable.

So can you just -- I echo her comment about what are you waiting for?

Well, I think, Matt, I think we've said, we know what all of our options are.

We're watching the markets, both the steel markets and the capital markets.

When we think it makes sense for us and the right opportunity is there, then we will do something.

But it's really a combination of what's going on in both the steel markets and the capital markets.

And we have a very strong cash and liquidity position.

So that's how we think about it.

But we've explored the possibilities.

We know what's out there.

And don't misunderstand it.

We don't disagree with you.

If you look at where the market was just a couple of months ago to where it is right now, it certainly has changed and then we are confident of it.

Okay.

Well, good luck.

Thanks very much.

Thank you.

Your next question comes from the line of Charles Bradford from Bradford Research.

Please go ahead.

Good morning.

Good morning, Chuck.

You had a nice gain apparently on the retirement of debt.

I'm assuming that, that showed up in the other financial costs.

Can you give us a number for how much that gain was?

Sure.

You're right.

That's where it is.

And we -- it was $2 million.

And if you look in the details, we retired -- we got back $19 million in debt for $17 million in cost.

All right.

Terrific.

In the fourth quarter report, you talked about an impairment on an equity investment.

But even in the 10-K, I couldn't find an explanation as to what that was.

Can you tell us what equity investment was impaired?

That was one of the assets in our real estate portfolio, not a very big one.

It was real estate.

It wasn't related to the steel business.

Okay.

Because it was $18 million.

What's that, Chuck?

It was $18 million.

Yes, it was.

It was part of our remaining real estate portfolio.

Then on the trade side, one of the companies or countries that was sued was Korea on Hot Rolled.

Since you are the big buyer or UPI is the big buyer from POSCO, who pays whatever dumping margin is found in that case?

That JV is responsible for its own activity.

Okay.

Thank you.

All right.

Thanks, Chuck.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Please go ahead.

Good morning.

Good morning, Phil.

Mario, can you give us an update on the automotive opportunities for the Company and potential new products and just some evolution there with all of the substitution going on with the lightweighting and how you're thinking about that over the next couple of years?

Well, actually, Phil, we're very happy and excited with everything that's happening in automotive.

We have several new alternatives that have been given to the OEMs.

I mean, if you look at most of the OEMs that we're working with, the solutions that they are going for are steel solutions.

Many of them are our solutions.

Our engagement has gone beyond just a material.

It's going very heavily towards what we can do with the design engineers of the OEMs in order to come up with designs that are much more prone to receive some of the materials that we're offering, as well as current materials.

So we are very comfortable with what is taking place in that realm for us.

Do you need to add any capabilities within the organization right now to hit some of the targets that the OEMs are looking for over the next couple of years?

I don't think so.

The capability that we had was mostly technical and intellectual capability, because we've gone beyond the normal board of relationships where you're just talking about a material.

You're talking now about a solution, and there are plenty of contributions that we're making as the design engineers go about crafting the ultimate shapes and structures of the new vehicle.

And our input has been essential for them to really get to the best, safest, lightest and more economical solution that they're looking for.

Okay.

Terrific.

And speaking of automotive and annual contracts, have those pricing resets largely taken place, or should we expect anything incremental here in the second quarter?

I think for the most part, they've been concluded.

There are still some that are in the last phase of conclusion.

It shouldn't take very long for that to be done in full.

Your next question comes from the line of Garrett Nelson from BB&T Capital Markets.

Please go ahead.

Hi.

Good morning, everyone.

Good morning.

Just a question about your assumptions in the bridge and getting to positive $400 million of EBITDA for the year mainly as it pertains to Flat Rolled.

Does that assume that Flat Rolled volumes and price realizations will increase every quarter sequentially for the remainder of the year?

Well, it assumes things would flow off of where current market conditions are.

So to the extent that current market conditions will eventually flow into our adjustable contracts, yes.

As far as volumes of demand, it doesn't -- if you assume demand doesn't change, then that's our assumption that the demand stays where it is today.

But, yes, if you hold Flat Rolled -- if you hold spot prices flat from today forward, our adjustable contracts will start to pick up some benefits in the next couple of quarters.

Okay.

And are you assuming that your adjusted EBITDA will turn positive in the second quarter or maybe not -- maybe you're not expecting that to happen until the second half?

We're not -- this is annual.

We're not talking about quarters.

Okay.

And finally, any update on when you might circle back on the Fairfield EAF project?

Has your thinking changed at all regarding that project with the improved EBITDA and cash generation outlook for this year?

Well, that project is solely dependent upon the turnaround on the energy demand.

And right now, it's still very low.

We are concluding the warehousing of all of the equipment.

Everything has finally arrived.

It's all taken care of.

We can certainly kick it back on whenever the moment is right.

And we just need to see what happens with that market.

Right now, we're really looking into addressing the very small demand that we're seeing out of the operations and adequating it to make sure that we address cash flows to the best of our ability here.

And remind us of the cost of completing that project and how long it would take?

I think it would probably require between $50 million and $100 million to finish it off.

And we certainly could conclude it between six months and a year, depending on what the conditions are at the time that we reignite it.

Your next question comes from the line of Nick Jarmoszuk from Stifel.

Please go ahead.

Hi, good morning.

Thanks for taking the question.

I was hoping to talk about again the 2017, 2018 maturities and just the options that are available to you.

How do you think about issuing secured debt in this market when you have other capital options available to you, versus keeping that secured debt available to you when all the other capital markets are closed?

Do you think you should -- essentially, the question is, do you think you should save that secured capacity for yourselves when your back is against the wall and there are no other capital market options available to you?

Hi, Nick.

We are evaluating all options.

We wouldn't take any off the table.

But we're not going to get any more specific than that at this point.

But we know what all of our options are, and that's certainly one of them.

But we know what the full spectrum is.

But beyond that, I don't think we have anything additional to add to that.

Okay.

Thanks.

Your next question comes from the line of Lee McMillan from Clarksons.

Please go ahead.

Hi, everyone.

Thanks for taking my questions.

You've talked a lot about initiatives to work with customers to improve quality and delivery performance.

I'm just wondering if the feedback from customers is improving significantly since you've been making those changes?

Well, the feedback is very good.

I don't think we've ever been as transparent and engaged with them when we analyze the overall of the value chain for them.

And that includes not just the delivery performance, but the way in which we do some forecasting which impacts how we do sales and operations planning.

So I think the progress is real.

And the candidness and the feedback feed into the way in which we do the planning for improvement over here.

So it's certainly a lot better than I've ever seen.

Okay.

And then for the $100 million in Carnegie Way this quarter, where are those benefits showing up?

Is that in working capital or is it, say, cost reduction that's showing up in COGS?

And then could you break it down by Flat Rolled, Europe and Tubular?

Actually if you look at the slide we have in the deck, it shows the split by segment of the updated Carnegie Way benefits.

And the Carnegie Way benefits, these are P&L benefits.

So these showing up in SG&A.

They're showing up in COGS.

But the slide we have out there gives you a breakdown of what category and what segment they're going to.

Okay.

Thanks.

Lastly, what level of debt do you think is right for the Company?

I mean, historically, you know, it depends on the market situation.

If there is a real opportunity for investment, you go a little harder at it.

But on average, 30%, 35% has been the pretty good place to be.

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

Please go ahead.

Great.

Thanks for taking my follow-up.

Just a quick one on capital spending.

It seems like you're earning pretty high above the full-year guidance if you were to run rate it.

And I saw that there's a big expense this quarter in Tubular, which surprised me a little bit.

So just wondering, are you still feeling comfortable with that $350 million number and what was the big expense that we saw in the first quarter?

Yes, we're comfortable with the number.

And the big expense was, as I mentioned before, was the conclusion on the position of all of the parts for the EAF.

And, Dan, you have another piece of --

I think the other piece was that we did have at our other businesses, our railroad business, we bought some rail cars and that shows up as some additional spending there, but that was all in our plan.

Your next question comes from the line of Tony Rizzuto from Cowen and Company.

Please go ahead.

Thanks.

Thanks very much.

I appreciate also the ability to ask a follow-up here.

I wasn't going to ask a 337 question, but I heard you answer one.

But does this also seek to include all products containing Chinese steel, or is it just direct steel?

It's direct steel.

Direct steel.

Okay.

So just to confirm, this is not seeking to exclude any products that might contain Chinese steel?

No, this is Chinese steel directly.

No.

All right.

Thanks, guys.

Sure.

Your next question comes from the line of Gordon Johnson from Axiom Capital.

Please go ahead.

Hey, thanks, guys.

My question has been asked.

All right.

Thanks, Gordon.

And your final question today comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Please go ahead.

Hey, Mario.

I just had a question on the 35% that you just mentioned.

Was that debt to cap that you were pointing to?

Yes.

Okay.

And then, lastly here, do you have a view on the Canadian steel market, either Essar or US Steel and whether or not those are viable longer-term operations at this point in time?

Thanks.

Well, you know, the Canadian process continues to flow as expected.

The market over there is going to be susceptible at the same levels of injuries that you've seen over here.

And it's -- we don't have a direct interest at this point in that particular market.

We have enough going on between Europe and here.

We have plenty of opportunities.

And that's what we're really mainly focused -- focusing on.

All right.

Well, we appreciate all of your questions.

Mario, do you want to give us a final comment before we're done?

Yes.

I just -- before we sign off, I want to acknowledge and thank our employees one more time.

I know it's been hard for them to see the positives because they've been confronted by significant challenge after significant challenge.

However, we certainly would not be where we are today seeing the light at the end of the tunnel without them doing what they've been doing.

Very grateful for that and proud of it.

So thanks, everyone.

Thank you, Mario.

I'd like to thank everybody for joining us, and we will be back with you in July.

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