美國鋼鐵 (X) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to United States Steel Corporation 2016 second-quarter earnings call and webcast.

(Operator Instructions)

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

I would now like to turn the conference over to host, Mr. Dan Lesnak. Please go ahead.

Thank you, Shannon.

Good morning, everyone, and we appreciate you joining us today for our second-quarter 2016 earnings conference call and webcast. On the call with me today will be US Steel President and CEO, Mario Longhi, and Executive Vice President and CFO, Dave Burritt.

We posted our slide presentation and prepared remarks under the investor section of our website when we released earnings after the market closed yesterday to provide everyone with a better opportunity to prepare for our call. We will not be repeating the presentation 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 session.

Before we begin, I want to caution you, 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 side deck posted on our website and are included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the safe harbor provisions.

Now to start the call, I will turn it over to our CEO, Mario Longhi.

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

We're encouraged by the improvements we are currently seeing in our results, as the significant changes we have made to our business model have greatly enhanced our earnings power by creating a lower cost structure and by improving our commercial position. We have seen a steady increase in our mix of value-added products, from 62% of our flat-rolled shipments in 2013 to 70% of our shipments today. We are well positioned to deliver strong results under current market conditions.

However, our Carnegie Way transformation is about more than just short-term results. Our aspiration to become sustainably profitable has not changed. As we keep our Carnegie Way strategy in action we can unleash considerable value. Our commercial entities, and ultimately our employees, are driving customer focus and value creation by succeeding in both product development and process improvements.

We have our employees focused on developing new ideas for process, system, method, service, product, and technology that advances our operating performance, customer satisfaction, and stockholder value. Going forward, our ability to keep executing on and implementing these ideas will determine our ability to be able to differentiate ourselves from both processes and products and to continue to drive structural cost improvements.

Our many successes over the last two years have provided the platform that we'll use to become a true business partner and solutions provider to our customers and create the sustainable earnings that will translate into value for our stockholders, employers, and other stakeholders.

Thank you Mario. Shannon, can you please queue the line for questions?

Ladies and gentlemen, will now begin the question and answer session.

(Operator Instructions)

Curt Woodworth, Credit Suisse

Yes. Thank you. Morning.

Good morning, Curt.

Mario, when you look at your flat-rolled cost structure this quarter relative to the year ago itself, roughly $100 a ton, despite the fact that you've got idle costs in there for Granite City. You've got, obviously, the Gary outage and what I assume is a much more expensive product mix. Can you give us a sense of the contribution was as the decline between, say, raw materials and conversion, and do you feel like that's a sustainable unit customer going forward?

Hey, Curt. This is Dan. When you look at that, the raw materials change year over year that you're looking at. It's probably in the range of up $25 a ton. The rest of it is really going to be more of the structural and controllable cost improvements we made.

And Curt, this progress is sustainable. The Carnegie Way processes, we have trained about 10,000 people. The methodologies have been implemented. People continue to learn, and they continue to generate great ideas for improvement, so we're not done yet.

Okay. Thank you for that. Then just as a follow up, you're one of the largest unsecured creditors to the former Stelco assets you acquired, and I'm sure you're following the process up there, but KPS and Essar are no longer in the bidding process, and it looks like liquidation of that asset is becoming more likely. I think Lake Erie is producing roughly 2 million, 2.5 million tons. So I'm just wondering, are you seeing any evidence from the customer of AS talking to you about potential eventualities of that outcome, and do you have any color on how you see it playing out?

No. We've been a participant in this process as a creditor as of late. And we just keep watching it and engaged with the proper parties over there, and I think we're getting close to a conclusion of that process.

Okay. Thank you very much.

Matthew Korn, Barclays

Good morning, everyone.

Good morning.

So saw substantial quarter-over-quarter turn over there at USS Europe in its profitability. When you're looking at the orders and the shipments so far this quarter, is that volume strength holding in the third quarter? And as you expect higher prices, you mentioned, for the -- going into the rest of the year, is there anything to make you think that that profitability performance can continue in the second half?

We'll be operating at a very good level, and we've seen a steady, consistent level of improvement in the quality of their operations. They're really performing well. I think we can look forward to -- everything else to be maintained as such -- to another great performance from Europe.

Got it. Let me follow up, Dan, on some -- the issue of trade. You've been happy with the final determinations seen so far for sheet steel, and now looking ahead at the hot-rolled case and the precedent we've seen where Korea receives substantially higher final duty rates in the preliminary numbers, what's your view on how meaningful a similar result could be on hot-rolled pricing as Korea, I believe, still supplies the plurality HRC imports into the US?

Well, we certainly are pleased to the outcomes that we've seen so far. And that's proof that the level playing field is being established, and under those conditions, the industry should be able to benefit from everything that we do that is really good, but it gets undermined when the level playing field is not level.

So in the next couple of weeks, we're going to see the final determination on the last two cases, and the preliminary ones have been very positive. And with the ITC rectifying what we've seen, it should really create a much better playing field for us to be able to play in this environment. And we really do expect and look forward for significant results. America needs our country to enforce our laws.

Thanks very much, fellows. Have a great rest of the quarter.

Thank you.

Gordon Johnson, Axiom Capital Management

Thanks for taking my question.

Good morning, Gordon.

Good morning.

I'm just thinking about the OCTG case and looking back on that case. It was filed against China, and China seemed to have dominated the US market. It was blocked, and for a while, OCTG imports were down, and then they picked back up as South Korea replaced China. And when I look at US Steel imports, adjusted for July, the number that was updated last night, it looks like they're going to be up roughly 9% month over month and up for three straight months now, and looking like July is going to be the highest month in over a year.

So it looks like imports are now starting to pour back into our shores. And when I look at places like Vietnam that went from nothing to something and thinking maybe some other countries could do that, is there risk, in your view, that we could get a flood of imports, given the differentials between US prices and international prices? And then I have a follow-up.

Well, on the OCTG case, you saw the margins that were determined to -- certainly, it didn't reflect the nature of the situation that we had. And you can see that still being present in earnest today. Now, one of the issues that we see that can happen that we were trying to address is a problem of you still have transshipment taking shape; you still have false labeling taking place.

So the risks are real. But we've been working diligently to address them, and if you look at the fact that the [Enforce Act] has now being put into law, there are much better ways in which we can track and address some of these practices that have been inhibiting the true market forces to prevail in every case.

Hey, Gordon. This is Dan. One other thing to think about is, the ton's you're seeing coming in now are based on lead times from orders from really before the big price movement started. Then the orders really drop off, so anybody that starts ordering now the spreads [route], you probably won't see those tons until mid to late fourth quarter at the earliest.

So I think the current volumes are based on orders from early in the year, not what's actively happening right now. But certainly, those spreads are what we're watching, and if people do start ordering, it would show up, but it would not show up until late in the year.

Okay. That's helpful. And then just looking at the EBITDA guidance, when I think about the Carnegie Way cost savings, which have been impressive, billions of dollars of cost savings, and I look back to 2014 when you did about a $1.4 billion in EBITDA, and in that year, HRC price's average was $658. So fast forwarding to the second half, assuming prices stay where they are at $624, you're talking about, on an annual basis, $1.575 billion EBITDA in guidance.

So the question is, the differential in HRC prices second half of this year versus 2014 is just $34, yet you shipped 14 million net tons in 2014 versus roughly -- we're estimating 11 million net tons this year. So the point is, it seems like the cost savings aren't flowing through to the EBITDA when just comparing 2014 versus the second half of this year. Could you maybe helping understand that? Maybe I'm missing something there.

Actually, Gordon, there's a good presentation that's in our earnings call from a couple quarters ago and also in our 10-K that is a bridge chart that shows you how you can find that by stripping out the big variable raw materials components and how they move. But the one thing I'd point out is, when you think about our prices, what you're seeing now, current second quarter, our prices don't reflect current market. Those really reflected the prices from a quarter ago before the change.

So if you think about our average realized prices, what you're seeing in the second quarter results is really based on pre-price run. If you flow through the changes of CRU into your model, you should, for the second half of the year, get a price realization for our flat-rolled segment north of $700.

Evan Kurtz, Morgan Stanley

Good morning, guys.

Good morning. How you doing?

Pretty good Question on Granite City. Is there a restart of Granite City included in the guide?

No. The Granite City sits idle until we see that markets really substantially and solidly evolved. So we're keeping our eye on it and keeping our powder dry.

Got it. Is there any to quantify that a little bit? Just what is it -- how close are you at this point would you say to making that decision?

I've seen, Evan, demand has been pretty stable across all the markets. So I don't think we've seen much demand change at all, so I don't think our position has change very much in the last few months.

Got it. Okay. And then just a question on your outlook for OCTG. We have seen the rig count evidently show a little bit of signs of life. I imagine some of the inventories are starting to dwindle for some products. What's your view on the timing of a recovery potentially in OCTG, and maybe some thoughts on 2017 there?

Yes, nothing much more meaningful, I believe, can happen through the rest of this year. What it shows is probably we've hit bottom. Inventories in total are still very high. And you stated correctly, we're beginning to see some spots where there is weakness, so with very short lead times, we're -- that's how we're operating.

Rig counts came up just a little bit, but inventories in general are still very high. I think we're going to have to wade through next year and see what happens. Geopolitical forces in North America, we still have the volatile environment in the political environment, so we don't know how the Fed is going to act. There are so many things up in the air that people are still going to be cautious as to how they bring more capacity to life.

Understood. Then just one last one on maintenance. Do you have anything scheduled for the second half?

Yes, we do. We have some maintenance that is scheduled, I believe, for October at Granite City.

That's at Great Lakes.

Sorry. Great Lakes.

We do have about a 25-day blast furnace outage set up for the fourth quarter in Great Lakes right now.

Got it. Thanks, guys.

Sure.

Dave Gagliano, BMO Capital markets

Great. Thanks for taking my question. And first of all, I want to thank you for providing the presentation, the prepared remarks ahead of time. I think that's a great idea. Let's just cut to the chase, and love it for other companies to do the same.

Along those lines, cutting to the chase, the question I had was related to volumes. I was wondering if you'd just give us a sense as to the volume expectations over the next couple of quarters directionally. And along those lines as well, the utilization rates in Europe, obviously phenomenal, over 100% this quarter. What your thoughts with regards to opportunities to grow that business further, most likely via capital investment, things like that? Thanks.

Well, we do have, certainly, several projects that we're contemplating going forward, but we haven't quite stopped doing it. There are so many investments that we're making that are making us so much better, and there's still opportunity for improvement within what we have. So the opportunity for growth is real; it is happening. And what we are considering, it's really more value rather than just volume.

You're seeing that, as I referred to in my initial remarks here, we continue to evolve into that chain. We're doing well. That's an important feature as we think about how we go forward.

And that's -- sorry, just -- so two quick followups. That's specific to Europe, or is that across the chain, number one? And then number two, can you talk a little bit about your volume expectations in the third quarter and the fourth quarter specifically in the US?

My comments are for the whole system. I think we have a little more opportunities given the fact that we're not full yet everywhere in North America, but I think volumes for both are pretty consistent as we look forward to the rest of this year.

Great. Thank you very much.

Sure.

Michael Gambardella, JPMorgan

Yes. Good morning, Mario, and congratulations on all the hard work. It's really shown some great results.

Good morning, Mike. Thank you.

You're welcome. I have a couple questions. On the guidance that you gave, at the current level of market activity, you're basically saying you're at a run rate of $1.6 billion in EBITDA with the (inaudible) for the with the year given that you are near breakeven for the first half. Is that correct?

That's right.

Yes, that's right, Mike.

Amazing. Now how -- at a $1.6-billion EBITDA run rate, what percent of your book is not getting any of the price increases? So what percent of the book is locked up at (inaudible) pricing and won't be renegotiated until the end of the year?

Mike, as we sit now, about 40% of our flat-rolled volumes are on those annual contracts that aren't moving. But like I said, these quarterly adjustables are about 20, spots about 25. Monthly adjustables are the difference. So as I mentioned, you'll see that really flowing through, particularly when you look at the quarterly adjustables, second-quarter CRU was much, much than the first, and that's what we'll really see the benefit of in the second half.

But you're right. About 40% of our volumes, we don't get a change on those until we get to year-end, early next year price negotiations, and that will really be determined by where markets are when we get later in the year here.

Okay. And then a question on trade. It seems like the market appears to be very concerned about trade slows increasing, particularly from Korea. With the hot-roll's final determinations coming up, if Korea, and particularly POSCO, gets a high number, my assumption and beliefs is that a large percent of the vast majority of Korean hot-rolled exports to the US are actually being sold to your operations, the joint venture that you have with POSCO in California and Pittsburgh, California the UTI facility. If POSCO gets hit with a very large tariff on hot-rolled, are you -- do you have to supply hot-rolled to the west coast operations, or is that still the responsibility of POSCO?

Well the impact of the final determination should flow across every single business in the United States, period, Mike. And we certainly are capable of supplying. We still have capacity available. So the answer would be yes. We're still ready to support to support the market.

But Mike, to your point, we have the option, but we don't have the requirements. That JV is free to source their substrate wherever they want.

Phil Gibbs, KeyBanc Capital Markets

Good morning.

Good morning, Phil.

Good morning Phil.

I had a question, Mario, just on your automotive momentum year to date in terms of shipments or any color you could provide on that, and what your plans are in terms of expanding your next-gen capabilities.

Well, we're doing fairly well. We still have some opportunities. Whenever you consolidate a footprint the way that we did, you certainly have a few challenges, and folks are diligently working through it. But the simple answer is, yes, we are ready, and we do have some plans to expand those capabilities as we go into 2017.

Okay. And David, if interest rates stayed subdued -- let's say the 10-year was 1.5% at year end -- would you have to make an alteration on your discount rate for your pension, or is there some longer-term view that you would have to take? I'm just trying to understand how the actuarials could potentially push that decision.

If the rates are lower, obviously, we'd -- I think we're at, what is it? 4.25%? We'd be lower at the end of the year. This is a GAAP requirement, so certainly, the discount rate would be lower now if we actually had to put it in place.

Terrific. And Mario, on the Section 337, I know there's been some back and forthing with the government agency looking at the case. Can you give us an update in terms of where that stands and what we should be looking for moving forward because obviously, not a lot of us have dealt with this in recent history. Thanks.

The 337 had a little bit of a technicality, but I think it's being overcome, and we should see a continuation of the process going forward in earnest very soon. The ITC and the Department of Commerce are very supportive of our position, so nothing in our view has changed, and we do have very high expectations that this is going to be a positive, for the industry as a whole, not just for us.

Timna Tanners, BofA Merrill Lynch

Good morning, everyone.

Good morning.

So you know that you've been doing this, and you clarify on the presentation at 2016 outlook and what it contains, but I'm still a little bit confused when you talk about today at current levels, stock prices, customer demand, et cetera. Are you talking about the expected second-half demand and expected-second half -- I know you're talking about today's spot prices, right? But are you doing any forward look at what you see seasonally or imports doing or rig count is doing, or is it all precisely a snapshot today?

We're not speculating on what markets do, so we're just trying to give you a good benchmark to work from. Obviously, when you talk about spot prices today, there's a flow-through into our contracts based on [structure and space].

Sure.

That's certainly built in there. But, no, we try to really take the speculation out just to give you a good starting point to work from.

Okay. Do you expect seasonal demand in Europe as normal in the third quarter? It sounds like not. That was one question. The other one is, if rig counts change in the second half, because you're saying at current levels, would that change your view much given the amount of inventory? Is there much change in tubular as you can see it here and now, even if rig counts continue their upward trajectory on US land?

I think that the slow pace they're moving, there's probably not a lot of change based on rig counts. It's one thing, as Mario mentioned, that you might start seeing some bigger holes in the inventory out there, but that's about it.

Okay. And then on the Europe question?

Well, I don't think there's anything out there that says the markets are going to behave like they have.

For example, especially where we are, Timna, the V4 continues to be more resilient than many of the other areas in Europe, and we've seen virtually no impact from Brexit. Everybody still continues to operate fairly well. The flows of in and out are still very solid. So we are looking forward to the rest of this year in Europe, too.

That's helpful. Can you talk a little bit more about and elaborate separately on your comment in the presentation about how you're working to strengthen the balance sheet and, quote, constantly evaluating all options to improve your position? What you mean by that?

Well that's an area of focus that we've had since day one. Cash and balance sheet are key components of our ability to be sustainably profitable, to invest, and continue to develop. Our Team has done a superb job with the issues that we've had the last couple of months. We've extended our obligations all the way now to 2020, 2021, which gives us a lot more flexibility, not only to eventually deal with the volatility that we see in our market, but it gives us a better condition, then, to position priority projects and keep moving forward on it.

Maybe I will just add to that. We always say here, cash is king. We must keep strong liquidity; it's really important to us. That's just not for earning the right to grow, but also when we do a pivot to grow in the business. We feel more comfortable with more cash on the balance sheet, and so we're continuing to focus on that, so you see our $820 million in cash increase from (inaudible), and of course, the refinancing a balance sheet, but we're not done yet.

We believe we should carry enough cash to be very flexible no matter what the economic conditions will be. That may mean going down or going up. We're going to make sure that we're carrying enough cash to be very responsive to the marketplace, and ultimately, help us grow the business.

Seth Rosenfeld, Jefferies

Good morning. A couple follow-up questions on your European business. You obviously have very strong Q-over-Q volume growth in the region that seems to be outpacing, perhaps, what we've see from the broader European market and where apparent demand would be for the industry as a whole. Can you comment to what extent that's driven by share gains, either versus your domestic peers or versus imports?

And then beyond that, there's obviously some major trade cases in hot-rolled coil in Europe perhaps gradually moving down the same route as the US market has seen over the past year. Given that you've had a very good experience in the US with rising prices as imports drift lower, do you think the E is moving that direction as well, or do you have a general view on where trade policy is projected in that area? Thank you.

Our European operations have been remarkably consistent, their ability to improve both on their operating performance as well as the repositioning of their mix and bringing forward some innovation that is serving them well. I think we've performed like second to none. The customers are supporting every initiative that we've had with them. We believe, like I said, we're in the region of Europe that has performed better than the rest, and we see that continuing.

The other part that is becoming very positive in Europe, if you look back, until last year, the Europeans were much slower in recognizing that the level playing field was unlevel for them also, while we were making a lot of progress here in the United States, both from the excellent fielding of cases as well as the repositioning of the law. The level playing field is now much more robust in terms of being preserved, the United States (inaudible) than has been in Europe, but we've been working in parallel with the European Union to bring to their attention how critical the situation was for them.

And as of early this year, we began to see a shift. Trade cases are being put in place in there. There is an enormous amount of discussion on how damaging some of the abuses have been, and they are moving to enforce the law just like America is doing. It's beginning to take hold.

We really should have a condition in Europe where you're going to see that people that don't play by the rules are going to be barred from playing at all. It's very positive, what is taking place.

Great. Thank you.

Sure.

Jorge Beristain, Deutsche Bank

Hey, guys. Good morning, and congrats on the results. My question just is what were specifically the maintenance and outage costs in the second quarter for flat-rolled?

We will just point out, they were higher than the prior, but they were not -- we used to say material -- they were not -- it was a normal planned blast furnace outage that we had. It wasn't a reline. So it was a maintenance outage.

It's just a change quarter over quarter, but it's certainly not an unusual spend for us. It's just really -- you can't really smooth it out across the quarter. It just gets lumpy. That's why we tend to call it out when there's a change quarter to quarter.

Okay. And then maybe following up on the questions -- I'm sorry -- the comment in the press release where you said that your guidance on a go-forward basis could be subject to change, but then it seems from your earlier comments that a lot of the oil and country tubular goods is not really going to change, Europe seems to be on pace. So just trying to understand what change you're intoning there. Is that the risk of a correction in HRC prices down, or what did you mean by those comments?

All we're saying is we're giving you a -- one scenario, and we're acknowledging that the markets do change. You should expect our numbers to change. We're not -- we don't have a theory out there on it. We're just saying if things stay the way they are, do we $850. If you think prices are going to come off, then you'll probably come up with a lower number. If you think something is going to go the other way, you'll come up with a higher number.

It's just our outlook on what happens if you would dollarize where things stand today. All we're saying is, if things change, you should expect our number to change.

Okay. Then just last question. Any plans you can comment on for your $161 million of notes due 2018?

We're still looking -- I think we may -- we have a very manageable maturities now. We understand that they'll be coming. If we see an opportunity, there's no reason we wouldn't exercise our opportunity.

But right now, we're pretty comfortable where we are. I don't think you'd want to go out and pay a big premium to clean up something with that small of a number, particularly since we are building cash right now and are liquidity strong.

Great. Thank you.

Tony Rizzuto, Cowen and Company

Thank you. Good morning, and thanks for taking my questions.

Good morning Tony.

Hi, Mario. In Europe, on the trade front, given the timeline, when would you expect to begin benefiting there?

Well, it comes pretty quickly after the final determination takes place. The resolutions in Europe are -- they take longer. If you see the complicated environment that we go through here in America, the European Union is significantly more complicated. But it will take at least a quarter before we begin to see that play in full.

Okay. In the past, Mario, and I think David, you've also talked about rising import pressures in tin mill. Are there any trade cases underway there?

Look, Tony, we keep looking at this whole area that we participate in very carefully, and I believe by now you've seen, we will never hesitate taking action whenever the situation warrants it.

Okay. Are you seeing any green shoots of note in your industrial end markets?

We are, with the exception of the areas of mining and agriculture. There is a lot of good work that we're doing with our customers in that arena, but those areas are still pretty slow.

Okay. One final question. I appreciate taking all my questions. I'm wondering on iron ore, haven't heard any questions there, but what is the current balance for the Minntac facility? Are you guys in the merchant market right now? I'm just wondering how the competitive dynamics have change.

One of your competitors has had some commercial successes recently. I'm just wondering what the status is there. Are you just a supplier to your own system right now? How does that dynamic play out?

Well, Minntac is operating extremely efficiently, and we're very comfortable with our current needs, that Minntac can take of that and some more. Now, Keetac will stay idle. We certainly have the capacity to seize the opportunity, the right opportunity, if it comes by. It will remain the source of supply, just whenever we decide that Granite City is going to have to come back. So we're really very flexible, and for the right opportunity, we may sell some pellets.

Mario, if Granite City were to restart -- obviously, that's a big if, and I understand your comments that you made earlier -- would you be basically in balance and obviously with Keetac online, too?

Long term, absolutely, yes. We have flexibility. There's no issues with that.

Aldo Mazzaferro, Macquarie

Hi, Mario. How are you?

Good morning. I'm well, thank you.

I'm trying to get a little more comfort level on the guidance, and few don't mind, I just want to ask a couple questions about assumptions. I heard Dan say over $700 of pricing, and I heard you say relatively steady on the volume side. That leaves me with needing something like a $40 or $50 a ton cost cut in the six months then. I'm wondering, without volume gain in productivity coming from that, can you give us some input of what areas you're looking to cut out that much cost?

Well, Aldo, it's hard to -- a lot depends on what you got for the other segments, too, because it's more than just lateral that's flowing through the numbers. Certainly, if you look at our -- the pace and trajectory of our Carnegie Way progress, we keep on racking up additional savings quarter after quarter after quarter. So that -- our assumptions on where we get to on the cost side, the things we control, that's what we control. That's built into our numbers. It's what we're not speculating on is the market forces.

Yes. But what do you control other than labor cost?

We control an enormous amount of things inside of our process, Aldo. It's a myriad of projects. I commented before, there are folks that are coming up with thousands of different initiatives that are contributing to the outcomes, and that's going to continue. I think the additional levels of utilization that we've seen coming out of the repositioning of the footprint is certainly helping also.

And operating efficiency, materials efficiencies, process improvements, those all create those benefits. There's a lot that goes on rather than just the labor piece.

You can do that without a volume growth, you think?

Yes.

Yes, you can.

You can make your facilities more productive.

I would like to offer to you though that our employees are a critical and very important source of where all of these improvements are coming from. They are a source of value creation.

All right. Can I ask a second question? It's good to hear you say, Mario, that you want to position yourself down the road to be liquid enough for growth. And I'm just wondering, if you were to look at the crystal ball, and say two or three years out, if you were to do, say, acquisitions to grow, would you be looking at products that are different than flat, like long product, maybe SBQ? Or is the EAF technology still in there? And can you comment on the likelihood of a equity offering over the next six months?

Sure. You know that we're very clear that growth is a significant part of our strategy, and to do that, you have some things that come out of the organic evolution of innovation and all of that. But the crystal ball has all of those elements you mentioned plus some. And we have a very dedicated group of analysts that helping with that, very well integrated with our commercial entities.

The amount of knowledge that we're acquiring, much more clarity on where our customers are going, and what are the solutions that they're really looking for will eventually yield some new and interesting avenues for our growth. So we're really very carefully looking at it, and that's why we really need to have the capability to do it whenever the moment is right. We can't, and won't, specifically get into details, but I just can tell you that innovation is an important thing and market analysis and what is the world around us and where the trends are taking are guiding our thinking as to what we're going to be doing going forward.

Brett Levy, Loop Capital

Thank you, guys. As your contracts shift here, what percentage of them are third-quarter, shifts fourth-quarter shifts, first-quarter shifts, and just as we start to look at the adjustments to the CRU pricing, a rough census to what the approximate timing as you look at -- you said your contract book is about 40%. What is the timing over the next several quarters?

Well, Brett, there's a pie chart on the back of our slide deck that lays it out. About 40% of our contracts are annual fixed; most of those are calendar year. But we do have the pieces of a quarterly adjustable; they adjust every single quarter. We have the monthly adjustables that adjust every single month.

In total, about 75% or business is contract, but about 35% of that contract business adjustments much more frequently than annual. That breakdown we have in the back of the slide deck will help you see the flow on that.

Yes. In terms of the import competition you are seeing right now, the delta between the Chinese price and the US price I see is starting pretty big. Are you feeling like you're running into any competition? And then the other piece of the puzzle is, do you feel like the way the trade cases are written that the possibility that maybe Chinese steel goes through Vietnam or Korea or somewhere else and ends up landing on our shores is somewhat precluded?

The last part of your question is, the answer is yes. If you go and you read a little bit about this 337 that we filed, it addresses that. The 337 case is about addressing not only the transshipments, but there is fraud in it and there's collusion, and we cannot allow for those countries to continue to operate in that way to the detriment of US companies.

The American people are also beginning to feel the impact of that. You can look at the campaign and see all the comments that we get about unfairness in the trade world. So we have put the 337, and it's a really strong case. I think we will prevail in that matter.

But coming out of the trade cases, you look at the margins that are being determined out there. If you just look at the prices they've been quoting, you put those margins on it, it determines what the real honest price should be, not the fraudulent prices that have been practice before. If you just look at that, you're going to see what fairness of the market should be, and that's what we're beginning to see happen.

Thanks very much, guys.

Sure.

Thank you. We certainly appreciate everybody's interest. Mario, you have final statement for us here today?

Thanks, Dan. Before I sign off, I want to acknowledge and thank our employees one more time. They have faced many challenges over the last couple of years, and they have taken on these challenges and delivered tremendous improvements to our business model. They have done so without compromising our core value of safety, which remains the foundation to the Carnegie Way, and we have demonstrated improved performance since the Carnegie Way journey began.

Our safety performance measured by global total reportable entry rate has improved by almost 15%, and our days away from work rate has improved by more than 18%. We certainly still have more work to do, but we recognized we're making progress. We have dedicated and talented employees that will continue to be a driving force behind our Carnegie Way transformation. Thank you very much. I wish you a good day.

Thank you, everybody, for joining us, and we will talk to you again next quarter.

Ladies and gentlemen, this conference will be available for playback beginning today at 10.30 a.m. Eastern, running through Wednesday, August 3, 2016, at midnight Eastern Time. You may access the AT&T playback service by dialing 1-320-365-3844, and entering the access of 397560.

Again, this conference will be available for playback beginning today at 10.30 a.m. Eastern, running through Wednesday, August 3, 2016, at midnight Eastern Time. You may access the AT&T playback service by dialing 1-320-365-3844, and entering the access of 397560.

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