美國鋼鐵 (X) 2016 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to The United States Steel Corporation's 2016 fourth-quarter and full-year 2016 earnings call and webcast.

(Operator Instructions)

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

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

Please go ahead, sir.

Thanks, Kevin.

Good morning, and thank you for participating in the United States Steel Corporation's fourth-quarter and full-year 2016 earnings conference call 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 prepared remarks as well as an updated question-and-answer document under the investor section of the website when we released our earnings after the market closed yesterday.

To provide everyone a better opportunity to prepare for the call.

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

Before we begin I must caution you today's conference call contains forward-looking statements.

And the future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and 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 will turn it over to our CEO, Mario Longhi.

Good morning everyone and thank you for joining us today.

We have now completed a third year of our transformation.

And our progress continues to exceed our expectations.

The hard and competent work of the Carnegie Way transformation is translating into stronger financial results.

And better performance for our investors, customers and employees.

As we have demonstrated over the last couple of years, we have a robust process in place that has consistently generated benefits.

Even during times of difficult market conditions.

Our aspiration to become, sustainably profitable, earning economic profit across the cycle, and being profitable at the trough remains unchanged.

At the beginning of our journey, we identify the three areas we needed to address to achieve our goal.

Reduce our fixed costs, and create a more flexible cost structure.

Improve the capabilities, productivity, and reliabilities of our facilities.

And improve our product mix by creating differentiated solutions for customers.

We have given you regular updates on the significant progress we have made on improving our cost structure.

And our increased focus on our customers through our commercial entities, which has resulted in the continuing improvement and our value added product mix.

We have also been investing our facilities as we indicated last quarter.

Increasing the base and magnitude of our efforts in this area is a priority for this year.

Before we move on to 2017, I would like to give a quick recap of some of our important accomplishment in 2016.

The very strong headwinds we faced in late 2015 actually got stronger early in 2016.

The four conditions began to slowly unsteadily improve.

Still we were able to deliver improved results in 2016.

Despite facing our lowest average realized prices since 2004.

The hard and capable work we put into place into our efforts on trade issues has started to deliver value.

The trade cases decided in 2016 began to address market distorting practices by foreign producers.

However, we are certainly a long way of achieving a level playing field and still have more work to do.

We executed two very successful capital market transactions that strengthened our balance sheet, improved our cash and liquidity, and addressed our near-term debt maturities.

As we move into 2017, we are starting with a much better market conditions then we faced at the beginning of 2016.

Our Carnegie Way transformation efforts have improved our cost structure, streamlined our operating footprint, and increased our customer focus.

These substantial changes and improvements have increase our earnings power and while we will benefit from improved market conditions, they continue to be volatile.

We must remain focused on improving the things that we can control.

As I mentioned earlier, accelerating our efforts to revitalize our assets is a priority for 2017.

We have developed a comprehensive plan to improve our profitability of competitiveness, and to meet the increasing expectations of our customers.

With a structured and flexible plan, based on the completion of a large number of smaller and less complex projects to reduce execution risk.

And it is adaptable in both its scale and the pace of its implementation to changing business conditions.

We will be implementing this plan over the next three to four years, in order to minimize disruptions to operations, and to ensure we continue to support our customers throughout this process.

Our asset revitalization plan is not just sustaining capital and maintenance spending.

These projects will deliver both operational and commercial benefits.

After we complete our asset revitalization plan, we will have well-maintained facilities with a strong core infrastructure, strong reliability centered maintenance organizations, and we will deliver products to our customers with improved reliability and quality.

Executing this plan is a critical milestone in the Carnegie Way journey to take us from earning the right to grow to driving and sustaining profitable growth.

Thank you, Mario.

Kevin, will you please queue the lines for questions now?

Thank you.

(Operator Instructions)

One moment for the first question.

First question from the line of Curt Woodworth, Credit Suisse.

Please go ahead,

Good morning, Mario, everyone.

I want to get clarification on some of the assumptions that underlie the $1.3 billion guidance.

Depending on the data provider, hot-rolled sheet, trading between $610 at $640.

Obviously every $20 or $30 is a pretty big variance to EBITDAs.

Can you let us know what the actual deck you are using is?

And secondly, in terms of the contract book, which is 40% of your volume.

Can you give us any guidance on the magnitude of price change that you were able to achieve your January 1 contracts?

Sure Curt.

We were using, because we had to take time to prepare, last Wednesday's CRU numbers are the basis.

For our US operations.

That would have been the series that starts with $626 for hot rolled.

In Europe were was using the deck that started with $552 per metric ton.

Those are the base points we're coming from.

On the contract side Curt, all I can tell you is where happy with the progress we have made so far.

Curt to give you little bit more color, the $1.3 billion outlook where holding more than just prices.

We're holding our variable costs also steady.

Particularly on the raw material side.

Raw materials costs are very high now.

If you look at how we get to that $1.3 billion, and compared to last year, you are going to have raw materials costs headwinds there of about $1 billion overall.

The increased outage and maintenance spending we have has been in relation to asset revitalization.

Net of some other changes got about $150 million headwind there.

Then we have maybe $80 million headwind from increased pension OPEB.

Those are some pretty big cost numbers we are offsetting.

If you look at our Tubular segment.

Certainly that is an improving environment right now.

But, as we are being fair and holding everything constant, we do not have any upside built into Tubular.

That is the basis.

We're pretty consistent on maintaining both the positive and negatives.

But to Mario's comment, the fact we are going to offset all those headwinds and still drive significantly higher earnings, would say that we feel our commercial guys have done a good job.

Okay.

I'm sorry can you give me those numbers again?

You have a have $1 billion total cost headwinds this year of current spot.

Raw materials.

Of that $150 million is asset revitalization, $80 million is pension.

No.

the $1 billion is just the raw materials impact.

That is just raws.

Okay.

It'd be somewhere in that range.

And then you have the increased outage of $150 million and the increased pension and OPEB on top of that.

Okay, lastly on the asset revitalization plan, the incremental spend of $200 million.

How much it of that would be CapEx versus OpEx?

And what is the baseline spend that you had last year just to get the sense of the magnitude of the increase?

We're focused on the difference year-over-year.

Of that $200 million about $150 million is that outage and maintenance increase.

That is your P&L impact.

Your increasing CapEx year over year is about $50 million.

As we get projects up and running, the CapEx piece starts to grow.

We're in the early stages now.

We have been investing.

We are just going to do it at about a $200 million higher level than we did last year.

Thanks very much.

David Gagliano, BMO Capital Markets.

Great.

I actually have a couple of related questions.

Just to clarify, the $1.3 billion includes expected maintenance downtime, correct?

Yes, absolutely.

Did you say you had $1 billion of raw material cost headwinds year over year?

If you held them at today's prices.

Today, raw materials prices are very high.

Right.

But in the press release and in the Q&A, the coal costs were only 19 bucks a ton, which is about $170 million.

(Multiple speakers).

That is just coal in the US.

You are going to have scrap, you are going to have iron ore, all your coating metals.

All those things are high now.

Particularly in Europe.

Raw materials prices in Europe, particularly coal are really inflated right now.

You have to pick up all of those parts.

And natural gas.

We have natural gas here.

Natural gas is probably up $1 MMBTU or more.

But I would say the bigger piece is actually in Europe.

Because they are more exposed to market-based material.

And they're more exposed to materials that are directly in line with the global market.

So the coal cost information I was provided in the press release the 8.5 to 9 million tons at $19 a ton year-over-year

I don't know where you got the 8.5 to 9 million tons.

We need about a half a ton of coal for every ton of steel we make.

That $19 is our US pricing.

Maybe you can help me then.

I'm sorry.

Can you tell me what the coal cost increase is expected to be specifically in Europe year-over-year?

That will just fill that in.

Europe has quarterly pricing.

In Europe we cannot say.

First quarter, it is high.

First quarter, they are probably up versus fourth quarter of over $100 a ton.

Okay.

I want to switch gears really quick.

Obviously, a lot of projects mixed into the $200 million.

The indications in the Q&A was 40% of the projects or $10 million each or lower.

And 60% are $20 million or lower.

It seems to be $10 million to $20 million and a steel mill doesn't go that far.

What are some of the bigger ticket items that we should be thinking about here?

Number two, is there a way to quantify for us the expected in aggregate costs save or margin improvement from all of these projects?

Thanks.

At this point, no.

I mean it is a multi-year project.

We broke it into small pieces.

(Inaudible) operations.

You could have a five and one project to replace a drive on a line somewhere.

You could have a couple million to replace sensors, or upgrade sensors, or side trimming; anything and everything.

There's not any one big ticket project.

You will have multiple projects on an individual facility that will add up over time, but we did it this way to reduce the execution risk of projects.

And it gives us the ability to move project backwards and forwards.

To run the operations in line with our order book and take care of our customers.

The other thing that will do it will help is as you see we keep improving our mix.

It will give us the capability to keep doing that.

Okay great.

Thanks.

Matthew Korn, Barclays.

Good morning, Mario and Dan.

Question for you here.

Help me understand if you could, how is your finished flat roll capacity going to flex over this next year as you have some closures taken under a revitalization program, as you pointed out, offset with the restart of some of the downstream capacity at Granite City.

I'm wondering, presuming that imports do tighten, demand improves from policy or what have you.

Practically speaking, could last year's 10.1 million get to 11 million or 12 million.

Are we much more constrained in that practically when we are thinking about capacity?

The capacity utilization for the finishing end last year was pretty tight.

This was the reason why Dan was saying that some of the investments we are going to be making, they will be given as a capability to do better products but also to be able to push it up a little bit.

We cannot at this point precisely tell you how much more.

But I can tell you there will be more.

Fair enough.

Let me then ask on the Tubular market.

We are watching the volumes there.

And they are and they are picking up.

While you're talking about price being challenged and the import pressure.

How do we think about your approach to shipping volumes here even with a substantial loss per ton?

Are you seeing enough vision either through improvement in costs or better demand soon enough?

Driving what may be absolute lower segment EBIT is worth it in the near term or over the next year?

I would start by saying, we believe we hit bottom for sure in that particular segment, Matthew.

What has been inspiring I would say, is the fact that if you go back to May, we were running about half the number of rigs that we're running right now.

The tendency should be to continue to increase.

From that perspective, we're going to be utilizing our assets much better.

The other thing, is when it comes to competitiveness, the amount of improvement in our cost base that the folks have delivered throughout this year, the mills are still losing money, is very significant.

So we will not need to get back to the same levels of operations that we were to be able to deliver a positive return here.

So the combination of the two, it is our view in the next couple of years we should be in a better world than we've been.

We did shut down some permanent shop operations.

Streamlined a footprint focus on where our most profitable opportunities are.

In the appendix of the presentation we posted last night, we do give an update.

We reduced our exposure to welded because those are much more difficult markets.

Our new footprint is outlined in there so you can get a better feel.

Roughly about 1 million tons of seamless capacity.

About 400 thousand tons of welded.

But more focused on not really the commodity line pipes.

But some of the small diameter welded that's more of an OCTG product.

Also, moving forward with our premium connections business.

Got it guys.

We do appreciate all the additional detail you give with each sequential quarter.

Good luck.

Thanks.

Thank you.

Evan Kurtz, Morgan Stanley.

Good morning Mario and Dan.

Just to be clear, I wanted to understand the $150 million headwind from asset revitalization, is that the impact on the operating and expense line?

And how does that change going forward?

I assume that you get a lot of these projects done this probably actually becomes a benefit once they are finished.

Should we view that as a high water mark that decreases over the next few years as the program continues?

Hi Evan.

I do not know that I can say decreases over the next couple, because there is a lot of work over the next few years on the program.

But I think you are on the right track.

Once we are done we should have sustainably lower maintenance cost than we had in the past.

Okay.

Just one question on that $180 million in pension an OPEB expenses this year.

How much is that the service costs?

It depends on how you look at it.

Service costs plus our steelworker multi employer trust.

Those pieces combined are probably about $120 million of that number.

Okay.

Assuming these FASB rules go through, that will drop out next year when we see the service costs next year in the expense?

So that is a high water mark there, as well?

On our service costs should continue to decline because our plans are shrinking.

As far as when you go through the return on assets the interests costs associated to get that full calculation, it's too early to speculate on that.

You are right, our service costs should continue to decrease.

Great.

Thanks.

I'll get back in the queue.

Timna Tanners, Bank of America.

Hello.

Good morning guys.

I know you addressed this a bit.

I was not clear the OCTG assumptions embedded in your guidance.

I think you had probably have in there the recent price hikes that were announced by Vallourec and Tenaris.

And you note that the rig count it is improving.

I wanted to be explicit about assuming.

A, are you embedding those into your overall EBITDA guidance?

And B, I know in the past you made some of the large diameter grades, do you have any exposure potentially to the pipeline projects?

Or is that already built?

Our outlook is based on where prices were.

So those price increases from the last few days would not be in there.

It was based on where rig counts were late last week.

We would not be projecting upside.

We're saying is, we are not projecting upside, we are saying they stayed right where they were.

As far as line pipe, the large diameter line pipe for those big transmission lines, those spiral weld, we do not make spiral weld directly but that is certainly it an opportunity for our flat rolled segment.

If that market picks up, we had the ability to supply that X70 like hot rolled.

It would be a very good product for us.

Our own welding capabilities would only get us up to about 8 or 9 inches.

If they get into seamless, maybe (multiple speakers) go up to about 26.

Helpful.

I wanted to ask about what volume improvement we might be able to anticipate in flat rolled in 2017 under your current configuration?

It was helpful you clarified that you're running, what, three blast furnaces.

Obviously not running Granite City.

Just the rolling mill which was helpful for some I think.

What kind of volume might we expect into 2017?

Where can you flex from 2016 levels that at least started out pretty strong if we have a decent demand environment and fewer imports in 2017?

Our blast furnace capacity is going to be capable of supplying whatever additional alternatives that we're going to find out there Timna.

So from blast furnace capacity, we're not anticipating bringing any of that online.

What we do anticipate is to be more reliable than we were so we can benefit from being able to roll more slabs.

You can run 100% and add what amount of -- not 100%, I'm sorry.

At full utilization relative to last year's level what amount of additional tons roughly could we anticipate?

It's about 5%.

Okay thank you.

Brett Levy, Loop Capital.

Is a follow-up to what Timna was saying.

The OCTG market was massively oversupplied, lots of month of inventory sitting around.

Can you talk about what utilization rate you have seen and are seeing going forward, what the bookings have been et cetera.

Do you see equilibrium coming back to the pipe market?

Give some details from your order book if you would?

I would start with inventories.

Inventories as you know have been hovering around nine to 10 months.

I think for the first time in a long time, we're seeing that it has come down to around six.

What is happening is we're seeing a lot of specific requirements.

Six months is still not a small amount of inventory.

I think we still probably have another couple of months of inventory to be consumed.

And then I think we get back to a more balanced environment.

And then we will have also a broader amount of needs which are going to put the demand at higher pace.

We foresee if things continue with the trend we are seeing, some time probably by the second quarter we will see an improvement throughout the whole mix of products that we can make.

In the service center space, do you see some of the service centers in Tubulars starting to speculate and starting to build inventories, or asking what you have in what month or anything like that?

No.

We do not see the build of inventory.

Of course the requests can you do this, can you make that, do you still have that, that is normal.

It has increased, given the fact of the depletion inside of the current inventory is increasing for some of those products.

That has increased.

We expected to continue.

As I mentioned, hopefully in the next couple of quarters we are in a more interesting space.

Thank you.

Sure.

Michael Gambardella, JPMorgan.

Yes, good morning Dan and Mario.

Good morning, Mike.

A couple of questions The first on trade.

Mario, I was watching a thing on CNN and saw you in the White House with President Trump, I think on the second day he was in office.

Can you talk about, just strictly enforcing our steel trade laws, meaning US Steel and the industry this year.

I think it's one of the areas Mike where the opportunity still remains real.

Because many of the elements that we're able to improve in the trade laws require that enforcement is performed at a higher level.

That's an area where we continue to remain engaged.

There's good work that being done both from an amount of the folks that keep checking everything.

The utilization of better artificial intelligence, analytics.

The Commerce Department is now issuing more regularly information on what materials is supposed to be come imported from where.

So the ability to do better analytics will help with all of the enforcement that we are seeing.

The current administration has very openly declared that they are going to do everything they can to make these rules to be properly enforced.

One of the areas that still remains a concern is about circumvention.

That's still a delicate area that requires a lot more work to be done.

But I feel optimistic that this administration, they are saying all the right things.

And they are asking for how they can better prepare themselves to make sure that our laws are respected.

One other question in terms of forecasts goal of $1.3 billion, where you already have a $1 billion headwind from raw materials.

Could you break down the raw materials headwinds in billion dollars, because I noticed on your release yesterday you said your make whole price contracts are only going to be up $19 year-over-year.

I was curious, since I think you did the forecasts, scrap prices are soon to come off of 10 bucks to 20 bucks, which I assume will be a benefit to that $1.3 billion.

I'm trying to understand the components of the $1 billion headwind.

Yes Mike.

That coal increase is the US, it is much higher in Europe.

When you talk about roughly $1 billion headwind to be held all prices constant.

A majority of that will be in Europe because of their exposure to global, and more majority of that would be on the coal side.

That is what's driving it more than here.

You are right, if any of those materials prices move down throughout the year, we would expect to pick up a benefit against that number.

Okay.

Thanks.

Gordon Johnson, [Axiom] Capital Management.

Good morning guys, thanks for taking the question.

Continuing on the thought of trade cases.

Just looking at what's happened in China.

We've seen imports from China into the US drop 63% in 2016.

Yet total imports were down just 15% into US steel imports.

We've seen China's mix dropped from 6.1% of total imports to 2.6% in 2016.

The question is, do you see additional trade actions against China as impacting the import balance?

Secondly, with respect to Vietnam, we saw in December imports drop 56%, yet it looks like adjusted or the full month they're up 112% in January.

Do you guys see the protectionism actually having a positive effect looking forward?

Absolutely, Gordon.

I don't like to use the word protectionism.

Because some people interpret it as if we're asking a favor of somebody.

Which is the opposite.

All we want is the rule of law prevails.

So we can go and compete in the way the world market should complete.

Where market forces play the role.

Not subsidies and all types of --.

That is protectionism.

The reductions that you have seen are a direct consequence of all the hard work that we've been putting in that arena.

We're not done and we will never let up.

It is something that is important.

It is something if the globalized environment is to really provide betterment for society, the rule of law has to prevail everywhere.

And it is proven that if we do not remain vigilant, these things can deteriorate pretty quickly.

We will always be watching over this.

When it comes to China you see that we do have a 337 case against them that is in process.

The dimensions of aggression to our markets are so enormous that they are beyond just dumping.

You have all the circumvents and trans shipments, and you have the hacking of intellectual property incorporated into their level of aggressiveness that takes place.

So we will remain vigilant in this regard.

Thank you.

Seth Rosenfeld, Jefferies.

Good morning.

A couple of questions on your European business please.

Can you please walk us through some of the drivers in the significant quarter to quarter uplift in shipments you saw in Q4?

It seems to be somewhat counter normal seasonality.

I was wondering if you think you're taking share versus domestic peers or imports?

Or just expanding your customer mix.

Second question, with the recent news of the various disposal options and play, can you give us any update on expectations?

And would you be interested in maintaining a stake in the European business given the improving markets dynamics in the region?

Last question, sorry.

On guidance, just to confirmed for the European coal expectations, when you say you are modeling spot is that reflective of the Q1 contract price for your sea borne purchases?

Or reflective of the sea borne price contract 285 sea borne price [175]?

It is reflective of the Q1 benchmark for that.

From a volume perspective, we saw a little counter seasonality.

Maybe a little restock.

But I do not think it was anything real unusual going on over there.

Okay.

Thank you.

On the disposal options.

Obviously there have been various headlines recently.

Would you be interested in maintaining a stake in that European business?

Or just completely economic dependent?

Look Seth, you know that we do not comment on rumors or speculations.

We're always focus on creating value for our stockholders, and we will always considered any strategic options that have the potential to increase value for them.

Whenever any business decisions in that regard is to be made, we will let you know, but we will never comment on rumors.

Okay.

Thank you.

One follow up with regards to the Q4 volumes.

Was there any shift in your product mix Q4 versus the prior quarter?

Or normal seasonal period of the year.

You say it's normal, but the pickup Q over Q does seems quite large versus what we've seen from your peers or for national production stats.

I don't think we saw any mix shift.

No.

We probably still have some upside going into Q1.

I have to go back and look.

It may be we were off a little bit in Q3 for some reason, but I have to check on that.

Phil Gibbs, KeyBank Capital Markets.

Good morning Mario and Dan.

Mario, what type of feedback do you think President Trump is looking for from you and the steel industry to stimulate US manufacturing.

And then sub question there.

What do you think Bob Lighthizer brings to the table as the US Trade Representative?

Because most of us on the sell side aren't old enough to understand his efforts during the 80's.

From what we've seen The President is remaining true to his promises during the campaign.

One of them is buy America and hire America.

So he sees in manufacturing environment a tremendous opportunity for that promise to be fulfilled.

So he's been very open.

He wants to hear what the recommendations are.

I think he is paying attention to the different nuances that exists between different business segments.

He is wanting to continue to do that.

So I think this is all very positive.

You look around manufacturing is responsible for 33% of China's GDP.

We are very low in the teens over here.

The potential for good quality jobs to be created and maintained is truly real when it comes to manufacturing.

Probably for every job that we can create inside of our industry seven more quality jobs will be created as a consequence of that.

I think if you add on top of that, the dimension of security that is required, economic security is a fundamental one.

If we can make this country grow at least 3.5% per year, you can see all of the good that can come out of it.

He's been very open.

He's very curious and he is addressing, I imagine that when the full cabinet is in place, the conversations will continue.

My expectation is that it will lead to action that could be very positive for manufacturing and certainly for the steel industry.

What about in terms of the Bob Lighthizer promotion to US trade Representative?

What you think that means?

And how may --?

I think you can qualify Bob as one of the top specialists on that subject manner.

He has been at it for a long time.

He has seen so many different cycles, and so many different ways in which trade has been impacted.

I think he would be a incredible contributor to establishing the rule of law.

And make of trade a balanced effort for this economy.

Just a follow-up.

Are you anticipating any improvement in your position within the UPI joint venture in terms of being a substrate provider?

Thank you very much.

Sure, we're here to supply the customers.

And even though UPI, we are in a joint venture over there.

They are also a customer in that regard and we would be willing to support them whatever they need.

Alex Hacking, Citi.

Good morning, Mario and Dan.

My first question is on your CapEx guidance for 2017.

$475 million.

Can you give the breakout on there on sustaining versus growth?

We have been running pretty close to 50/50.

This year is probably a little bit more growth because a lot of what we're doing in asset revitalization really is relaxation is growth and not sustaining.

I would say it would be more than half would be growth.

Okay, thanks.

Coming back to potential asset sales.

I know you don't comment on rumors.

I would say US Steel is in quite a strong liquidity position at the moment.

Credit to the Company.

Were you to get a significant cash inflow from an asset sale, how should investors think about capital allocation in that kind of scenario?

When you can get $1 billion plus in cash.

Every day we're looking on how do we create more value, and that's just another piece of the puzzle that we try to solve every day here.

Clearly we have made great progress on the balance sheet.

Deleveraging is still one of our objectives.

We'd also look at where are the opportunities for growth.

I think we would be pretty balanced on our approach to capital allocation in that type of scenario.

Thanks a lot.

Nick Gimalson, Stifel.

Hi Good morning.

I wanted to talk about how you think about the margin outlook for European operations versus the US given that most of the raw material price pressure is going to be in Europe.

Are you thinking you're going to be able to keep the EBITDA per ton stable?

Or is there going to be compression in Europe and you will see margin expansion in the US markets?

Well our expectations, is that as Dan was commenting, the headwinds are real.

The folks have been working very hard at both ends.

Continue to get the cost better.

Continue to shift the product mix to a better place.

And our expectation that the European folks continue to do better.

With the asset revitalization program, is that going to change the mix of your products and markets transition away from spot pricing and towards more contracted business?

Any chance in your product book?

I think certainly not moving away from the base commodity volumes is front and center to the strategy.

I think we're being successful in that regard.

And that should continue.

Do you have any targets for where you want to get to for the book of business?

We do have some targets that the folks are still and each of the commercial entities are dissecting it and crafting the journey ahead.

There's a lot of innovation that we're working on.

There is a pretty nice approach to how we should move forward.

Any timeframe over which you guys think you can accomplish this?

This is just like the asset revitalization process.

It's a multi-year program.

In many of the markets where this innovation takes place, our markets that mature, they develop and mature over a cycle of a few years.

So when we look into the next 4 to 5 years, there's a lot of new things that are going to be coming to fruition.

And you look at the types of availability of new products that have been created just in the past three years, it's quite significant.

This is quite an exciting environment that we are playing in.

Jorge Bernstein, Deutsche Bank.

Hi guys.

Good morning.

I want to circle back on the CapEx question.

Of the $200 million odd that you putting in these asset revitalization programs, a lot of them you said $10 million and $20 millions.

What is the payback on these kind of projects?

Are you looking for six to 12 months?

Or could you frame it in return on capital framework?

(Inaudible) vary by products, but think I would say in total, this plan that we're implementing meets all of our thresholds that we had for normally evaluating capital projects and the returns we expect and require before we would implement a project.

This isn't just spending to spend, this is projects that have real returns at levels that are consistent with how we would normally view capital projects.

There's really nothing unusual on that side.

What I'm trying to get at is are these really low-lying fruit type of projects?

That because they are small in nature have abnormally high paybacks?

Not necessarily, because some of these projects are a small steps.

We are taking a bigger project and cutting it into smaller steps.

So we do not to disrupt the operations as much.

Some of these projects, until you complete a series of them is when you get your return.

Some you get returns right away.

So this could be a mixed bag.

Got it.

And then on your comments that you would be cash positive for 2017, does that include the potential proceeds from the McKeesport Tubular Plant sale?

Are when you say you would be cash positive is that based on operations?

If you look at that $1.3 billion outlook and take what your cash requirements would be, including our CapEx guidance, that would lead you to a cash positive number.

The equipment sale in McKeesport is immaterial.

Actually that occurred last year.

And also the USSC sale.

I forgot to ask about that.

So in other words your free cash flow outlook is exclusive of asset sales.

Yes, you are right.

On Canada, we have not gotten our settlement in Canada yet.

That would be additional cash in the door.

Perfect thank you.

Aldo Mazzaferro, Macquarie.

Good morning Mario and Dan.

I think I heard you say you might have 5% of some volumes.

Could you talk about what market you might see regarding that growth next year in volume?

It's spread throughout all the commercial entities, Aldo.

In aggregate, that's the number that we have.

I think Aldo, capacity wise we have that kind of ability.

It's not necessarily that it's going to be there.

But if it grows we have the ability to serve it.

I see.

Okay.

A second question.

You guys have done a great job of getting your SG&A line down.

I noticed $49 million this quarter, down sharply from the previous quarter, and down over 50% from a year ago.

I wonder what kind of sustainable level of SG&A should we expect?

This quarter we had a [favorable] item of about maybe $9 million.

But if you adjust for that, you're getting to pretty much what you should think the run rate is going to be.

What was that $9 million, Dan?

It was related to a workers' comp and the true ups at the end of the year.

And then one final one, Mario.

Do you think if Trump puts a border tax on imports of steel that he will include slabs in that or not?

Too early to tell those details, Aldo, the essential thing is free and fair trade should be balanced for everybody.

That is the core about how they're going to come out.

There are all sorts of different speculations.

So hard to tell right now.

John Tumazos, please go ahead.

Thank you very much for taking the question.

As it begins to rain cash flow, how much do you want to reduce debt and post employment liabilities before you have full latitude to pay out the money in dividends or extra dividends or share buy backs first.

And second, how big is the queue of potential capital projects if we were to add up the finishing the Fairfield Melt Shop or improvements for Ultra and the new steels you're inventing every day for autos.

Or fixing up the hot strip mill in Mon Valley Works, or whatever the queue of projects that may have been put on hold when things were tough.

I think that, you know, we see that there is a lot of value in continue to invest in our facilities and invest in our innovation.

And it's all about how do we make the best efforts to continue to create value as we move forward.

The investment in Fairfield, we do have all the equipment for the new electric furnace that we have and it will be a little more than $100 million to finish it off whenever we feel it that's the right time to do it.

It's a myriad of projects that we have under the Carnegie Way concept.

And it's not in the hundreds, it's in many cases in the thousands.

That's why when we mentioned we have a robust process to assess it, it is a robust process.

It took a while to get the proper granularity in all of those.

It took a while for us to embed flexibility.

Because, I still think we live in a very volatile environment.

It certainly seems like conditions are getting better, where we can have a more sustainable positive environment to play.

But that kind of flexibility is one key element that applies to the new things, to the new developments, and also to the reliability that we need.

The other thing that I bring to this answer here, is the fact we really have to make sure that trade becomes a common affair under the law.

Because there is still a risk out there.

Overcapacity still exists, and the behavior of the players that have not played by the rules.

We've proven that only changes if were very strong in enforcing our laws.

Mario if you're nervous about the 700 million tons of unused capacity, you might be quicker to pay down debt or fund some liabilities, and slower to take the dividend up to half of the earnings threshold.

Is that a fair statement?

It is one of the alternatives that I'd say we would look at before we make any decisions for sure.

On the legacy liability side, I would say our exposure is very low.

We don't really see much funding risk that's out there for us there.

Congratulations.

I hope it keeps raining money.

Thank you.

Sean Wondrack, Deutsche Bank.

Thank you for taking my questions.

Mario first of all, thank you very much for all the work you've done with the President and otherwise regarding the US steel industry.

I know it is a big distraction, but very important.

First question, just regarding capacity utilization.

When I look at the slides, it looks like your adjusted capacity utilization was somewhere around 69% in 2016.

At your flat rolled segment.

That feels like it is a little bit low.

Why would that be?

I know you probably try to target around 80%.

Obviously, Granite City idled.

As a follow-up, do you expect there to be improved demand relative to either infrastructure projects, Pipeline projects, or potentially a law that could use your facilities and enhance the utilization there?

Thank you.

Sean I'll give you a little bit of utilization.

And then Mario can finish up.

That blast furnace utilization rate is actually flat making utilization.

And actually, based on our more complex product mix, and moving to some of the more value of products our strip mills and finishing lines were running very full.

We made as many slabs as we could consume.

The more important thing for us, was we did fill up all our strip mills and finishing lines.

When you get into those more complex products, it takes longer to process.

So, we made all the slabs we needed to keep those lines full.

As far as the market is concerned, it's yes.

We look forward to a better environment where there's going to be more activity.

Infrastructure will go one way or another.

It is a common theme that everybody understands that it is more than just roads and bridges.

It's airports, it's water treatment stations, it's all the infrastructure related to energy in general.

So, everybody understands the importance of that.

That is why, for example, if you can figure out a way in which the conditions for the economy to grow at a higher rate are put in place, all of these projects in infrastructure are going to drive significant improvement to all the manufacturing companies.

The other things this would do, I think it will improve labor, it will improve salaries, it will improve the confidence of consumers, which all bode well for the economy as a whole.

Matthew Fields, Bank of America.

Hi guys.

I just wanted to ask a couple housekeeping questions and then a more thematic one.

I think Mario mentioned earlier that you guys see improvement in the Tubular market as early as 2Q.

Just to be clear, is that baked into your $1.3 billion guidance?

Or is January 26 levels baked in indefinitely?

It is embedded into the guidance.

Thank you.

Basically to that same question.

I think I heard Dan say you were assuming, in your guidance, $285 per tone net coal in Europe for the entirety of the year?

We're assuming their pricing based on what they settled against the first quarter benchmark.

They don't pay benchmark.

Okay.

But you're assuming a $285 benchmark for the year.

We are assuming whatever their first quarter number was based on that benchmark stays the whole year yes.

Okay.

I know you said you're working on a lot of $10 million to $20 million projects.

Maybe even bigger ones cut up into pieces.

Can you let us know if there is a group of four, five, six or seven of these projects that are focused on one facility?

Over the course will focus on all of our existing facilities.

Right now for the most part our strip mills have been our biggest priority.

It's across all the flat rolled facilities.

The existing facilities.

Asset revitalization attacks the existing facilities.

New facilities are different story but we are going after all the assets.

And [like initially] our hot strip mills are our focus.

That's where we had some unusual operating problems in the third quarter.

Thanks for that.

Lastly, Mario we all saw you on TV last week with the President.

Did cafe standards come up in your discussions?

If so, can you tell us a little bit what was discussed?

Yes it did.

It was part of a broader regulation discussion that came to fruition.

If you look at all of the players in that environment, everybody has regularly been doing pretty good work when it comes to making, for example, cars more efficient.

We have been implementing significantly better, lighter, safer products.

The OEMs have pursued that alternative very significant improvement taking place in power trains.

I think that will continue at a natural pace.

What is important, is that every new piece of improvement in legislation gets properly assessed against the economic impact and the overall impact into the environment and the world.

It's proven that we can pretty much stopped consuming carbon in this country here.

Some other countries do not follow suit, the environment will not change.

The other thing that was brought up, is, in spite of all the improvements that we made in the United States, it's been negatively compensated by the activity that has taken place in other countries.

As a matter of fact, when it comes to steel in particularly, every pound of steel that is not made here, that is made in some of the more natural places out there.

Especially where overcapacity exists, is generating a significantly worse condition from an emissions standpoint.

So the discussion was around regulations in general.

Cafe was certainly one topic that was brought to the table.

Thank you.

Final question from the line of Curt Woodworth.

Thanks.

Mario had a follow-up with respect to the Keetac pellet restart.

Because based on my numbers I had your total pellet capacity ex Keetac at around 18 million tons and your current requirement at 12 to 13.

To me I'm struggling a little bit to understand why you need to restart that facility?

And can you give comments on how much third-party pellet you think you can increase into the market this year?

Curt, just based on what we produced and 2016, we probably consumed between 14 million and 15 million tons at those production levels.

That should give the depth of third-party sales.

So what we did is, we entered into contracts.

We had our opportunity to (inaudible) pellets.

We entered into contracts and enough volume that supports the Keetac restart.

And it was more volume than we can handle without Keetac.

Okay.

I was assuming a 20% scrap charge, so I was getting to a number a lot lower than that for your pellet.

If you look at our raw steel production, we have about 1.3 to 1.4 tons per ton of raw steel.

Okay.

But 20% scrap charges what you typically use, right?

About 25%.

Right okay.

How much pellet you expect to ship to the bedrock or the stelco assets?

That's a requirements-based on track that really depends on how hard they run.

All right.

Thank you.

Mario, final comment.

Thanks, Dan.

Before we sign off, I want to acknowledge and thank our employees.

They have faced so many challenges over the last couple of years.

And they have taking on these challenges and delivered tremendous improvement to our business model.

They have done so, though, while maintaining their focus on our core value of safety.

Which remains the foundation for the Carnegie Way.

While we are already an industry leader in safety performance, our employees are continuously finding ways to become more efficient, effective and to further enhance our safety process.

We still have challenges and more work to do.

But we recognize that were making progress.

We have dedicated and talented employees that will continue to be a driving force behind our Carnegie Way transformation and journey.

Thank you Mario.

I would like to thank everybody for joining us and we will talk to you next quarter.

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