美國鋼鐵 (X) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to United States Steel Corporation's 2017 First Quarter Earnings Call and Webcast.

(Operator Instructions) Now as a reminder, today's call is being recorded.

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

Please go ahead, sir.

Thank you, Kevin.

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

On the call with me today will be U.S. Steel's CEO, Mario Longhi; and President, COO, Dave Burritt.

We posted our slide presentation and prepared remarks as well as an updated Q&A document under the Investors 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 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 that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and the slide deck posted on our website and included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

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

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

I would like to make a few brief comments on some of the current issues and events that could be significant for our country, our industry and our company.

Last week, President Trump signed an Executive order, which begins an investigation by the Department of Commerce into the implications of foreign steel imports in America's National Security under Section 232 of the Trade Expansion Act of 1962.

Steel is a core industry to our nation and a critical building block of our economy and national security.

And we cannot afford to be undermined due to unfair and illegal trade practices that target our steel markets and steel jobs.

For too long, China, Korea and other nations have been conducting economic warfare against the American steel industry by subsidizing their steel industries, distorting global markets and dumping excess steel into the United States.

Tens of thousands of works -- workers in the American steel industry, the industry supply chain and the communities in which our industry operates have lost their jobs due to unfair and illegal practices by foreign producers.

President Trump also signed an executive order that is a positive step in ensuring full enforcement of existing Buy American laws and ensuring the steel industry remains competitive.

The foundation of a strong Buy American program is the long-standing requirement that all iron and steelmaking processes occur in the U.S. for the product to be Buy American compliant from the actual steel production to the finishing processes.

This melted and poured standard or what we call mined, melt and made has been successfully applied since 1983 and must continue to be the standard using Federal Buy American rules for steel procurement.

We applaud the President for affirming his commitment to full and effective enforcement of our laws and to addressing the issue of unfairly dumped and subsidized steel.

We look forward to working with the administration on these matters.

Turning to items specific to our company.

During the first quarter, we restarted the hot strip mill at Granite City Works, and the mining operations at our Keetac Facility.

Both restarts were completed in a phased, timely and efficient manner.

And we are beginning to see the benefits from having these facilities back online.

Running the Granite City hot strip mill enabled us to take a 10-day outage at the Gary Works hot strip mill, one of our most critical assets, to complete several projects that will improve the reliability, quality and product capabilities of that mill, including improving and expanding our ability to supply substrate to domestic welded pipe producers for pipeline projects.

Keetac has started shipping pellets to third-party customers, including our former Canadian operations.

We believe that the sale of our former Canadian operations to Bedrock Industries will be completed soon and our 5-year pellet supply agreement with Bedrock will commence.

We are also in the process of restarting the welded pipe mill at our Lone Star Facility and expect production to resume in May as the energy markets continue to improve.

Last quarter, we discussed the comprehensive asset revitalization plan we are implementing to improve our profitability and competitiveness and to meet or exceed the increasing expectations of our customers.

This is a multiyear plan that will take 3 to 4 years till full implementation and is not just sustaining capital and maintenance spending.

These projects will deliver both operational and commercial benefits.

As we get deeper into our asset revitalization efforts, we are seeing opportunities for greater efficiency in implementing our plan.

We believe we can create more long term and sustainable value by moving faster now.

And we have made a strategic decision to accelerate our efforts to address some of the issues and implement the improvements that will enhance our ability to achieve sustainable long-term profitability.

As a result of this acceleration, we now expect our investment in asset revitalization in 2017 to be approximately $300 million higher than it was in 2016.

We will be taking more downtime at our facilities, which will limit our steel production volumes and with the restart of our Lone Star welded pipe mill, that I mentioned earlier, we'll resume shipping hot-rolled bands to our Tubular segment.

Based on these factors, we will have fewer tons available to offer into the spot market after taking care of our strategic customers' requirements.

We currently expect our flat-rolled shipments to third-party customers will be approximately 10 million tons this year.

The disciplined process and cooperative culture established by our Carnegie Way transformation efforts give us more confidence that we can implement our asset revitalization plan safely, efficiently and effectively, even at an accelerated pace.

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

Thank you, Mario.

We'll provide more detail on many of the topics Mario just mentioned in the earnings presentation and the Q&A documents we posted to our website.

We'd encourage you to review those materials when you have time.

At this point, Kevin, can you please queue the line for questions.

(Operator Instructions) And first question is from the line of David Gagliano, BMO Capital Markets.

I think I've got a few questions obviously, I think like a lot of people do.

The changes from last quarter to this quarter, it's a pretty big change.

And it looks to me like it's about the, obviously, the accounting change, I mean you cut your guidance by 35% on the EBITDA line, in a rising price environment and an improving environment.

So I think it's really important for the investment community in general to get more color, a little more information regarding these, the things that you highlighted here.

Obviously, you told this you're taking downtime, if you can put some numbers around each of these moving parts, number one and number two, what's different than when 3 months ago you guided to $1.3 billion of EBITDA, where is the biggest change if you could bridge that, arguably $400 million reduction?

That's my question?

So Dave, I guess the one thing I think it is the biggest factor is, based on our assessment of how we operated and now our acceleration to take more downtime, we had a pretty big adjustment in our volume assumptions, which is what Mario pointed out.

We expect we're going to be around 10 million tons, which is below what we were for both reasons, how our assessment of our current operating performance and our decision to take more downtime proactively to get after our assets.

You see, Dave, when we designed a few years ago, the journey, we always mentioned that we needed to get our assets up to a better condition and after 2014, '15, '16, have been pretty challenging, but we did take the time to create the balance sheet condition in order to help us maintain a more aggressive level of investment.

When you couple that up with what I believe is a market that is stronger and it has all the ability to remain stronger, it's the right strategic decision for us to move quicker.

This accelerated level of investment will better couple with the foundational improvements that the current assets need to achieve in order for us to fully benefit from the growth initiatives that are taking place.

We have already filed for permits in a few states and we're moving ahead with investments that will improve our tin capability for packaging, it will improve our capability for our automotive development of new products and will enhance our ability to much better benefit from the development of the premium connections that we've introduced in the marketplace and are having great acceptance.

So when we think about this market being stronger, we believe that it's the right thing to do, to make us more capable to benefit into mid- to long-term than just focusing on the shorter-term plans that we have before.

I appreciate that, and that all does sound very encouraging from a longer-term perspective.

But again, specifically, where is the money going, what facilities -- what exactly are you doing in terms of your investments, specifically?

And then secondly, just, and I'll let other people ask the question, can you give us a sense as to when you expect this to be done and when you expect to and what you expect the profitability to be in the company?

If you were to do the same mark-to-market that you do, what would be say for example, the fourth quarter exit rate, EBITDA run rate that we should be thinking about?

Those are my few questions.

Well, the investments are going pretty much throughout all the facilities, Dave.

If you think of the footprint that we have before 5 years ago, we had a significant larger number of assets that even if we poured money into it would not deliver the additional capability to support the downstream improvements that we were considering then.

So we did address that and the footprint now is one that merits the investments they are going to make, they are going to become more efficient.

I think we're providing you with some level of reference on how these improvements are going to deliver on quality, reliability, delivery performance and all of that.

But that it will also be more capable, so that we can benefit from the downstream investments that we're going to be making here.

If you remember, last year, we got additional debt and we repositioned the profile of it, and we also did some issuing of shares that were solely dedicated for the support of this asset revitalization initiative.

What we are doing really is assessing that we believe that this market is going to be good and it's going to be better.

So the more acceleration that we put in place, the better we will be to deliver economic profit, which is the sole purpose of what we are trying to do here.

This is David.

I think that's absolutely right that, let's go back to one of your earlier questions.

When you look at the fourth quarter to the first quarter, that delta, that change was not completely unexpected as we prepare for the first quarter, because there's a lot of activity that goes on year-over-year.

And if you look at kind of the trends for us, first, we know the Soo Locks are down and that creates some absorption costs for us.

We also had the hot strip mill startup in Granite City, we had the Keetac startup and we also improved the Gary hot strip mill, which is a big project and actually accelerated some costs in that area, so that we can make the improvements longer term.

So with the delta change from the fourth quarter to first quarter was not completely unexpected, and if you look at the total company, we weren't all that far off from our plan.

But admittedly Europe much stronger, admittedly North American flat-rolled, lighter, that was more outage, more focused and as we continue to study what needs to be done, it's a good learning experience for us.

To Mario's point, we have got the firepower now, with our balance sheet to accelerate.

And we need to accelerate so that we can take advantage of these things sooner.

As far as what type of returns we're going to get, we're going to be well above the weighted average cost of capital longer term.

But this year is year of investment, a year for us to put money into capital expenditures, a year to put money into expense and take more downtime.

We're going to give up some spot market, we're going to give up some volumes.

But we need to do it now because we have to strike when the iron's hot and make these tough calls now, so that we position ourselves for a better future, longer term.

As we say in the Q&A document, it's a 3, 4-year journey.

We'd like to move it faster.

We'll move as fast as we can, and there are some encouraging things with the things that we've learned about this first quarter, and as Mario likes to say...

it is a journey.

And we're going to stay on this journey and move as fast as we can to get the benefits.

But there is clearly a delta change from the fourth quarter to the first quarter.

It was more than what the estimates and the analysts thought, it was somewhat -- we were somewhat disappointed with North American flat-rolled, but very pleased with Europe.

And we are focused on making sure that we do better by taking the assets down to make a longer-term future achieving weighted average cost of capital.

I don't know if that helps you or not.

And David, I think I would add is, the more of this is right now focused on the upstream, our steelmaking, to our strip mills, that's where folks are getting that up to high performance.

And I will point to the slide deck we posted, we have a slide here that shows over the next 3 years, the magnitude of improvement we're going to get at Gary hot -- we expect to get at Gary hot strip mill.

So I mean, we want to make sure everyone understands, we're not just fixing stuff, we are upgrading these facilities to a higher standard and that's really most important thing.

Next question is from Curt Woodworth, Credit Suisse.

Yes, I just want to have a different take on Dave's question.

I mean, I think that we acknowledge sort of the need and the long-term benefits of upgrading the facilities.

But I think, it's a question of kind of quantifying the impact and understanding some of the magnitude of the disruption, because it does look like between what prices have done on tubular, sheet as well as the switch to unitary depreciation, the baseline for EBITDA will be closer to $1.5 billion, $1.6 billion versus say $1.1 billion.

So this $400 to 500 million implied cut is a very large number and even if you say we're going to take 1 million tons out of the guidance for flat-rolled and you assume say $100 per ton contribution margin, and still $100 million relative to a big gap so I think, is there -- are there other things to think about or can you quantify, I guess, what the volume impact do you think was on your guidance and do you see any -- you mentioned some operational challenges this quarter, can you quantify what that was and whether that lingers into 2Q?

Yes.

Curt, so, yes, the operating challenges, you look the bridge chart we put out there to help show this, we had a -- we called our raw materials, we called our LIFO, which is something you only couldn't forecast.

That other bucket of about $95 million, the single biggest thing in there is as Dave Burritt mentioned, is the normal seasonality of our mining.

So that should have been not a surprise to anybody.

The operating inefficiencies to operating challenges part of that is probably $20 million to $30 million, the rest of that's going to be your higher plan spending and then the restart costs.

So I think as we accelerate our spending and our efforts, you're going to see higher levels there.

Even with the cap change, there's obviously more spending.

But you're also going to see more operating inefficiency, because we said when we take volumes down, we not only lose the margin, but it creates operating inefficiencies and absorption issues that go with it.

The other thing that probably people overestimated was the flow of the additional prices into our system and some of it did flow a little bit into the first quarter, but we should benefit from those more in the second quarter.

Okay and just a follow-up with respect to Lone Star.

I guess, how much hot-rolled substrate do you expect to ship into Lone Star this year and are you saying that effectively you're going to have to take more profitable tons at your third-party business to supply effectively a lower HRC substrate into Lone Star this year?

No, I think the substrate supply to Lone Star make sense for us because, we take the benefit of shipping into them and then their profit on the back end.

It's a good tons for us, but I mean, even when you count those tons, our total tons are well below where we were before.

As far as that mill -- our pipe mill is a very stated capacity, is very theoretical.

If you look back historically, we're in very, very strong markets, we maybe run at 70% to 75% of stated capacity.

Certainly these markets are improving, but they are not back to those historically strong levels.

So if you think about that, that will give you a feel for maybe what level we could run at from the next 7 months.

Do you think you can get to breakeven by tubular in tubular by year-end, given the trends you're seeing?

By run rate.

By run rate, I think we see this possibly as yes.

Yes.

Okay.

The other thing and as we're talking about the tubular side, I probably skipped mentioning, remember we started our EAF project a couple of years ago, and because of market conditions, we decided to halt it a little bit.

There are serious studies going back to that to see what it would take for us to accelerate restarting that project that will not only benefit tubular side, but given the fact that the tubular business will not consume the full capacity and that will give us a lot more flexibility when it comes to making additional slabs for the flat-rolled side as that capability has been protected down there in Fairfield.

Next question is from Evan Kurtz, Morgan Stanley.

So a couple of questions.

I was hoping to drill down on with respect to the guidance as well.

Just on pricing, we look at all these indices and it seems like, if you look from where the guidance was put out last quarter to this week, in general, how our prices were up, maybe $15 a ton, but all depends on which index you're looking at and which day specifically you're marking these things.

So I just wanted to hopefully nail down at least whether or not, you actually factored in a higher price into this new revised guidance or was it more flat or can you give us any color there?

Sure, Evan, this is Dan.

Yes, what we use the CRU because that's what our adjustable contracts are primary tied to.

And so CRU comes out every Wednesday so we would have used last Wednesday's.

If you go back to when we gave guidance for it, it's all is going to be CRU the Wednesday before we gave with the guidance, the outlook.

If you look back, hot-rolled was $644 last Wednesday on CRU.

So that was the base of that.

That CRU sheet was what we used to calculate these numbers.

Okay, great.

I'll check that.

And then on the tubular side, I think you said last quarter that you had then some sort of year-to-date run rate on how volumes and profits were trending there.

Is that the same methodology that you're using this time around or how should we think about how tubular is included into the guidance this time?

Everything is flat-rolled tubular Europe.

Everything is based on current conditions.

So we've been using where tubular prices are now.

We've been basing our kind of volume assumptions on what our rig counts are now.

If things get better, that wouldn't be built in there.

It's all based on point in time.

And I think, maybe just follow-up a little bit on tubular because I think some of the things I've seen are maybe a little bit ahead of us.

You think about our particular assets, that onshore rig count moving up is certainly providing benefits to our Fairfield operations.

And that's why obviously is why we're restarting our Lone Star operations.

When you look at our Lorain's seamless, our #3 mill that we have in Lorain now as a large diameter mill.

It's much more aligned to the offshore.

So you really haven't seen an improvement in offshore.

So when you think about our potential in tubular this year, if offshore doesn't move, this change in rig count really only applies to our Fairfield and Lone Star operations.

Got it, okay, that's helpful.

And then maybe one last one for me.

Just on the accounting change, it sounds like you basically moved a bunch of OpEx into CapEx with that move.

Correct me if I'm wrong, but so kind of left a question in my mind that CapEx guide for the year went up about $150 million, although it seems like, you may have added $175 million to CapEx just from the OpEx to CapEx accounting change?

And so, with respect to the asset revitalization program, it seems like you are spending the same or maybe even $25 million less this year.

Just wondering, it seems like I might be missing a piece to that, I was hoping you can explain?

Sure.

So yes, so I mean, our total investment, we said is going to be more like $300 million than $200 million.

And that change will be -- with capitalization change, operating expense goes down $175 million.

$150 million is the increasing CapEx really there.

So that's why you see that increase our CapEx guidance, the other piece is the increase in depreciation.

And so when we think about that -- so that is how it works.

We think about how as we spend -- that money will spend going forward now becomes capital or what was expensed, which now that we're on unitary depreciation makes us consistent with everybody else.

So I think this is a really important point here because, now we are comparable with other industrials in terms of how they do their capitalization process.

This has been incredibly conservative approach and with a lot of study and look back, we are clear -- with working with our partners, PricewaterhouseCoopers and working with others, it was clear that this was a preferential method, and now we can compare with others in a better way.

So it's clear that we have a better approach and this is consistent across the industry.

And I would add (inaudible) one thing, along that is our change on how we spend going forward, the impact in the first quarter was only about $10 million.

Next question is from the line of Matthew Fields, Bank of America.

So asset revitalization investment, $300 million this year, and you mentioned in the Q&A that this would be a 3 to 4-year program.

Is this a $1 billion program over the next several years?

It's more than that.

But we were ramping up right now.

So as Dave Burritt said, this is an investment year, but this is a rampup.

We're accelerating where we thought we do this year, we're still in a ramp-up phase.

It takes a lot of advance engineering and planning for a lot of these projects.

So we would expect going forward that the numbers get bigger before they get smaller.

And there is a lot of rigor into the dollars they're going to be spent, the KPIs that are going to be associated with it to ensure that they're going to deliver improvement over the cost of capital.

I mean, the pursuit of the earn the right to grow concept is now deployed to the level of detail for each project.

And there are plenty of projects that are -- the way that this has been designed.

This is not several hundred million dollar project.

These are projects that will mostly vary with exception of the growth ones.

These are projects that are going to be ranging, let's say from $10 million to $20 million.

They're much more manageable in that regard, much easier for to control, both from a timing and execution as well as being able to assess that the improvement to the proper KPIs as we begin to operate them.

It also gives a lot more flexibility.

When you start $100 million project, for you to maneuver in this volatile environment, it's more complicated, I mean, you remember, how complicated it was to kind of get to a point of being able to halt the EAF.

It's really much more complicated.

So this gives us a lot more flexibility in how we maneuver throughout this very significant effort.

And how do we preserve the flexibility required if need be.

And this is an important opportunity for us and kind of this is what's happening.

We've implemented projects to revitalize our assets throughout the first quarter.

We learned a lot more about our assets and more about our ability to build projects efficiently and more about our capability and increase the number of projects, we can manage concurrently.

And, so as we evaluated our first quarter performance and the impact of the projects we completed, we determined that we have the capability to move forward faster.

And that moving forward faster will increase the value that we can create and sustain over the long term.

So yes, we could move at a slower pace, we could chase the spot market.

But we need to have the courage to strike when the iron is hot and take some extra downtime, so that we can get more reliable faster for our strategic customers.

And we've built that balance sheet and have the cash to do so.

It's in the best interest of our stockholders frankly to move faster, deliver more reliably to customers since we've gained confidence to do so.

We learned a lot in this first quarter and we need to accelerate.

So I understand the need for it and I certainly understand the operational improvements and profitability improvements from going down this road.

From the scope of what it sounds like this multiyear, multi-billion dollar project, do you think you will be able to finance it within the confines of your existing balance sheet or will you need to come to market to supplement operating cash to finance this multiyear project?

I think, as a matter of fact, we're doing it in some decent market conditions.

In addition to the cash we built by improving working capital and the equity raise we did.

No, we're comfortable that we have and we need to do this.

We need to perform, we need to execute and to Dan's point, if you look at our balance sheet, we do have the firepower on our balance sheet to finance this thing.

But we have to perform and we have to do better and that's why we need to move faster on this.

And we need to take advantage of the opportunity we have now when the market conditions are good.

Because we know at some point, hopefully in the distant future, things would head in the opposite direction, but we will be in much better shape to manage the downturn.

So this is not a quarter to quarter play, this -- we're in this for the long haul and we have to make sure that we're focused on the assets.

And even in this first quarter, it was a Gary Hot Strip Mill, the Gary Blast Furnace, Irvin Hot Strip Mill and Edgar Thomson BOP, Great Lakes Works hot strip mill, the Great Lakes BOP is...

going down a list of things that we went after.

And these things continue on.

We have capital projects in flight, some 23 capital projects, so we're over 100 total spending projects that have been launched.

This is a big deal for us, but we got to do it faster.

We have to have the courage to do it faster and we have the confidence now especially after the things we've learned in the first quarter to push on it.

Next question Karl Blunden, Goldman Sachs.

I just had a couple here on the asset revitalization plan.

It sounds like you increased the spend on that by $100 million this year, and potentially a small number relative to the full program.

But does this mean that that's just been pulled forward and so the out-year spend should be $100 million less or is this just incremental spend that was identified and needed?

No, that's corrected, we're pulling forward.

Okay.

Got you.

And then on acceleration, so you brought it forward based on what you've learned during the quarter, should we read that to understand that you're very confident about future market conditions, because you're taking downtime now at a pretty profitable stage in the cycle?

Should we read that?

Absolutely.

Yes, so we do have confidence that the markets will be good going forward.

And that -- and it's really a combination.

We have projects, for example, that were slated to come after this outage, let's say in the next quarter.

But as we got in there, we saw that there was an opportunity to accelerate them, because it just made sense to do it.

As you open up, think of a hot strip mill, when you open it up, and then you find situations that you can clearly benefit from a productivity standpoint, because you already down and you already have capabilities.

So significant pull ahead, but also meaningful make up for things that we found, because we were down.

Okay.

That's helpful.

Then on to the next question I had.

It's just a smaller one, it hasn't gotten much attention on the call.

On the raw materials, you do mentioned on some of your slides that there was a headwind in the quarter.

Is there a way to quantify that and then also give us a sense as to whether you expect that to be temporary or sustained?

Yes, Karl, this is Dan.

That's particularly in for the flat-rolled segment, it was $74 million was the quarter-over-quarter change for us.

Our coal cost in the U.S. are up $19 a ton, that's fully a fixed cost, fixed for the year number.

The rest of the change are the more market based.

So depending on where scrap or gas, which will be 2 other bigger inputs, depending on where they go or coating metals or alloys that would determine how much that is quarter-to-quarter because the coal piece is fixed, the rest of which is pretty much floating at that market.

Europe is sort of a little a bit different, though.

Europe is quarter-to-quarter pricing.

So it's going to fluctuate much more than the U.S. probably is.

And just, I don't want anybody to get offended, but we have a lot of people in queue.

So we'll probably have to pick up the a pace a little bit, so I don't want anybody to think I'm cutting them short, but we do need to pick-up pace.

The next question from the line of Nick Jarmoszuk, Stifel.

Regarding the reclassification of OpEx to CapEx.

Can you give us a sense for what that number has been historically for 2016, for maybe '15, '14?

And how much of that's been for the U.S. operations versus Europe?

Nick, we really can't, and in fact our approval to do this was based on the fact that -- it is impractical to go back and try reconstruct that.

So we really don't have that information.

How about going forward, is $175 million a pretty steady number?

Or is that going to bounce around a little bit?

I think -- no, I mean, going forward, it's just going to be a matter of now, how big our plans are and what we spend.

Like said -- and the key is that a lot of things that we would have had to spend because we were on groups instead of units is about a change.

So as I said, Q1 is -- so I said, it was actually depend how much we spend maintenance -- CapEx, it's got to shift more, but like I said, you spend more, you'll have a bigger impact than you had this year, or we spend lesser to be less.

Like said, it is a method now that's very much consistent with all our competitors.

And then the last one, can you give us the sense for what the restart cost for working back in Granite City?

I think we're pretty low piece of that total.

They were really well done and efficient.

They were probably in the range of $10 million.

The next question is from the line of Gordon Johnson, Axiom Capital.

Just, I guess, 2 questions.

Number one, when I look at your CapEx spend versus your D&A, the CapEx spend has been below D&A since 2013.

Could this be an indication that maybe some of the facilities maybe require higher maintenance than maybe some of your peers and that's why we're seeing some of these costs, and then I will have a follow-up?

Actually Gordon, part of the reason our CapEx -- and as accounting change explains, part of the reason why our CapEx appeared low compared to other people we actually spent a lot more things that normally would have flow to that.

So I said, we couldn't go back to recalculate it, but our CapEx would have been higher under this new -- capitalization depreciation method.

So I think the perception -- that may have helped to fuel the perception that we were under-investing, and our operating costs were too high just because we're accounting for things differently.

But -- so if you did, it wouldn't be -- maybe it wouldn't look as if the (inaudible) investment was quite as low as it was.

Okay.

That's helpful.

And then just one last question.

When you guys talk about looking forward and some of the demand trends being stronger, we're looking at things like clearly SAAR data, U.S., auto is kind of rolling over, nonresi construction spend looks like it's rolling over both when looking at Dodge data and Census data, construction employment -- unemployment rather is really high.

So can you guys talk about maybe some of the things you're seeing that give you confidence that we're looking at an upmarket rather than a potentially neutral to down market?

Yes.

I think you can consider that we see it as the market getting better.

You take automotive, I think, even though it may not be at the level of what it was last year, but it's still going to be fairly high, and our opportunity in that market is real substantial.

Same thing applies with construction, same thing applies with the yellow lines, white lines.

The energy side, we believe, that they're trying to find a base for it to grow.

There is certainly global conditions taking place that impact it.

But even on the energy side, with our ability to have -- we brought more products that gave us an opportunity to have a full line to be able to now pursue the international markets.

We just opened our office in Dubai.

We are having contacts over there.

And those are markets that we have had first of all zero market share for anything and second zero market share for the premium products.

So I think that we see that our journey in the direction that we've set out to do is going to benefit from these markets remaining pretty good.

Our next question is from the line of Timna Tanners, Bank of America.

So I understand you're reinvesting in assets after some lean years here, but kind of trying to understand how to think about your production costs under the next 3, 4 years of these heavy investments taking assets offline, tend to be a lot of inefficiencies as you've seen over the last several quarters of stopping and starting assets.

So how should we think about the trend of your cost of production going forward over the next couple of years, if you could help quantify some of the benefits offsetting some of these inefficiencies and the cadence of that ahead.

I don't know, it's just kind of hard to quantify.

I think we'll have a better read.

And we do have a few unusual in 1Qs of -- maybe as we get to 2Q, we'll have a better read of maybe what the near-term run rate looks like.

But I think how fast get things done.

And that -- in slide we have showed -- a slide we have in our deck showing how we expect improvement in the Gary hot strip mill.

The faster we get things done will determine how much we gain back on off against our efficiency.

So it's probably hard to project that too far out into the future at this point.

Okay.

I can follow-up offline because I just think that there's little more explanation trying to understand the -- like the stops and starts and the inefficiencies that you've seen over the last couple of quarters, is that something that will be offset eventually by inefficiencies -- by the efficiencies that you're expecting to (inaudible).

But just...

Absolutely.

But do look at the chart on Gary.

I think that's very instructive in terms of the kind of improvements you'd expect to see on the projects.

Yes, I try that.

And certainly, over the long, yes, these efficiencies will show up and improve us.

I think the more work we do that's planned, the better it is.

Unplanned is really where you get your most pain on inefficiencies.

So the fact that we are planning and doing more planned work should help us as opposed to periods when we have unplanned.

Fair enough.

All right.

The 10 million tons that you talked about, I just want to understand that you talked about reducing tons of the spot market, but that like about actually an increase from your recent run rate over the past couple of quarters.

Am I missing something?

Or is there -- I mean, I think like this is fairly flat?

No?

No.

I think in the context of -- when we talk about the outlook and the outlook calculation, we expected our shipments to be well above that.

But based on where we are now, when we had to recalculate the outlook, we had to get, I said a better assessment from where we operate in the first quarter and now the additional outages we plan to take.

That brings us down to that range.

So I think that's more kind of a calculation of how we did -- how we calculated previous outlook, how we calculated current.

From our perspective, we took a fair amount of tons out of our expectations.

And next question is from the line of John Tumazos, Independent Research.

In terms of your mix, several years ago, you had a lot of tube scope, which is heavy gauge and easier to roll, and now you've got the evolution of a high strength auto steels that are tougher to roll.

So the mix is different, and I guess that has some influence on the productivity ratios.

Do these events argue more in favor of a toll agreement with the ATI Brackenridge hot-strip mill?

Or even buying ATI where you might have better labor relations, better connections with steel distributors, little more clout, you could say the headquarters, if you ever lost the techs or a GE Louisville as a customer and downsized at Mon Valley you could flow into their hot-strip mill or their Midland melt shop if you couldn't keep it all going at the Mon Valley, and there could be other benefits.

I guess, John..

(inaudible) for titanium.

I guess, John, I will start with, we are capable of making the products on our facilities, particularly with the work we're doing.

So we don't have anything out there that we would need their capability to make -- we can make what we're doing on our facilities to go and make it somewhere else would probably be less cost effective, less efficient for us.

And then when it comes to headquarters and all that, I mean, we probably have reduced our DNFC by 30-some-percent last year.

So the efficiencies have been looked after in this regard, too.

We know you're efficient.

Thanks, John.

The other guy might be as good as you too, we hope so.

Next question is from the line of Phil Gibbs, the KeyBank Capital Markets.

Mario, is it fair to say given all this commentary that the biggest piece of the guidance cut was the combination of the accelerated asset revitalization time line and lower flat-rolled shipments?

Absolutely correct, Phil.

That's correct.

And is there any LIFO expense in this new guidance, given the fact that you had that switch in Q1.

And if so, how does that compare to what you were thinking before?

In that, Phil, we do our full year -- we do our assessment based on full year look and mark to that all at one time.

So once there is some real change in raw materials, we wouldn't expect anything different, but if materials change, obviously, it'll change.

Okay.

So not too much in the bridge.

So actually there'll be no assumption of a change at this point because, I said, we adjusted our full year expectation.

So there wouldn't be any assumed changed in there right now.

So is it fair to say that you expect $80 million of LIFO expense for the year then?

No.

No.

The way we do it is, we make our full year assessment, and we record the full amounts.

Got it.

Okay.

So you've already taken it essentially then.

Yes.

And then just last question, bigger question here.

How was the asset revitalization plan different than the Carnegie Way?

Well conceptually, the Carnegie Way is the umbrella for everything we do.

So if you look at the rigor that we've had in creating Carnegie Way projects for improvement, the rigor -- and implementing them, preserving the benefits that we get, the same rigor is being addressed into the asset revitalization plan.

The asset revitalization has a dimension of improvement in every single one of them.

But the concept of the rewards will get from them to supersede across the capital is going to be done exactly the same way that everything is done in the Carnegie Way.

The Carnegie Way is a foundation of thinking and methodology that allow for us to really execute well on the stuff that we go after.

Just as a number, for example, distinction is, we worked on 20-some projects of major caliber in the first quarter in the asset revitalization.

There is more than a 100 slated to go after.

But we executed on more than 400 Carnegie Way improvements, and we have about another 4,000 of them slated to go after.

Next question is Brett Levy, Loop Capital.

In terms of the spacing, I saw the quarter, I saw the guidance and now you guys got a lot of CapEx projects going at various points, things that will be up and down, also noted the steel industry tends to be -- second quarter is strong, third quarter and the fourth quarter are somewhat weaker.

Can you give us some sense of spacing in terms of the second quarter, third quarter and fourth quarter, either volumes -- I don't know that you want to get all the way down to the operating line, but some sense as to sort of what the timing of some of your projects are and how that will effect volumes for 2Q, 3Q and 4Q as we try to get to the 2017 guidance that you gave?

Well, I think, Brett, no, with our kind of perspective, this will be about 10 million total.

That we'd expect in the next quarter, couple will be higher than 1Q.

Again, seasonality is pretty much always there.

I would say that we will have because of how spot prices have moved, and our quarterly and our monthly adjustable contracts, we still have some uplift coming on pricing.

Then certainly it's there in 2Q, probably hold a fair amount in 3Q just based on how things reset.

Probably too soon to speculate past that.

Next question is from the line of Novid Rassouli, Cowen & Company.

For tubular shipments, they've been lagging the rising rig count.

I wanted to see if you guys can help us understand the moving parts there, and when you can potentially see your shipments start to more closely track rising rig counts?

I guess Novid, as I would say that right now the only thing we have operating really tied to onshore rig counts is Fairfield and it's been improving.

I said -- I mentioned Lorain #3 mill is really an offshore play, so that rig count hasn't changed.

And right now, we're just in the process of getting the Lone Star welded up and running.

So I think you'll see a better gain once we have Lone Star running because now we have that facility online.

I think the reason, maybe it appears we've been not moving as fast because out of our capacity, Fairfield was really the only piece of capacity we had, that would benefit from that rising rig count.

There is also some additional investment on premium products that are being made that should kick-in September time frame, so that will help.

Right.

And then how long do you expect the ramp to be at Lone Star #2 that starts in May, I believe?

I guess that really depends on the order book.

But that facility probably gets -- I mean, it would probably be capable of running pretty hard, pretty quickly, but it's about the order book.

Okay.

And then lastly, achieving that kind of run rate breakeven that you'd mentioned to an earlier question by the end of 2017, what would that imply for your shipment run rate?

Actually it's due to a lot more price.

I mean, the prices have to keep on moving, where we're seeing that trend in the market, where we need it continue because, frankly, prices have moved up, but they're still well below historical levels.

So I think it's a combination of price and volume.

If prices don't move, it's going to be a much harder to get enough volume to get there.

So we're going to need both.

And next question is Alex Hacking, Citi.

I apologize if this is a little repetitive, but is there any way that you can quantify as it stands today, what you envision is just the total spend on the asset revitalization program?

You mentioned earlier, it would be more than $1 billion.

If there's any way that you could quantify that.

And then how is that going to be spread in terms of timing?

Is it something that you're spending a consistent amount of money for the next 10 years?

Or is this more of a finite kind of 1- to 3-year program?

Anything quantitative that you could give us there will be extremely helpful.

Sure.

So currently we're saying this is 3 or 4 years, incrementally $300 more than last year.

The '18 is going to be higher depending on how much we pull forward.

But I'd expect '18, '19 certainly higher than '17.

How much is left for '20, I think, we don't know yet.

But we think on our -- from our incremental base, it grows the next 2 years.

And then just -- sorry, one clarification on the spending this year.

You've moved -- I think I'm just being slow here, but you've moved $150 million from OpEx to CapEx.

CapEx guidance is up $150 million.

But you said that you're spending more on accelerating the program, like where are we seeing the additional spending this year?

The acceleration includes capital, that's the total number.

And I guess that if you follow-through, from last quarter to this quarter, that $300 million is probably about the split -- an even split between CapEx and operating expense.

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

Actually it was related to the last question.

I still -- I'm a little bit confused about it actually and maybe we can take it offline.

But -- so the CapEx number, it sounds like didn't really change since last quarter, since $150 million, the $175 million of the accounting change was responsible for that boost.

But obviously, asset revitalization is higher.

So that means something must have come down.

So I was just wondering if you can kind of walk us through how that all balances out, like why the number didn't really move?

I think part of it is -- and Dave talked about how much we learned as we went through the first quarter.

By going faster, we're being more efficient, so our spends should be more efficient.

So hopefully, we do a better job of actually minimizing and beating our CapEx expectations on a lot of these individual projects.

By accumulating them and then maybe push them together, we get some net efficiency out of that.

And next question is from the line of Phil Gibbs, KeyBanc Capital Markets.

I just noticed the SG&A went up pretty dramatically relative to Q4, the second half run rate of last year, just curious if that's the right -- the $97 million is the right number, I mean, moving forward?

Or there's something unusual in that number?

Actually, Phil.

The big reason it went up was related to -- last quarter, we talked about we derisked our VEBA investments, so our pension OPEB expense went up.

And by derisking, our expected return on assets go down our expense goes up.

So that increase we called out on pension OPEB expense year-over-year.

Almost all of it is flowing to the SG&A line, so that actually is probably a decent run rate with that adjustment for the higher pension OPEB expense.

And final question from the line of Nick Jarmoszuk, Stifel.

Just a follow-up on the asset revitalization program.

Let's say, we get into a lower steel price environment in '17 and '18, is the spend fixed in stone?

Or would you adjust the spend over the next couple of years?

We invested -- we went to the markets, you recall, to raise $500 million of equity.

This is money we expect to get good returns on.

We're going to protect this spend, we're going to deliver on this, and that it gets back to -- we have high confidence that we're going to be able to do this, and it takes a little bit of courage more than a little to take this type of action right now.

But we wouldn't be -- we wouldn't have gone to the capital markets to get the $500 million, if we didn't believe this was necessary.

So clearly, we're learning a lot, we're moving it forward, but the $500 million that we raised is dedicated to this.

It wasn't dedicated paying down debt, it was dedicated to getting good returns for investors longer term.

And then can you give us a sense what the lead time it is for most of these projects?

I'm sorry, Nick, we didn't clearly hear you.

Could you give us a sense for the lead time for most of these projects?

It really depends.

Like I said, some of the bigger projects, particularly as it relates to blast furnaces, can have a much longer lead time just because of engineering and the materials -- and getting the materials on site.

So it's going to be a pretty mixed bag.

But there are certainly some fairly long lead time projects.

There are certainly a lot more that are more immediate and those are the ones we have the best opportunity to accelerate.

All right.

Thanks.

At this point, Mario's couple of final comments.

Thanks, Dan.

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

They've faced many challenges over the last couple of years, and they have taken on those challenges and delivered tremendous improvements to our business model.

And they have done so while maintaining their focus on our core value of safety.

Safety remains the foundation of 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 there and more work to do but recognize we're making progress.

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

Thanks, Mario.

I'd like to thank everyone for joining us, and we will talk to you again next quarter.

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