美國鋼鐵 (X) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to United States Steel Corporation's Second Quarter 2017 Earnings Conference Call and Webcast.

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

After the close of business yesterday, U. S. Steel posted a slide presentation and prepared remarks as well as an updated question-and-answer document under the Investors section of www.ussteel.com to provide everyone with a better opportunity to prepare for the call.

Today's conference call contains forward-looking statements in that future results may differ material -- materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of the U. S. Steel earnings release in the earnings presentation and question-and-answer document posted on the U. S. Steel website and are included in U. S. Steel's most recent annual report on Form 10-K and updated in their quarterly reports on Form 10-Q in accordance with the safe harbor provisions.

I would now like to turn the conference over to your host, U. S. Steel President and CEO, Dave Burritt.

Good morning.

This is Dave Burritt, President and CEO of U. S. Steel.

With me here today is Dan Lesnak, General Manager of Investor Relations.

First, I'd like to thank Pipasu Soni, our Vice President of Finance, for the role he played the last couple of months as Interim CFO.

We're announcing today that Kevin Bradley will become the new Executive Vice President and CFO for U. S. Steel effective tomorrow, and you will see that in a press release shortly.

Kevin most recently was the Senior Vice President and CFO at Terex Corporation, where he had previous roles as President of Terex Cranes and before that as President of Terex Financial Services.

Let's begin.

The second quarter was stronger than the first quarter, both operationally and financially, and we are glad to see the improvement.

We have a strong cash position to finance revitalizing our assets.

It's been a lot of hard work, but the discipline and focus that we're putting on our operations is beginning to show promise.

We have 2 areas of focus: our operations and geopolitical challenges.

An example of a geopolitical issue is unfairly traded steel.

We have a talented team that was put in place to deal with this, and the process is in place.

We're managing that very well.

I spend less of my time on these issues, but as CEO, I will do what is necessary to help with geopolitical challenges.

But to be very clear, my primary focus is on operations.

When we execute at our steel mills well, it shows.

Achieving operational excellence is what's going to make the difference for this company.

It's about safety, quality, delivery and cost.

Like the beating of a drum, safety, quality, delivery and cost.

I'm spending my time at the facilities with our people, making sure that we develop our talent and our assets to perform at their best.

While our operational performance was better in the second quarter, we remain very focused on the need to improve our assets, support our employees and deliver for our customers.

When we do this, we will help our customers succeed, and our stockholders will be rewarded.

We are making capital investments of $1.2 billion.

This will help ensure we're able to achieve returns well above our weighted average cost of capital across the business cycle.

We've modeled the numbers, and we believe that we can get internal rates of return of between 15% to 20% on the improvements.

We are already seeing improvements from the first phase of our investments in the Gary Works hot strip mill.

We're seeing better blast furnace performance, especially at Great Lakes Works, where we faced our biggest challenges.

It's good work, and I know we can do better.

These are just 2 examples of what we can achieve when we focus on our assets, our talent and deliver for our customers.

The other thing we've done is we're putting in place more robust performance scorecards.

We're providing you with a performance scorecard for the implementation of our asset revitalization program, which we will be reporting to you on a regular basis.

We are going to provide targets for our EBITDA improvement and the capital spending related to our revitalization of assets, the quality improvements that we're going to be having as a result of our investments and the improvements that we're going to make in unplanned maintenance downtime.

We will be held accountable for reaching those targets, and those targets are cascaded to the operations, where the real work, the important work, gets done.

We've also been investing in our employees, building capabilities.

We are realigning the organization to make sure we have the right talent in the right positions.

Best talent wins.

We're getting the right people on the team to ensure we are succeeding.

We are making sure that we're adequately supporting our employees.

When things go wrong at our plants, our employees work with a tremendous sense of urgency, and their outstanding response time and ability to find and solve problems quickly and safely protects our facilities, our environment and our customers.

But the real solution is to not have things go wrong, and we are addressing that through revitalizing our assets and implementing a strong reliability centered maintenance program.

In addition, we are also investing in product development.

It's very clear to us that Generation 3 advanced high-strength steels are our future.

And this is where we're going to be focusing research and development spending.

We are investing in R&D to ensure that we remain competitive through future business cycles.

You will hear more about this in the near future.

Finally, on geopolitical issues.

We continue to monitor the progress of the 232 investigation.

We believe, we have a compelling case of the harm that imports are having on America's economic and national security.

In order to have a strong U.S. manufacturing base, we must have a strong steel industry.

So goes our manufacturing base, so goes our country, and we firmly believe that this administration understands the importance of U. S. Steel to this country.

This is in the government's hands.

They understand what is at stake.

They know what needs to be done, and we are confident this administration will come to the right conclusion.

When the President announces his actions under Section 232, we are prepared to respond quickly.

We will make our assessment of the potential impact of the Section 232 actions taken and then make adjustments to our operations necessary to continue to support our customers and respond to new opportunities.

Enough said about 232.

But make no mistake about this.

This country has been in a trade war for decades, and it needs to end now.

Dan, let's go to questions.

Thank you, Dave.

Brad, can you please queue the line for questions?

(Operator Instructions) And we'll go to the line of Curt Woodworth with Credit Suisse.

Thanks for the additional transparency on the guidance and the asset revitalization programs.

But I guess with respect to revitalization, you outlined a fairly significant increase in the capital spending for '18.

And I just wanted to understand if that would create potentially any operational headwinds or any more downtime on equipment?

Or if that would potentially result in more maintenance spending?

Because I would think you should start to harvest investments made this year, and you're already facing a pretty big maintenance expense rise this year.

I think you outlined $1.3 billion versus $950 million last year.

So any color on that would be helpful.

Yes, Curt.

I'd say we are scheduling things carefully.

So operationally, we're going to do a lot of projects, but we should be -- we are going to maintain our operational levels, probably see some gains as you mentioned from some improved quality operations which will probably help some yields and give us a little bit more room to get some tons in as we move forward.

From the spending side, we are going to spend more next year than this year.

We are ramping up through this year and into next year.

Next year is probably the biggest spend year of the program.

Once we get through the projects this year that we complete, we'll have a better feel for which ones will be on the slate next year.

And then we'll be able to give you guys some better color on costs and capital for next year on the January call.

Would you think that maintenance expense would be about the same level next year, then, given the acceleration or...

It's hard to say at this point, Curt, because it really depends on which projects gets pulled forward into this year and which ones don't.

Every project has some component of cost and capital to it.

So it really is going to depend on what the project mix winds up being.

Okay.

And then just a quick follow-up.

Regarding that the guidance, keeping it flat, it looked like the CRU price is off about $30, $35 a ton, so potentially $100 million, $150 million headwind on EBITDA.

Can you just comment on some of the offsets you're seeing relative to your prior guidance to keep it flat?

Yes.

This is Dave.

Thanks for the questions, Curt.

What we're seeing is better performance on our assets, as we saw in this quarter.

Very much focused on making the operations better.

An example of that, for example, is the B2 Blast Furnace at Great Lakes Works.

This blast furnace is 65 years old.

And through some revitalization of that asset, we actually had been able to run that at all-time record levels of tons produced.

We ran it at all-time record levels of tons produced, and then we did it on the next day, and the day after that, and the day after that, and the day after that until we got to the point where we had a bottleneck on the hot strip mill.

So when we get very focused on revitalizing our assets and we give our people the money to spend in those areas, we see the benefits through the rest of the year and into the future.

So we have a few good success stories on some big assets.

And you saw in the advance material the 4 categories in which we're focused.

Well, there's 13 big assets that support those 4 categories.

And when we do improvements in those areas, they actually carry through to other areas of the operations.

So one by one, we're going after them.

And we're pleased so far with what happened in the second quarter.

We need to repeat in the third and the fourth and again in the first.

And when we do that and we provide our people with the tools and the focus needed to do their jobs, I think we can be successful.

And we'll go to the line of Seth Rosenfeld with Jefferies.

I have a follow-up question on the asset revitalization plan.

I'd just like to better understand how today's commentary compares to what we heard last quarter.

I think last quarter, you talked about total costs of $300 million increased, about roughly split in OpEx and CapEx.

Today, it seems that the CapEx increase alone is $200 million to $250 million, plus that $350 million increase on the OpEx side on maintenance and outages.

Is this a like-for-like increase, if I'm thinking about it right, in the $300 million to north of $550 million?

Or how should we compare today's commentary to what we heard last?

Seth, yes, this is Dan.

We were giving incremental changes last time.

I think it's more clear to give you guys the actual full year numbers.

So the CapEx is $200 million to $250 million this year we expect to spend, not incremental to last year, but what we actually expect to spend this year.

On that outage expense piece, that includes also some higher maintenance and outage expense outside of the program.

If you think about it, last year, Keetac wasn't operating.

This year, we're going to have our normal maintenance and outage spending at Keetac.

Granite City hot strip mill wasn't running last year.

We're going to have spending there.

So that $350 million increase in maintenance and outage is a combination of normal increases related to running more facilities, and then a piece related to all the work were doing on the assets right now.

Okay, great.

And a second question, if I can, on the European business.

Can you just walk us through the FIFO loss that you reported in the second quarter?

Does this simply reflect the higher cost iron ore and coal inventories held following the first half volatility?

Or does it have anything to do with longer-dated mismatch between sales, contracts and input costs?

Any guidance you can give on what we should expect both on FIFO and perhaps margins into the back half of the year in Europe?

Yes.

On the FIFO, that's due to -- the FIFO, we had a benefit in the first quarter.

We had a charge in the second quarter.

It's all related to the extreme volatility we're seeing in the global raw materials prices.

We are a buyer over there of all our materials.

If you -- they net -- for the front half of the year, they net to only $16 million.

So they do -- they net themselves out pretty well if you got those out of the way, I think you can tell from our description of where our gains and losses were as far as what drove the numbers.

The underlying operations did better in the second quarter than the first.

So that FIFO moving back and forth on us kind of obscures that a little bit.

We were trying to call that out in the presentation a little more clearly.

You look at where we are, I mean, we said under these conditions, we expect that Europe can deliver $400 million [EBITDA].

So that does imply a stronger back half, and we're seeing conditions that are leading us there.

And our next question will come from David Gagliano with BMO Capital Markets.

Congrats on a much improved outlook versus the last quarter, obviously.

So my question is really -- I wanted to drill down on the Flat-Rolled segment a bit more.

We've obviously seen -- we've seen some massive quarterly swings over the last 6 consecutive quarters, up, down, up.

And obviously, modeling is becoming increasingly challenging in a certain respect.

So I wanted to see if we could drill down a little bit on the EBITDA bridge, which is on one of your slides, from Q1 to Q2.

There's 2 buckets that seem to explain most of the move, the $290 million improvement in the last 3 months.

One is commercial, $103 million; the other is raw materials, $128 million.

And I was wondering if you could give us a little more color, first, on the commercial side, how much of that $103 million improvement was due to the Keetac pellet operations?

That's my first question.

And then...

Yes, Dave.

Yes.

So we -- there's 2 pieces.

Keetac up and running helps us efficiency wise.

And there's 2 pieces going on there.

Our mining operations normally have a big seasonal improvement Q2 versus 1Q.

Because in 1Q, with the locks closed, you're really not shipping pellets.

So the biggest factor there is the normal seasonal change in our mining.

And that will be in that raw materials bar you're looking at there on Page 13 in the presentation.

The benefit of selling pellets as the -- to third-parties now is new to us compared to the past.

That's actually showing up in that commercial bar.

Because that really isn't an improvement in our materials business, that is a commercial venture we're in now.

So the primary piece of that raw materials bar is the improvement in the mining operations that we would normally see year-over-year from our internal use of our pellets.

Okay.

So my question is really just on that commercial side, the $103 million, how much of that is actually due to Keetac versus finished steel prices, et cetera?

It's -- with -- our mining operations aren't a segment because the way our management structure, we're following the segment rules.

That's -- we consider that really commercially sensitive.

We only have one competitor in that market, so we really don't want to tell them too much about what we're going on.

I think you guys can appreciate that.

Okay.

And then just for, again, modeling purposes moving forward, obviously, maintenance and outage wasn't a big driver either way this quarter.

How should we be thinking about maintenance and outage costs over the next 6 quarters?

Well, I think to go back to what I was telling Curt, until we get a better feel for what projects we're actually going to complete in '18, we're really not going to know that piece of the outage.

So I think it's too soon to get into '18.

I think you can see from the stuff we have also in the presentation there, we expect that it's going to be about $660 million in the back half of this year, $660 million versus $640 million in the first half.

So pretty steady this year as far as how it spreads.

A little bit too soon to get into tell how much '18 is going to be until we get -- really get into developing the '18 business plan in total and the asset revitalization details behind that.

And our next question comes from Timna Tanners with Bank of America Merrill Lynch.

So I wanted to ask 2 questions.

One was about just being clear on what's baked into the guidance, because there was a very recent hot-rolled price hike.

And I wasn't sure if hot-rolled price hike, I wasn't sure if you would have baked that into your guidance already?

No.

We use the CRU index, so everybody is clear on what we're using.

And we -- the one we'd be using is the one from last Wednesday, because that was the most recent one when we developed the numbers.

So I think hot-rolled was $612.

And also for the rest of our product mix, we'd be using the CRU numbers off of that same last Wednesday report.

Yes, it was $640 at the end of April.

Right.

In late April, $640.

So now we're down to $612 in [helping] our calculations here.

Okay.

I just wanted to be crystal clear there.

And then if we could just talk -- I know you said that you'd be able to respond quickly in any Section 232 results, but I didn't understand what you were talking about with Fairfield making slabs.

I thought it was supposed to be making rounds, so forgive me for not following that.

Maybe you could clarify what you're thinking about with Fairfield, if that's a change or if that's something that's in line?

And also what kind of response would you be thinking if you convert to flat-rolled, you wouldn't be -- or slabs, you wouldn't be able to make rounds.

But presumably, Section 232 could benefit OCTG pretty nicely as well.

So I just wanted a little bit more about your Fairfield plans perhaps against any Granite City plans and your vision there?

Well, there's a lot in there, Timna.

I'm not sure where you're reading that information.

I'll just say this about our ability to be responsive given the 232.

Of course, a lot depends on how broad and comprehensive this is, and we -- that 232.

We would expect there to be a meaningful adjustment to the imports.

We'd expect it to be sufficient duration.

We expect it to be comprehensive.

And of course, we have to wait and see how that all plays out.

But we would turn on Granite City, a blast furnace, maybe 2 blast furnaces and be as responsive as we could in maybe 10 weeks or so, depending upon how fast we could get the people onboard.

But as far as this discussion about EAF and the slab caster, I'd say this about the EAF, this is something that's in our future.

I would say it's not a question of if, but when, and at the appropriate time, when our customers need the volumes, and the tubular business is EBITDA positive, and we see that coming at a run rate basis very soon, we will be moving forward with an EAF.

In fact, at the Board Meeting just this week, we had a detailed, in-depth discussion about the tubular business and the EAF specifically.

So we're waiting for an improved business results.

We're waiting to make sure that we can have the kind of flexible structure in our modeling, and then we'll be good to go with moving ahead with the EAF.

But you have to wait and see on that, because we want to see some numbers in the black for the tubular business first.

And Timna, this is Dan.

Yes, in the Q&A doc, when we put that sentence in about the potential for slabs, because as we've resized our tubular operations and permanently shut down some capacity, we just wanted to highlight the fact that when we get to this process of running the EAF, then we actually will have some available capability to do slabs if we need them.

Originally -- the original plans would have had that EAF feeding the rounds caster, consuming most of its output just for tubular.

But now that we have some seamless capacity tubular, we'd have some flex capacity when we get there.

And we'll go to line of Phil Gibbs with KeyBanc Capital Markets.

The question was just on the mining operations again.

Just curious, given the fact that there is probably some catch-up, and you noted closure in the locks in the first quarter and some new business wins.

Should we expect this second quarter rate of mining sales to persist into the back half or accelerate?

I mean, how should we think about that?

Yes.

Sure, Phil.

There's 2 moving parts there.

The big seasonal change that's normal in 2Q, that doesn't repeat itself.

You're kind of at that level now.

So you shouldn't see a big variance from our internal purposes in 3Q.

As far as the external sales, they're probably going to be reasonably consistent through the year.

So you'll continue to see a benefit from pellet sales, probably not -- but probably not a big quarter-over-quarter differential from mining, we wouldn't expect at this time.

Okay.

That's helpful.

And the 75% to 80% utilization rate you're running at now on your existing footprint or what's capable and running, is that sort of the limitation right now?

Because I saw that you had said that you plan on getting another 1 million tons potentially of creep capacity out of the assets and -- over the next 3 years.

But are we limited based on the asset revitalization to that 75% to 80%?

Where can we go?

We could probably do those a little bit.

As Dave pointed out, the blast furnaces are running better.

So we can do a little bit better.

But right now, also, since we opened the welded pipe mill down in Texas, we're going to supply some extra bands to those.

So our commercial shipments probably don't change much.

But we are going to get a little bit better utilization that will help support getting bands to our tubular operations.

Clearly, our blast furnaces are running much better, just based upon the challenges we had at Great Lakes Works.

So we have plenty of melt and we're moving ahead.

So we should have a little bit of upside, as Dan mentioned.

But I think the 10 million tons moving to 11 million tons, that's going to take a bit for us to get there.

With the revitalization of assets, it won't be overnight.

That's helpful.

And I just had a question for clarity kind of based off of the question that Timna asked on the Fairfield EAF.

So that sounds like something that is in the definitive plans here for the intermediate term.

So you -- I just wanted to clarify, so you are or are not planning on doing a rounds caster there?

We -- it's not a question of if, it's always been a question of when.

And again, some of the things we look for is we have accountable units.

The tubular business is fully accountable for their numbers.

When they deliver profitable numbers, they will be ready to move forward with the EAF.

We have to make sure that they have a flexible structure.

It wasn't too long ago that we saw rig counts at a low level.

We believe with the rig count increase and the density of pipe that we're able to produce, that this business is much, much healthier and in a much better position certainly in the near and intermediate term.

And we look forward to starting that EAF up at the appropriate time.

And you'll hear about it when we're ready to go.

And Phil, the rounds caster is already there.

We -- that's from the past.

We've had that down there for a quite a while.

Well, I just meant in terms of that being something that you'd like to do in terms of casting rounds?

Yes, sir.

Yes, we would like to turn on the EAF.

That's definitely -- as part of our strategy, absolutely.

And we'll go to the line of Alex Hacking with Citi.

So just coming back around to the maintenance expense, you've targeted at $1.3 billion this year and $950 million last year.

I guess, my question is what do you see as a normalized level there per ton?

Is it closer to where it was last year?

Or post-asset revitalization, should we expect it to stay closer to current levels?

Well, Alex, I think the -- there's a lot of moving parts here.

Because, remember, last year was impacted by not having all the facilities running, which would make it lower then you would expect.

So there's that component of it.

I said, when we're done with the asset revitalization, we will have a much more efficient maintenance spend.

But I don't think we can really, at this point, quantify what we think 2020 is going to be.

That's a little bit too far out.

But like I said, at the end of the day, when your assets are better and you have better preventive, predictive reliability centered maintenance, you should expect maintenance spending to be below historical.

But at this point, I'm not sure which year to point to as historical because of all the changes we've had in footprint.

And our next question will come from Gordon Johnson with Axiom Capital Management.

I guess, just starting out on the 232.

It seems like some comments came out from Donald Trump last night, President Trump, and he seemed to go the exact opposite direction I think a lot of people were expecting.

If we look at the seasonality of HRC prices over the past 11 years, typically in the back half, they're quite weak, down 1.1% on average, versus being up 1.6% in the first half.

And if we look at what happened last year, right around this time, HRC prices traded off.

So do you guys see or do you think that there's been some support for HRC prices as a result of the 232?

And do you think that given this delay, which seems to be counter consensus, that we could start to see some of your customers buy more imported steel?

Well, you know, Gordon -- I mean, the timing of what they're going to do is so, I think, vague at this point.

I mean, at some point, will the import guys get more emboldened?

I don't think we have any better insight into that than anybody else.

I don't know that we want to comment on price in any case.

But Gordon, we do believe a remedy is coming.

The administration needs to be thoughtful.

There's a lot of other issues rattling around right now that they're dealing with.

And I think being thoughtful about this is really important.

But we do believe they're going to go broad and go deep.

Whether or not any of that is built into the current price, I don't know.

But I know from our perspective, particularly when you think about the OCTG business, the Korean OCTG is a prime example of the unfair foreign trade.

And I think this President, this administration, understands that very well.

At U. S. Steel, we've been forced to idle 50% of our tubular mills, abandon about 40% of our OCTG products and reduce our workforce by more than 2/3.

As we said earlier, the Granite City blast furnaces, they feed our tubular business.

And so the tubular business pretty much dried up over the last year.

And in spite of no 232, this business is returning to profitability and run rate positive on an EBITDA basis before the end of this year.

And we saw a nice jump even in the month of June.

So whether 232 is in the numbers or not in the numbers, I don't know, but we're working really hard.

No matter what happens with 232, we're going to be fighting each and every day at our mills to make them stronger and better.

And we're investing in our people and investing in our assets to do that.

I know that doesn't help you a lot, but I think it's anybody's guess what's going to happen to prices.

Okay.

That's helpful.

And then with respect to your costs in your Flat-Rolled division, impressive print there this quarter.

Can you give any guidance how we should expect that to trend going forward?

Should we expect it to continue trending lower?

Was there -- or was there something special this quarter?

Just to be really clear here, we're -- Gordon, and we've talked a lot about this.

It's about execution.

It's about operational excellence.

And we're putting the blinders on our leaders here.

It's really important that people spend time on the shop floor.

I've got to get out there more.

I've got to be out there every month.

And we have leaders in this building, when I see them in the building, I ask them if this is an in-house vacation day because what they ought to be doing is be at the plants.

That's where the action is.

And I firmly believe when you put focus on the people that are doing the real work, the people in our operations, that's when we succeed.

If we're sitting around here in steel towers, that's not where the work is done.

If we're in Washington, D.C., the work's not getting done there.

Where the work gets done is with our employees.

We got outstanding people on the shop floor.

I can tell you them by name.

We've got great operators at our facilities.

And now we have tools.

We're just prototyping a tool at Great Lakes Works that lets our operators understand immediately when they get a little bit off track.

It's exciting stuff for it.

And that's what gives us confidence in the revitalization of assets, because that cascades from the top of the organization, these targets, to full accountability on the shop floor.

And we have to do more here.

And with each step, each success, we feel more emboldened, more confident.

But we're still in the early stages.

It was a good first step in the quarter.

We have to repeat that.

We repeat that when we get our leaders on the shop floor, engaging with our people, helping them be successful and giving them the money to spend to fix the assets.

And when we do that, we do well.

So I expect the third quarter to be as good as the second quarter, the fourth quarter to repeat, the first quarter.

We need to run our assets well.

That's the expectation.

And we -- and when we don't, there are consequences.

There's consequences in our stock prices and there's consequences to our leaders.

Full stop.

We'll go to the line of Novid Rassouli with Cowen and Company.

So just to stick with costs.

Can you guys break down the roughly $100 per ton delta, quarter-over-quarter in the U.S. flat-rolled cost per ton just into buckets for us?

It would be helpful to understand the moving parts driving the sequential swing.

I think the biggest piece is definitely the mining -- the improvement in mining operations, the flow through there, by far.

I mean, that was -- it's a big number.

That's a -- the chart we have on Page 13 of the deck is kind of where we're getting into that.

But that -- and as I said, operating efficiency, I mean -- I'd say the operating efficiency as Dave is talking about is hard to measure.

It's hard to model.

But the fact is it's not just how many tons you produce, it's how well you produce them.

And I think we saw the benefit of that in 2Q is you run better, your fuel usage gets better, your yields get better, your reject rates go down.

So those are a big impact on costs, but there's not a really good way to model and quantify those.

And what we're doing through the asset revitalization is we're trying to get more consistency across the operations, which will kind of minimize the quarter-on-quarter fluctuation of that type of thing.

Because we know it's so hard to model, the best thing we can do is try and make it a much smaller number.

What we'd like to be able to do with you folks is we need to get you into these war rooms, our Carnegie Way war rooms and the excitement that happens.

We're accelerating in this space.

We have more focus.

We have, I think, stronger emphasis on the operations right now.

And when you see our workers, our USW teammates present the improvements that they're making, it makes you feel great about U. S. Steel, great about U.S. manufacturing, great about the future for the U.S. We've got to get you in the war rooms.

You've got to feel the intensity by which our team's performing.

And then on the tubular side, you guys have thought that you'd achieve kind of EBITDA breakeven by year-end.

I was just curious if rig counts plateau near the current level, is this still an achievable target?

If you look at our outlook, that would assume things stay where they are.

So based on that, that would show that we would -- we should be doing -- we should be turning positive in the second half, yes, at current conditions.

And we'll move to the line of John Tumazos, and I apologize, I don't have John's company name.

It's John Tumazos, John Tumazos Very Independent Research.

The derived cost of sales, or at the EBIT level in the Flat-Rolled division improved $101 a ton in June from March, which is really good blocking and tackling.

The price effect of $23 a ton was about $57 million and 93,000 tons more volume might have been a couple hundred dollars a ton.

$20 million, the iron ore might have been $50 million.

So I was guessing that there was a $182 million improvement in productivity.

Now -- and is there anything you could do to sort of explain that besides maintenance expense and the blast furnace issues at Great Lakes you referred to?

Three years ago, when there was a couple of furnace glitches, it was very apparent what the problems were.

And maybe there's a customer relations or employee relations reason why you're not being specific, and I respect that.

Well, no John.

I think when you think about that calculated cost you're looking at, actually, in that scenario, all the proceeds from pellet sales are also moving that number down, the way you're breaking it down.

So that's another moving part that would start cutting into your gap.

But, so as I said, so it's -- the biggest factors are the ones we've called out.

It's the seasonal improvement in mining.

When you're looking at costs the way you're looking at them, actual the benefits of proceeds from pellet sales will be in there and those will be the major factors that are moving it.

Productivity helps, but it's not nearly the magnitude of those things.

And our next question will come from Michael Gambardella with JPMorgan.

Just a question though, over in Europe, European costs went up quite a bit.

Is that largely due to higher met coal costs running through their system?

No.

Mike, that's part of that -- that's related to the FIFO adjustments.

Because actually, our raw materials costs for the materials we actually purchased in the quarter, were down quarter-over-quarter.

So that big swing in costs is purely that FIFO inventory adjustment.

Actual physical commodity prices for us went down.

Okay.

So it wasn't the price input going up in the quarter?

No.

It was the FIFO evaluation adjustment.

Okay.

And just one other question on the Section 232.

I mean, what is your recommended format for 232 if you were doing it?

Would it be a quota system in conjunction with the existing tariffs we have?

I mean, my view is that, that would be the only way to really address the circumvention issue.

Is that what you're hearing?

Or is there some other format that you'd...

This is Dave.

What I'd do -- you're asking me what I'd do.

I'd do exclusion.

-- I think I'd give them the big punch to the gut.

But the reality is it's going to be something that's going to be comprehensive, broad based, that will meaningfully adjust the imports of sufficient duration.

I believe it should be a combination of quotas and tariffs, but we've got to have at least tariffs.

And it's got to be significant.

People have to get this.

Sometimes, the free trader guys, of which I was one back in the old days before I really understood this, people worry about a trade war.

We are in a trade war and have been in it for decades.

And now is the time we have to fix it.

So you don't fix it with soft response.

And I think this administration understands that.

And at the appropriate time, they will take action.

Meanwhile, we're focused on execution.

We're focused on our operations, and that's where we're going to make our money.

And at the appropriate time, when this happens, we'll take advantage of that as well, and that will be a good thing for U. S. Steel, a good thing for U.S. manufacturing, a good thing for the U.S. But we need bold action on this.

And we are awaiting that to happen.

And our next question will come from Charles Bradford from Bradford Research.

I've got some questions about the seamless projects.

You've talked about being able to supply rounds for both Fairfield and Lorain.

But historically, you've been buying the rounds for Lorain from Republic Steel, also in Lorain, and they put in a new EAF 4 years ago.

The relationship you have with them, would that be terminated?

Actually, Chuck, we haven't been buying rounds from those guys for quite a while.

That operation just wasn't working for us.

Historically, we've always supplied some of our rounds for Lorain from Fairfield.

The only ones we go outside to buy are the large diameter or small diameter we can't make ourselves.

So -- now we did shut down -- permanently shutdown one of the seamless mills in Lorain.

So our rounds -- future rounds demands would be less than they were historically.

So as I said, we haven't been buying from those guys.

We need less than we needed historically.

And the Fairfield rounds caster can cover most of our needs.

If we get into some of the really, really large diameter business, we'd probably have to go and find those because our caster molds don't get us there.

But we should be reasonably self-sufficient when we get to these points of time where we can feed liquids -- liquid iron, liquid steel into that rounds caster.

Well, their EAF has been shut down for some time even though it's 4 years old.

Might not that be the cheaper way to go to get an electric furnace about the same size as you're planning on at Fairfield?

It's much more suitable for our operations economically to have that rounds caster in Fairfield, because that's our point of consumption of the majority of the rounds we need.

Okay.

And then second point, in Mon Valley, you've got an 80-year-old hot strip mill.

It's making PIW coils well below industry standard.

Does it make sense to put small money in like you're planning rather than do something to really fix the problem of an 80-year-old hot strip mill?

That strip mill has a very good customer base and is doing very well.

So it does serve a specific market, but it does have a strong, stable customer base.

So at this point, we don't see that as a big headwind for us at all.

But it is one of the 13 assets that we're very focused on.

I mean, this hot strip mill runs well and we're going to focus on it and keep it going.

When you maintain the assets well and you don't wait for them to break, instead you invest in them as you go, we get the returns, and we're seeing that.

Next question will come from Matthew Fields with Bank of America.

Thanks for the increased detail on the asset revitalization plan this quarter.

You broke it out in terms of timing of spending and areas of spending.

I was wondering if you could just sort of mix the 2 and say which areas are you going to focus on first?

Is it iron making and slabs?

Is it finishing and hot rolling?

Is it a mix of everything?

Sort of just the timing of when you're going to address what areas.

Matt, it's going to be -- we're attacking all areas at the same time.

If you take one part of the process down to do some work, it's probably a good time to do work in another part of process to minimize overall downtime.

I think on Slide 5 of the presentation we put out there, we're giving an example of the projects, some of the things we worked on in the second quarter and some of the things that are coming up soon.

So I think we'll continue to give you that kind of color.

In the appendix, there's a few more examples of where we're working currently, and where we worked in this past quarter, where we're working in the coming quarter.

So I think that presentation will give you a lot of good color that should help you there.

Yes.

We have accountability by each of the commercial entities, accountability in North American Flat-Rolled.

So Automotive Solutions basically owns the facility for Great Lakes Works.

Industrial, Service Center and Mining owns the Gary Works facility.

And Consumer Solutions owns Mon Valley.

So you could really work on all these things concurrently, so you can have work going on at a blast furnace at Great Lakes Works because that's a bottleneck for Auto Solutions, while at the same time, you could be working on the Mon Valley hot strip mill or at Gary Works, the slab caster.

And that's -- those 13 assets are outlined also in the slide deck, but we can do these things concurrently.

And that's under the leadership of each of the commercial entities with then what we call the global process owner that owns the overall prioritization of an integration across the whole company, under the new position that we created with Christie Breves as the Senior VP, who also has other manufacturing operations activities, including procurement and transportation and IT and so on.

So it's -- if you think of them as a global process owner focused on the standard work, while at the same time, we have commercial entities making sure that they're working on the things that meet their customer needs.

So blast furnaces may not be down sort of focused in the beginning of the program, it may be spread throughout is sort of a broader question there?

Well, we're very focused on this, but it's commercial-specific and constrained asset-specific.

So it depends on what needs and we'd like that -- again, what I mentioned earlier, the B2 Blast Furnace, that was a key thing that needed to be fixed.

And that was moved up into the queue.

And we had a lot of trouble with the melt in the first quarter, and it got fixed.

We changed some talents around, changed some focus and made the improvement.

That's an example.

The hot strip mill at Gary was another example that this was a constraint for us.

It was put in the queue to make the improvements based upon the customer base it was serving and moved ahead there.

So that's really the way that this thing has been laid out.

We focus on the assets that need the most help, the constrained assets and make the improvements there as part of the prioritization.

Okay, great.

And then one last question on 232 perspective.

I appreciate your thoughts so far.

Last week, we heard sort of a new concept where the administration may sort of lighten up on the 232 consequences in exchange for some kind of deal on Chinese overcapacity curtailment.

Can you give us your thoughts on sort of the objective (inaudible)

Well, I don't think we can speculate on this.

But I'd just say this, I believe -- we believe, and discussing with Wilbur Ross here recently, with other steel executives, I think we all believe that there is going to be strong action taken.

This administration understands what's at stake here.

This is something that's critical to our defense.

This asset base needs to make sure that it isn't harmed by these imports.

It has to be fixed.

And I believe the administration will do the right thing in spite of the heavy lobbying from the free-traders that really don't think they're affected by this.

But, again, we get back to this.

You've got to have a strong U.S. steel manufacturing base.

You've got to have a strong U. S. Steel for manufacturing for America.

I think most people get that.

And because of that, we believe the right decision will be made at the appropriate time.

And we'll move to the line of Lee McMillan with Clarksons.

Dan, can you talk a little about CapEx plans for the second half specifically?

So far, I think you've spent about $120 million of your $625 million budget.

So I'm just wondering if -- or where that spend might be targeting?

And if there are any implications for downtime?

No, as I said, the downtime, we've accounted for that in the fact that we still expect we're going to have 10 million tons of shipments out there for our customers.

But one of the things that kind of skews that number a little bit on the cash flow statement is our working capital team has done a phenomenal job on terms.

So there's actually quite a bit of work done in the second quarter, because we've been ramping up our pace.

There's a lot of work that was done in the second quarter that the bills don't need to be paid until the third quarter.

So you'll see that line jump significantly, and it will give you a better color to see that we're on track.

Along that same point, we should highlight here the cash conversion cycle.

We're very focused on that.

And that's been an important reason why we can afford to amp over the last couple of years.

We've been able to manage working capital very well.

So I don't want to people to think that we don't have the cash for the revitalization of assets because we do, and you also saw that we added liquidity at an all-time best since -- it's $3.3 billion liquidity going back to 2001 with the separation from Marathon.

Okay, really helpful.

The other question, Inside Coal was reporting yesterday that Clairton has been ramping up from maybe 80% utilization to full.

Can you give you any update on what's going on there?

Or where any extra coke might be going, if you're selling it to third parties or what?

Sure, Lee.

Yes, this ties back to actually the discussion of our blast furnaces are running better.

So we actually are getting more production out of them, so we need more coke for ourselves.

And for the most part, that's going to support the increased bands going to tubular now, now that they have the welded pipe mill back up and running, we need to make more bands for them.

So we need more -- the furnaces are running better, so we can make those tons.

We need the coke.

So that's really the connection there.

And the next question will come from Sean Wondrack with Deutsche Bank.

Just a quick question.

When you look at your Flat-Rolled segment, where you're doing a lot of the asset revitalization, you can see that your capacity utilization is improving.

It's at about 77%.

How far do you think with some of these programs you're going to be enacting, how much higher do you think we can get that?

And do you think there's a sensitivity associated with that?

Like every 10 percentage points is, I don't know, $500 million?

Or should we think about absorption as we see that improve over time?

Yes, Sean, this is Dan.

How much those tons add to the bottom line really depends upon kind of the market conditions and the spreads between pricing and raw materials and things like that.

But as far as the volumes, we said we expect that we can get, once we're done, another million tons out of these.

That would put them back to the levels we've seen in the past -- a mid-80s-type utilization rate.

Okay, great.

That's helpful.

And how long do you think that will take?

When should we start seeing the improvement there?

Will that come on a quarterly basis?

Or you think it will take like a year before we start to see that move?

No, it should be -- there shouldn't any big step changes out there.

I'm not sure what the pace would be now.

Certainly, it should gain some momentum the farther we go.

But I don't expect we're going to see some big step change in any one quarter.

But I would say that the rate of improvement should continue to increase over the next 2 years -- 2 to 3 years.

And is there a way to give a metric that, all other things equal, right now, 5 percentage points would equate to so much EBITDA improvement?

I haven't done that calculation, so I don't want to guess off the top of my head.

That's not good for anybody.

Okay.

Fair enough.

I'll follow up with you.

Sure.

And we'll go to our last question.

It will come from the line of Karl Blunden with Goldman Sachs.

Just a quick one here relating your balance sheet to both Section 232 and your operational initiatives.

As you think about potentially refinancing your bonds, you have some that are callable or some that become callable in 6 months or so.

Is that related at all to your thoughts on 232 and wanting to wait until people truly see the margin impact from the operational initiatives?

Or what's your strategy on the balance sheet right now?

I don't think the 232 has much to do with how we're going to refinance our balance sheet.

We always keep a close watch on the bonds and we'll be opportunistic.

When things are ready to go, we can pull the trigger and make the appropriate decisions for the balance sheet.

We're ready to go right now if we needed to go, and we just wait for the appropriate time.

That's helpful.

And just a final one, just on some new capacity coming into the market potentially, areas such as Arkansas.

How is that impacting your business?

Is it at all?

And is that something that you're concerned about for pricing going forward?

Yes, I think we're always concerned about the competition.

But in this case, it's probably less focused on us and more focused on other competitors.

But we respect the competition and do our best to manage our business well.

But in this case, we don't see as much impact in this space, as we think it's focused more on the mini mills.

And thank you.

We'll turn the call back over to Dan Lesnak.

All right.

Thank you.

Dave, could we get some final comments from you?

Sure, Dan.

Thanks.

It's very clear the reason we're doing the revitalization of our assets.

We need to improve our asset base.

Now to be clear, though, they're not broken, but we can do better.

We need to have better quality, better delivery, better cost structure and, of course, continued focus on safety.

We need to continuously improve in all of these areas.

And as you can see from the last quarter, in spite of the fact that we're very focused on revitalizing our assets and we're spending an enormous amount of our people's time and talent in that effort, we can run our facilities well when we stay very, very focused.

Revitalization of assets is going to improve our margins, and it will improve our operational stability.

It will reduce the volatility in our operations and, therefore, enable us to have better EBITDA margins and better performance for our customers, delivering better results to our stockholders.

It's a great honor to be leading this historic steelmaker.

Thank you to our employees for a strong quarter.

Our success is driven by their dedication and commitment to our customers.

And thank you for joining us today and for your continued interest in U. S. Steel.

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