美國鋼鐵 (X) 2017 Q4 法說會逐字稿

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

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

Now on the call this morning will be U.S. Steel President and CEO, Dave Burritt; Executive Vice President and CFO, Kevin Bradley; and Dan Lesnak, General Manager of Investor Relations.

Now after close of business yesterday, the company posted its earnings release, earnings presentation and an updated version Q&A -- updated question-and-answer document on the Investors section of its website.

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

The forward-looking statements and risk factors that could affect those statements are referenced at the end of the company's earnings release and the earnings presentation and in the question-and-answer document and are included in the U.S. Steel's most recent annual report on Form 10-K and updated in their quarterly report 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.

Please go ahead, sir.

Good morning.

We finished 2017 in a good position as we look forward to 2018.

Our earnings have improved, our facilities are operating better, and market conditions are supportive of continuing improvements.

We are focused on the fundamental drivers of our business: safety, quality, delivery and cost.

This is how we are establishing a foundation for future growth.

There's nothing flashy or untested here.

It's all about focus, discipline and execution, and we are on it.

Our investments in our assets are delivering results.

We established a scorecard for investors to track our progress on our asset revitalization program, setting out our goals for 2017.

The results are now in, and we exceeded our targets for improving quality and reliability, and our more consistent results reflect this.

The investments we are making in our employees are critical to our success.

Our employees are talented, dedicated and passionate about keeping U.S. Steel a critical foundation of the U.S. manufacturing base, and nothing is more important to us than their safety.

Throughout 2017, we continue to expand our safety programs, introducing new techniques and processes that will take our safety performance to the next level.

While we are already well above industry standards for safety performance, we're not at zero injuries, so we are not satisfied and must do better.

Zero injuries is the only acceptable outcome.

The investments we are making in our assets and our employees are driven by our commitment to our customers.

Improving our quality and reliability makes us a stronger business partner and increases the value we can create.

Providing stronger support for the current needs of our customers is only the first step.

We are also focused on developing the next generation of steel products and solutions that will keep steel the material of choice.

Looking ahead into 2018, we have established new targets on our asset revitalization scorecard that reflect continued progress toward our 2020 goals.

We currently expect capital spending for the program to be in the range of $275 million to $325 million.

This is lower than our previous estimate but does not reflect a slowdown in our commitment to raise our assets to a higher standard and deliver strong returns on our investment.

Our eyes are on the 2020 price of 15% to 20% return, and we get more confident with each success.

As we have stated in the past, we structured this program as a series of smaller projects to reduce project execution risk and to give us the flexibility to move projects around so that we can continue to take care of our contract customers.

We are seeing increased demand from our customers and have rescheduled some projects to ensure that we can make enough steel to support our customers' needs.

Also, we're not going to spend money just to spend money.

We are executing our asset revitalization program in a very prudent, controlled and disciplined manner to ensure we get the highest possible return on our investment.

We have communicated our goals for improvements in quality and reliability and are committed to reaching those goals in a cost-effective and timely manner.

More reliable operations will improve our position with our customers and increase the consistency and predictability of our earnings.

We are proud of our 2017 accomplishments and are looking forward to 2018 but realize we still have a lot of work to do.

Thank you, Dave.

Kevin, can you please queue the line for questions?

(Operator Instructions) And first question is from the line of Curt Woodworth, Credit Suisse.

Congrats on a really great operational result after some challenges you've faced in the first quarter.

Thanks, Curt.

Dave, first question is just understanding the EBITDA bridge you've provided, specifically with respect to the Flat-Rolled segment.

So you are looking for about $270 million of EBITDA improvement.

But just on my math, if the spot price is up 75 to 80, call the $700 CRU, that gives you about $400 million.

You've outlined improvement from revitalization you're going to get this year of $75 million to $100 million EBITDA.

And then if we assume the contract book gets you a little bit more leverage as well, it would suggest that you should be able to do more than the guide.

So I guess my question is, are you assuming more OpEx creeps in the guide relative to the return on revitalization you're getting this year?

Or should we potentially assume that your contract book isn't maybe generating more EBITDA than it did last year?

If I could give maybe just context here, first thing.

Thanks, Curt.

This is Dave, and thanks for the kind words upfront.

On, certainly, the Flat-Rolled segment has turned around a bit from the first quarter.

We've been able to put together some consistent earnings in the second quarter, in the third quarter and now the fourth quarter.

We're working really hard to make sure that we have the consistent, predictable results, and this is a big challenge.

We're humbled by the challenge in many cases, but I'm really comfortable now that we are putting that type of discipline in place to make us a stronger, more consistently predictable-type company.

As far as the EBITDA bridge, I'll turn that to Dan and have him talk through that.

Yes, thanks, Dave.

Yes, Curt, I think we are seeing some cost -- we're expecting some cost pressures.

We're going to see raw material headwinds.

It's what we're expecting now.

Not necessarily certainly across coal and iron ore, but scrap, gas, electricity, those type of things and some of the other materials, we buy them in smaller quantities, but they're all moving higher, whether it's other metallics or other alloys, refractories, electrodes, not one of those in itself is significant, but when you add them up, it makes an impact on the numbers.

So I would say that the offset you're probably looking for is on those materials and things like that.

Okay.

And then second question, just on the volume guide this year for being flat.

I've got your latent capacity close to 1.5 million tons.

So the question is, do you think that if the market were to stay at current robust price level, could you push revitalization back further to get more volume out of the business this year given the profitability level?

And then where do you think your exit rate will be in terms of the amount of volume you can push through the U.S. Flat-Rolled?

I assume that you're going to get some capacity creep from the reinvestment spend you're making.

Yes, Curt.

I think with what we said, I think we -- as Dave pointed out, we're not chasing short-term results at the expense of this program.

So we need to make enough to take care of our customers, our base.

You have to leave a little bit of flex in your system, so you're not running too tight, so you don't -- you can serve them well.

So that's how 10 million tons, I think, is by our choice because we do want to get work done on the assets.

I think, well, as we look into next year, it will be the same-type assessment.

Our capabilities may, in fact, be higher, and they will be, but we're going to look at the order book, we're going to listen to our customers and decide how much steel to make.

And the next question is from the line of Novid Rassouli, Cowen and Company.

Just to touch back on what Curt was just asking about, so the 1 million additional tons that you're expecting in capability -- in production capability by 2020, so we really shouldn't expect to see that incremental 1 million tons until 2020?

As you said, you're sticking with the course regardless of what the market is doing?

I would not go that far.

I mean, I said, depending on what our customers need, we'll make our product around that.

And if our customers start showing a bigger need and we need to push that up to 10.2, 10.4, 10.5, we'll move in that direction when we need to.

So we're not going to -- it's going to be available to us sooner if our customers need it.

Again, we're going to make sure again the eye on the price is the 15% to 20% return by 2020, and so we will be adaptive here.

But we do want to make sure that we get this revitalization in place and also the reliability center maintenance.

So we have to make sure that we manage this day-by-day, quarter-by-quarter and throughout the full year.

But just to be clear, it's about the longer term that we're focused on here and meeting the customer need in the current periods.

Great.

And the 2018 U.S. flat-rolled mix of contract versus spot, should we expect that, that will be very similar then to 2017?

Yes, I think that's pretty likely.

If anything, you could maybe inch up a little bit more the contract, but nothing -- I would say nothing significant.

That's roughly 80%, 20% is probably about the right mix.

And those incremental tons you were talking about, the 10.2, 10.4, where would those be distributed likely within that mix?

That really depends on which customers need it.

I mean, if any particular sector is running stronger, it's going to be for those customers that want more volume from us.

Okay.

And my last question, on the flat-rolled per ton -- or cost per ton on the flat-rolled side, very steady over the past couple of quarters here, 3 quarters.

Any reason for that to change in '18?

I know that you guys kind of adjusted some of your spending.

It looked like revitalization spending used to be kind of peaking in '18.

But based on the numbers, it looks like that's more likely '19 and '20.

So I just wanted to see if there's any reason that, that would adjust or if we should continue to assume that, that should remain pretty steady.

I think the couple of headwinds I pointed out to Curt's question, some raw materials, some other materials costs are going to flow through, but nothing probably real significant beyond that.

With volumes pretty constant and the other major materials pretty constant, shouldn't be a lot of surprises that we can see right now.

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

On the auto contract side, I know that another steel mill earlier this week talked about pretty competitive environment still.

So I just wonder if you could provide a little bit more color now they should be the annualized ones that are kind of the bulk of what I believe you do.

If you could characterize the ability to pass through higher costs given that that's about 1/3 of your shipments in Flat-Rolled, roughly.

Maybe -- thanks, Timna.

This is Dave.

Maybe first, just auto has finished the year with a solid fourth quarter sales, and we entered 2018 with the lowest day supply on hands since 2014.

So we feel like automotive is likely to deliver consistent performance with this year.

So I think given that, that we feel that the autos can be pretty much in line with what we had for 2017.

Yes, and if I could add -- Timna, I think I might add a little color on that.

I think everybody knows we have a fair amount of seasonality facing us here.

But when we think about first quarter, at least, yes, we will -- we do expect that we're going to see some meaningful up -- commercial uplift, particularly for prices in the Flat-Rolled segment.

So I mean, that's what we're seeing right now.

Other than that, though, we do have our normal seasonal headwinds in our mining.

We have the near-term raw materials pressure probably in Europe, probably with higher maintenance and outage expense, fourth quarter, first quarter versus fourth, Flat-Rolled in Europe.

I think when we net that all out, we're probably expecting the first quarter is going to come in somewhere a little bit down from fourth quarter, probably somewhere in the $250 million EBITDA range.

That is super helpful.

It's not exactly what I was asking, but that's really helpful.

I guess I was just trying to understand the ability to pass through higher costs in your contract business given the competitive nature of that auto industry end market.

But as I understood the volumes commentary on that consistent performance, but should we understand that to be something where you can sustain margin?

Is that the consistency you're referring to?

I have to say, if you look at our outlook, we certainly have bigger commercial tailwinds than we have cost headwinds, so we are outpacing our costs.

Okay, great.

And then I just wanted to ask, if I could, on Tubular.

I'm kind of confused with that market because, on the one hand, obviously, the rig count forecast looks better on the higher oil price.

December imports went down for OCTG, and then they look like they're back up for January.

You said inventories looked pretty low, so that's encouraging relative to historical levels, but why -- what are you assuming in your guidance, just today's market environment?

Or do you see prospects for that improving with the trade cases and the rig count going forward?

Well, yes, maybe just make -- this is Dave.

Rig counts, as you know, remain stable in the mid-900s.

And with energy extraction at high levels, we could see the OCTG market demand continue with its steady recovery, which, of course, is good for the Tubular segment as well as our North American Flat-Rolled business via the hot-rolled coil sales to customers.

Of course, the way this works is when the hot-rolled coil increase cost to the Tubular business, they have to find offsets for that.

But concerning the Tubular business more specifically, Timna, you recall where we come from with this business.

And in the last half, we've been able to deliver a positive EBITDA, as we foreshadowed.

And now we have some heavy lifting here as we get to the next year and deliver a positive EBITDA for the entire -- in the entire year.

Yes (inaudible) our outlook is based on, as we've pointed out, market conditions as of last Wednesday.

So any -- if you have any other market assumptions beyond that, we certainly understand you'll layer that into your thinking.

But our outlook is a point in time with no future assumptions embedded in it.

No, fair enough.

And just I know that it's -- you've, in the past, said that it's for sale at the right price.

But any updated thoughts on the -- whether or not Tubular is core to your business?

Yes, Tubular continues to be core to our business and, frankly, managed very, very well.

You've probably heard we have a leadership change.

We'll be making an announcement.

I think it's a testimony -- David Rintoul, I think everybody knows, is actually joining another company as a CEO.

And it's a testimony to the strength that we have in our talent here, that we have people that are considered for roles like that.

So we'll be announcing who the interim person is.

But we feel that Tubular is a really strong business, getting stronger, and it certainly can be part of our portfolio.

But you have heard me say this before.

Everything is for sale all the time.

We're here for our stockholders.

And if there's an opportunity for us to sell a piece of the business that would make sense for our stockholders, we'll certainly consider that.

It's a matter of price and a matter of, again, what we can do to create value.

So it certainly is a good part of our business.

We expect to grow that business.

And we look forward to, at the appropriate time, turning on the EAF.

But we still have to see the EBITDA continue to make progress.

And we want to make sure that we have a flexible cost structure.

And there are a few things left before we make that call to get back in the game on EAF.

But yes, it does have an important part of our future portfolio.

But again, everything is for sale all the time.

And as I said, we're here for the stockholders.

And next question is from the line of Chris Terry, Deutsche Bank.

I'm interested in your views on the spreads at the moment, just if we can talk through different product mixes, particularly the HRC, the CRC spread.

How do you see that evolving through the year?

And where do you think that will stabilize at?

Well, I think the market is going to tell us what happens.

There are certainly -- those spreads have been wider, and historically, briefly, they never move it.

They're moving back out a little bit now.

I think we're going to see an ebb and flow within a fairly tight range.

It's probably the best look we have right now.

Okay, sure, sure.

And then just on your tax, I mean, you talked about tax rate of less than 21%.

When does that actually kick in?

And can you just talk through the valuation allowance and the NOLs at this point after all the tax reform we've seen?

Yes, hi, this is Kevin.

Thanks for the question.

I'll give a little color on tax.

Obviously, reform alone, right, just like in infrastructure, anything that really attracts you and encourages U.S. investment is going to be positive for U.S. Steel and the industry, so obviously, it's a good thing for us.

Specific for -- specifically for us in the fourth quarter and full year rate, what you're seeing is an $81 million benefit that we recorded in Q4 from the reform, that included the $71 million release of a valuation allowance on our AMT credits.

That was $71 million.

That's going to be a refund that we're actually going to enjoy over the next 4 years, starting in '18.

And then there was about a $10 million benefit that we've recorded.

We had a tax liability that we're now applying -- the lower rate to, and that's about a $10 million impact.

So that's what's driving the rate in the year.

As we look forward, we're a tax payer and always have been in Europe.

That's 21% rate on our European business.

And then going forward, given the NOLs today in the $2 billion range, we don't see ourselves being cash tax payer in the U.S. for some time; I'm not going to give a specific date on that, but certainly, a couple of years out.

In fact, we'll be enjoying this refund, so the positive tax impact in the U.S.

Yes.

I think that's a good point, Kevin.

Frankly, the tax reform doesn't impact us so much directly as it does indirectly.

This tax reform is good for U.S. Steel because it's good for the United States and good for the globe.

I think it's -- everybody understands this, when, one day, you're getting big companies taxed at 35%, and now it's 21%, there's a lot more opportunity to invest.

And so as we see the ancillary effects of that on the marketplace and on us, we're going to have probably better projects, more projects, and we're going to invest in the business, and we'll get better returns.

And when we perform better, our employees will be rewarded for that, and our employees will stay focused and help our customers succeed and reward our stockholders.

So clearly, tax reform is going to be a really good thing for, I think, most everybody even though it's not a direct impact on us because of the billions of NOLs that we have.

And next is from the line of Seth Rosenfeld, Jefferies.

I have 2 different questions.

First, on the asset revitalization CapEx; and then separately, on Europe.

First, on the CapEx outlook, you commented earlier that, of course, you've had a trimmed revitalization CapEx target for '18, now only expecting, I think, a $50 million increase year-over-year.

At the group level, however, you're still targeting, I think, a $350 million increase in CapEx.

Can you walk us through where else in the system you're expecting the increase in CapEx spend for the current year?

Is that a reclassification of projects out of the revitalization plan, it's now to be treated as independent?

I'll start there and then come back on Europe, please.

Yes, let me start this off, Seth, right.

So a significant increase you're seeing, you're calling it out on capital spending.

I just want to remind everyone that asset revitalization is a very specific program within North American Flat-Rolled.

It's not 100% North American Flat-Rolled.

It doesn't include our coke-making facilities, our mining facilities.

Obviously, it doesn't include Europe or our Tubular.

So we're seeing a significant increase, and we're happy about that.

We're investing in our assets globally.

And the North American Flat-Rolled revitalization piece is smaller than we had called out originally, but overall, we're very happy with the amount of investment that we're making.

Yes, I mean, the only thing I would say on top of Kevin is, no, we haven't moved out anything out of the program.

We did say we shifted some work into our future years, and we can make sure we make enough products for our customers.

And we haven't taken any project out of the program.

The program is still the $2 billion total program we started with.

And again, to reemphasize, it's the 15% to 20% return eye on the prize for 2020.

That's what we're going to deliver.

And we can shift things from quarter-to-quarter or year-to-year, about $2 billion worth of spend, and we're going to get the return.

So that's 15% to 20%.

And then separately, please, on Europe.

It looks like your guidance imply roughly stable EBITDA, of course, in spot conditions.

Can you just talk a bit about some of the cost pressures you're seeing in Europe from coking coal and iron ore given the unique raw materials dynamics there versus in the U.S?

And on European auto contracts, I think the expectation was maybe for stronger margin progression in European auto contracts than the U.S. Is that still a reasonable assumption for 2018?

Yes.

We try not to get too much into detail around customers.

I think, in Europe, you do see a pretty good correlation in selling prices versus raw materials cost, push and pull maybe the quarterly lag sometimes that gets in the way.

But I think, in Europe, the biggest different year-over-year is we do have some higher maintenance and all these plans for this year.

We're going to do a little bit extra work on the cost side there.

So that's probably offsetting some other positives you were thinking about.

And maybe just to add a little more context on this just to recognize the people in Europe.

They've done an extraordinary job, Scott Buckiso in the leadership role there.

The fourth quarter, our European operations maintained a strong operating performance.

And they've been delivering consistently for the last 7 quarters.

And that's the kind of thing that we want to have in a business.

And we do have this unfavorable impact of the higher raw material prices and -- particularly for coking coal, PCI coal, iron ore pellets, concentrate and so on.

But clearly, our folks are very focused, very disciplined.

And it's showing in the consistent, reliable results that we want to deliver across our entire company.

And next, we have the line of David Gagliano of BMO Capital.

Just, first of all, a quick clarification question in terms of what you said earlier, Dan, on the sort of progression on EBITDA for the year.

And by the way, thanks for the indication for the first quarter.

I think you said $250 million.

Obviously, to get to the $1.5 billion, that implies quite a ramp after that.

So 2 questions, really.

One, does that ramp happen almost immediately in the second quarter?

And then number 2, if you could break down the drivers behind the ramp.

Specifically, how much of that ramp is tied to contract prices resetting higher throughout the course of the year versus, say, lower outage costs or other drivers during the year?

Dave, I think the biggest factor that would make second Q move quite big is the seasonality in mining.

The mining operations--that's a pretty deep dive in the first quarter, gets back to normal in the second quarter.

So a big ramp 1Q to 2Q just on seasonality in mining is what we see.

I said we're -- that outlook is based on holding prices where they are and let that flow through.

It does then flow through a lot of our contracts over the next quarter, so that would be building there also.

You think about our quarterly vessel contracts, they're going to pick up a benefit in the second quarter just based on if we hold prices where they are today.

So those are probably the 2 biggest moving pieces.

Is it reasonable to assume that it happens right away in the second quarter versus the first quarter?

It's $165 million average increase.

That's what I'm wondering.

And how much of that is to seasonality in mining?

It seems like a pretty high number.

No.

The other piece will be as these current spot prices flow into the monthly and quarterly contracts.

Right.

And can you tell us how much -- can you just break it down into how much is each one?

Each -- how much of the iron ore seasonality versus the contract?

If you open our chart, what our mix is in the back of our presentation on the contract, you can get a feel for how many tons it's going to apply to.

And then, let's say, you just kind of -- if you look at average CRU, 4Q versus what this was turning to the 1Q prices staying where they are, that should give you a reasonable estimate.

Okay.

That's helpful.

Then just moving on.

Just the change in the allocation of capital versus expenses for the asset revitalization program over the next couple of years, $300 million, I think, it is, down in expenses and up in CapEx basically versus the previous commentary, how much of that $300 million change is flowing through the 2018 expectations?

No, in 2018, not much.

I mean, yes, we said, as we get -- as we scrub the projects more and more and we get more comfortable with our ability to see enough detail to capitalize more than we have in the past, we're just getting a better read on the projects overall.

So it's just a lot of study on the advanced projects, but probably nothing dramatic in '18 from that.

So is it more -- not to pressure on it, but is it more in '19 and '20?

Yes, yes.

It would be more on the projects that are coming in later.

Like I said, we just keep on continually scrubbing and revising these projects and looking to where we have the opportunity to frankly, with the system capability we have now to capitalize more in line with what everybody else does as opposed to how we did it traditionally.

And next, we have the line of Matthew Fields, Bank of America.

I just want to ask about the balance sheet.

Obviously, the fourth quarter transaction redeemed $200 million in secured was a positive from that point of view.

Do you anticipate more of that type of transaction maybe going after the rest of that issue in 2018 before the -- before it's callable?

And then ArcelorMittal yesterday talked about a net debt level that's appropriate sort of even at the low point of a credit cycle.

What do you think your appropriate level of debt is even at the low point of the cycle?

Matt, this is Kevin.

Thanks for the question.

I would just say we're just -- we're committed to strengthening the balance sheet of U.S. Steel, right?

We see significant opportunities to improve the efficiency and flexibility of our capital structure, while we continue to deleverage and derisk the company.

So if you look at where we are now with total debt of $2.7 billion, cash at $1.55 billion, we're at the net debt of $1.15 billion.

So we're at 1.1x net debt to EBITDA, which is obviously a pretty good place to be.

So we feel good about that.

But we're not done.

We're looking for opportunities to continue some good work.

If you look at, historically, the company, we've been forced in difficult times in trough to make decisions that don't create value.

In fact, do the opposite.

So what we're trying to do is being very disciplined and prudent during these good times to derisk our balance sheet and protect ourselves, so that we're not vulnerable.

In fact, we want to be able to be on the offense and opportunistic in troughs going forward.

So we're going to continue to look at that.

We did take out $200 million of the secured debt.

That was at 8 3/8.

And we also made a voluntary pension contribution in Q4, which also we look at that as part of our capital structure and part of the derisking that we want to do.

As far as timing on -- we've said we don't see that secured debt as having a long-term position in our capital structure.

We still feel that way.

And we're going to look for the right time to address that opportunity.

But that's all the color I'm going to give on this call.

But if I could, just sticking to the balance sheet, right?

Some of the movement that we saw in our pension liability, right?

We've got a total liability in the pensions of $8.5 billion.

We took a reduction this year in '17 of unfunded liability from about $1.2 billion down to about $700 million.

It's an over $450 million reduction in our unfunded liability or about 40% in one year.

We're feeling really good about that.

And I think -- and just being prudent and disciplined around derisking the company, so that we can be less vulnerable in the troughs, in fact, more aggressive, opportunistic in the troughs is really what we're trying to do as a leadership team.

Yes, I think that's right, Kevin.

Kevin have these regular updates.

In fact, we're very cash conscious, as you know.

In fact, we -- we'll often have leadership meetings on cash daily because it's so important to the bulk of our company.

We take the look at liquidity very seriously and working with Christie Breves, who's the Senior VP of supply chain management and procurement and revitalization of assets together with commercial entities, have very intense meetings on how we manage our cash and our working capital.

We take these things very, very seriously as the pulse of our business.

And I'm very pleased with the way the team has really stepped it up in these areas.

And that puts us in this good liquidity position today, and the working capital is in a good shape.

But we still have more to do.

There's no doubt about it.

There's a lot of work to do.

But listen, cash focus is really intense for us and sometimes uncomfortable because we do it so frequently.

We have our hands on that pulse of cash.

Yes.

I just encourage you on the pension side.

Page 11 and 12 of the presentation gives some great historical context.

And you can really see the improvement.

Our pension is now funded at 93%, which is really a game changer for this company.

You guys have certainly done a lot of work there.

So I guess, while there's not a dollar value that you're going to put out there, the message is we're not done yet.

There's work to do, a lot more work to do.

We're going to continue -- you can expect us to continue to improve the credit profile of this company.

And next question is from the line of Piyush Sood, Morgan Stanley.

A couple of questions for me.

The guide for flat-rolled seems to be based on CRU from last week.

If you think hot dip galv price lower than cold rolled.

So this is really a question about the market.

Why do you think hot dip galv pricing is lagging behind cold rolled?

And when should we expect some normalization, if any?

Yes, like I said, there's -- it's going to be supply-demand where customers needed the most.

Right now, I guess, on the galv side, the galvanized substrates margins a little bit lower.

But -- it's just going to be driven by supply-demand for each particular products.

All right.

And the 2020 target of EBITDA increase of roughly $300 million, it now reference to the target as a 2020 exit rate.

So is there some slippage in timing?

Or are you just providing some more clarity around this?

That was just a clarification.

That was always how we saw the plan.

If you look at those targets, those are our exit rate targets.

And next, we have Charles Bradford, Bradford Research.

I wanted to talk a bit about the seamless business.

First of all, there are only a few guys domestically that are making blooms these days.

Have you been able to either tie their selling price to your seamless price?

Or are you straight supply and demand?

It's an open negotiation with our suppliers.

It's going to be supply and demand driven.

Do you know if the Mexicans are considering or have reopened their plants in Lorain, which was your typical source?

Honestly, Chuck, I haven't asked our guys that question.

I don't know the answer to that one.

Okay.

And then are you importing blooms?

No.

Next, we have Phil Gibbs, KeyBanc Capital.

Had a question on the CapEx for 2018 of $850 million.

How much of that specifically is targeted at flat-rolled?

And is the contemplation of the Fairfield EAF baked into that?

The EAF is its own standalone event.

So right now, I mean, this early in the year, we have a lot of prospects at all 3 segments we're evaluating.

So I don't know that we have a specific targeted mix at $850 million just yet.

We could probably give priority from change from the year.

So I would say, at this time, we really don't have a really clearly defined amount by segment.

We want to keep some flexibility.

So like I said, if we get some better return projects, whether it's Europe or Tubular, we'll shift in that direction.

Okay.

And Kevin, what's your net working capital expectation for 2018 given how closely you've managed the cash position of the company here?

Yes.

Great, great progress that we've made.

We're actually looking to try to hold, especially with the inflation in raw material prices.

We're also being very conscious, especially given this last winter in terms of what's the right level of inventory to carry over given potential weather risks.

So right now, we've made great progress.

But I would say we'll look for improvement across the different components of working capital.

But on the main, we'd like to kind of hold it where it is on a days basis.

We've come down considerably.

We're upper quartile in terms of our cash conversion cycle at 30 days.

We're pretty excited about that.

But really, right now, we're looking to try and hold at that level and not give up ground.

Yes, with the cash conversion cycle.

It's something that we're very, very focused on.

And while we hit the 30 days, that number will probably go a little bit higher here.

Working capital, you'll recall, as we raised about $1 billion worth of improvements through the working capital over last couple of years, which helped us be able to afford the revitalization program, in addition to the equity raise that we had.

So this cash conversion cycle, we actually had an all-time record here with the 30 days.

And so that could maybe go as high as 40.

But we are focused very much on this piece as part of the liquidity, as part of the cash management, as part of this process.

And are we done?

No.

We got work to do.

There's more we can do in terms of the way we run our operations and the improvements that we need to make, but it continues to be a big focus for us.

But Dave, I just have a strategic question for you on automotive.

Give us any flavor in 2018 of your mix of advanced high-strength steels in the automotive book maybe versus 5 years ago and where you see that going in, call it, 3 to 5 years based on your view of the market and then also some of the investments that you're making.

Well, yes.

Thanks for that question.

I think everybody is aware of the investment that we've made in PRO-TEC.

This is a galvanizing line investment with Kobe Steel.

It's about 0.5 million tons.

And you figure, if we've got 10 million tons in total, that tells you basically what that new opportunity is.

But for now, there's not a real big chunk that's in this advanced high-strength steels.

This is more future work that is in process.

But this is the kind of the keys to the kingdom for us here on this Gen 3. And it is going to grow.

And we're going to continue to invest in this.

So longer term, it will become a bigger percentage.

First, the additional 500,000 tons.

In the next couple of years, we'll start ramping up there.

But that's going to be a number that grows over time.

But for right now, and for the near term, it will be a small number.

But it is going to grow.

And we have to be very successful in this Generation 3 steel.

You recall, our Gen 3 steel is different than others.

It's different than the press hardened steel.

And our customers are lined up to participate in this.

So this is our future in North American flat-rolled, and we need to make sure that we're successful at it.

So again, getting more specific to your question, there's not a whole lot there.

There's -- it's not a big number now.

It's going to grow, but it's going to take some time for that to be a more important number in our total portfolio.

And our final question is from the line of David of Macquarie.

Just a quick question on the first quarter outages in mining and stuff like that.

Is that seasonal in terms of great weather this year than expected with the outages in the flat-Rolled from other perspective?

And are shipments impacted at all from a steel perspective?

We're having trouble hearing you.

You're breaking out.

Could you repeat that, please?

So just asking about the first quarter issues in the mining.

Is that more weather-related than normal?

And also are you having any issues from a weather-related perspective in the Flat-Rolled business or other steel division?

David, this is Dan.

No, the mining seasonality is based on, really, primarily the locks closing.

It's a scheduled event every year, so there's nothing there.

As far as weather, in general, we haven't seen any material impacts on our businesses at this point, no.

But to be clear, every winter, you have issues in this business.

It's challenging.

Things freeze up and it's tough.

So certainly, the weather does have an impact on our facilities.

And we fight through that every year.

And that's another reason why, typically, the first quarter is a bit lighter.

There's nothing more than normal stuff, like there was anything extra.

Like, I know that several years ago, you had big issues from freezing or (inaudible)?

Our operations are running better this quarter, much better than a year ago.

Thanks, David.

Dave, do you have final comments for us?

Well, thanks, everybody, for joining us today.

We're working hard every day and are focused on delivering long-term results without being distracted by short-term market volatility.

We believe our intense focus on operations and improving safety, quality, delivery and cost will result in more reliable and consistent results and create value for all of our stakeholders, our stockholders, our customers, our employees and the communities where we operate.

We are building the kind of results that should give investors more confidence in our ability to create value by delivering cost-effective and reliable solutions for our customers.

Thank you.

It's time for us to get back to work.

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