美國鋼鐵 (X) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to the United States Steel Corporation's First Quarter 2018 Earnings Conference Call and webcast. As a reminder, today's call is being recorded.

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.

After the close of business yesterday, the company posted its earnings release, earnings presentation and an updated question-and-answer document under 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, in the earnings presentation and in the question-and-answer document 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, and thank you for joining us today. We delivered as promised on our first quarter guidance, our strategy is working. Our strategy to create value is centered around 3 major pillars:

One, aggressively managing cash and maintaining a very strong cash and liquidity position to support our disciplined resource allocation process for improving customer satisfaction; two, making disciplined investments for our customers to promote long-term earnings growth through both our asset revitalization program and the development of customer solutions, such as our Generation 3 advanced high-strength steels and premium connections; and three, improving our risk profile, including de-risking our balance sheet and our exposure to legacy liabilities to be able to serve customers, no matter the economic circumstances, and we are making excellent progress in all 3 areas.

While we may have near-term challenges to deal with, we also have opportunities ahead of us. We will not be distracted by near-term challenges and are focused on creating a sustainably profitable business model.

The investments we are making in our assets and our people will help to reduce the amount of near-term challenges we will face going forward. But more importantly, we'll establish a solid foundation for a stronger and more mutually beneficial customer relationships through increased product capabilities and improved quality and delivery performance, and, of course, better, consistent and long-term returns for our investors. Enduring -- through the cycle, customer relationships are critical for long-term success in this cyclical industry.

Those with a short-term perspective will judge us by how we manage in the near-term challenges, but those who have truly invested in our company and share our long-term perspective will judge us by how we develop and optimize our opportunities. We are in this business for the long term and are developing differentiated capabilities to serve customers and benefit not only them but also our employees and investors through the business cycle.

Turning briefly to our results. The first quarter always has seasonal challenges, primarily related to winter weather conditions. But this year, we faced some additional logistical challenge due to record rainfall, the worst in over a century, disrupting river transportation in the Pittsburgh area. We also faced some smaller unplanned operating issues, but our people responded with great effort, and they did it without compromising safety.

I'm so pleased with our employees' efforts. We are working very hard to create a high-performance culture with high levels of personal and professional accountability in an environment of fairness and respect. Our priority in everything we do is the safety of our people and several programs we implemented in a cooperative effort with our represented employees in the first quarter added to our already industry-leading safety performance. We will never be satisfied until everyone in our facilities are safe.

Our ability to deliver results in line with our expectations in the face of unplanned operating issues is due to the talent and commitment of our people, and we applaud and thank them for their dedication to our company and customers. While our assets can be challenging, the performance of our people has never wavered. They have been and will continue to be our greatest strength.

As we move forward into 2018, steel consumption in the U.S. continues to grow in several markets that we serve, such as energy and construction, and remained steady in most of our other markets, including automotive. While it is difficult to quantify the impact of the Section 232 actions, we believe the pro-business mindset of the current administration has been instrumental in providing much-needed support for American manufacturing. The Section 232 remedy continues to evolve, but we are encouraged by the progress so far.

We are actively engaged in the country exemption and product exclusion process to achieve the goals of the administration's 232 report. We are passionate about the importance of the strong manufacturing base to the security of our country and are counting on the administration to take the necessary actions to establish a fair and level playing field for U.S. manufacturing.

Looking at the second quarter, we currently expect another strong performance from U.S. Steel Europe, and we expect improved market conditions for our Tubular operations to begin to offset the near-term cost headwinds we have been facing.

At our Flat-Rolled operations, as we noted in our earnings release, we are currently dealing with an unplanned operating issue at the steelmaking operations in Great Lakes Works that will have an unfavorable impact on second quarter EBITDA of approximately $30 million. We had an operational issue at 1 of the 2 vessels in the basic oxygen process steel shop. This failure caused damage to the vessel lining, and we have just now completed the temporary repairs on the vessel lining and we have returned it to service. We have a scheduled 52-day blast furnace outage in the third quarter at Great Lakes Works, and we'll make additional repairs to this vessel during that outage.

To be clear, our revitalization of assets is working very well but we can have issues for those assets like the Great Lakes Works steel shop vessel that have not had all of their planned projects completed yet.

Also as we announced in March, we are in the process of restarting the steelmaking operations at Granite City Works. The sooner we restart, the greater our benefits. But there are no shortcuts being taken, and we are committed to an injury-free return to making steel at Granite City. I recently visited Granite City and was energized by the passion and commitment of our people, and I am very pleased with the progress we are making. We have received an excellent response from our employees and are glad to see them returning to work after 2 long years. Market conditions continue to be supportive of the restart and the production of -- from Granite City will improve our ability to serve our customers as we continue with our asset revitalization efforts.

In the initial stages of our asset revitalization program, we have prioritized our most critical assets and we're seeing substantial and sustainable performance improvements. Our confidence that we will deliver our 2020 objectives of a 15% to 20% return on our investments and an incremental 1 million tons of production capability grows with each project we complete.

We believe that every dollar we reinvest in our business moves us closer to sustainable profitability and increases our opportunities for future growth. Dan?

Thanks, Dave. Greg, can you please queue the line for questions?

(Operator Instructions) Your first question comes from the line of Curt Woodworth from Crédit Suisse.

So first question, I guess, with respect to guidance and thinking about volume progression in Flat-Rolled. The first quarter shipments were the highest since 2Q '16, but clearly, the issues at Great Lakes, and you mentioned this 52-day outage as well in the third quarter. Should we expect the base business outside of Granite City, volumes to be relatively flat consistent with what you did in the first quarter? Or should there be a move lower given some of the outage costs you mentioned?

Yes, Curt, this is Dan. Like -- we do still expect 10 million tons out of Gary, Great Lakes, Mon Valley. The incremental tons from Granite City in the back half, we think about 100,000 tons a month, and given the operational outage at Great Lakes, second quarter shipments may be down a little from first quarter, but probably nothing dramatic.

Okay. And then, I guess, with respect to the guidance, when you sort of shifted your methodology in March to giving sort of your best guess versus a spot base estimate. I think it sort of was a de facto removal of guidance given there wasn't context around it. So can you help us understand a little bit on some of your assumptions into the back half of the year? For example, would you expect Tubular to get back into profitability by the back half of the year? And can you give us some sense of the backwardation of the curve you're using in terms of the spot price for the Flat-Rolled segment?

Curt, this is Kevin. Thanks for the question. Yes, we went to more traditional kind of guidance methodology. A lot of that's because of some of the uncertainty out there. We're doing a lot of revitalization. We've got the 232 and that whole process is playing out. We went out just before we went into the capital markets. We thought it was appropriate to give the investors what we thought was our best look. We gave firm guidance and reiterated it for Q1 and switched in early March to full guidance versus outlook for the year. Again, obviously, with our visibility, which is always going to be different than our investors, we thought given the market what we believe to be our best estimate of full year was the appropriate thing.

I can say, for Tubular, the answer will be yes. We do expect to get to positive EBITDA in the back half of the year. But bottom line, we try to be extremely transparent and we try to be very responsive in terms of dealing with our investors. And in a year of a lot of change, both internally on our part doing a lot of work on our assets, but also with the backdrop of 232 and other things that are hard to handicap, we felt we owed it to our investors to give them our best look at full year.

Great. But if your best look -- I mean, I understand that without giving the market some context around it, it's hard for us to kind of reconcile relative to your previous guidance. So for example, the forward curve has actually been moving up into the past couple of weeks around the May 1 deadline. So when you gave the guidance, the CRU price, I think, was about $85 per ton lower than it is today. So clearly, there's a big variance depending on what your forward look would be, and I understand you're not going to give us that number. But can you comment on some level of backwardation or conservatism or kind of how you see the market playing out, I mean, obviously, seasonality is a factor per quarter.

Sure. Yes. We're trying not to tie to a specific CRU forecast because, candidly, it's one very important, but it's one of many elements that's driving our overview of the year. I can tell you when we went out in early March just before the bond deal, within 2 weeks, I think CRU was up probably $84. So there was -- versus what we had expected, it was a faster climb than we had anticipated. I think where -- from our perspective, what's happened has been obviously very positive. Accelerated in terms of the pace.

I think where we may be disconnected in some cases from expectations is really around not the amount of benefit we're going to pull through, but the timing of that benefit when you get into the mix of spot, monthly, quarterly and fixed contracts and the mix across customers. So obviously, we're always going to have more visibility to that than our investors. When we put that all together, we think we're actually fairly aligned with general expectations out there, but the cadence with us seeing much more of it coming in, in Q3 and Q4 versus Q2.

Yes. This is Dave. Clearly, the first quarter was a low watermark for us and the back half is going to be much stronger. And when you look at the estimates that everybody comes up with, we feel that we're in the best position to make those estimates. And so we're giving more clear guidance than what others have given anywhere in the industry. And we think that I have given more specificity even by quarter that should help keep everybody together and eventually we'll get people pivoting toward the longer term, which is where the value is.

We're focused here on 2020. The eye is on the prize with a 15% to 20% return for the business. We're managing cash tightly. We're doing the resource allocation. We're growing the business because of the asset revitalization program and the work we're doing with Gen 3 steels and premium connections. And hey, I think the balance sheet is the best in modern times.

So we want people to start pivoting away from the short term, this low watermark place, and start thinking longer term about what's happening to this business and this industry, which to me, it's the best it's ever been since I've been here with the company and it feels like a renaissance, and as long as we can get more focused on the future with discipline and focus in the current term to deliver the future, I think we're going to have a really good business that can weather the economic circumstance.

Your next question comes from the line of Chris Terry from Deutsche Bank.

Just wondering if you could talk a little bit more about the Great Lakes and potential impact into 3Q. You're saying the 52 days, so the guidance you provided on the $30 million, you think it can all be wrapped up in that time frame?

This is Dan, Chris. Now, the 52 day blast furnace outage, that is a scheduled planned event that we have. So the Great Lakes vessel was a short-term event that occurred in April. We completed repairs on it. We put it back in service this morning. We're back to making steel. What we're saying is, we have a scheduled blast furnace outage, normal planned outage coming up. That will give us a chance to maybe to get into the vessel and maybe do something a little bit more enduring, but we are up and running. The 52 days blast furnace is obviously a planned event, a separate event. So that's all -- those types -- all those planned events are already embedded in our outlook.

And to be clear, this vessel, this vessel number 25, it's back in service. And I got to tell you, I got to thank the folks, Ron Kostyo and his team for their hard work getting this thing back into service and this was not part of the AMP program and it will be and when we get after these assets and put them through the program, they actually perform very well.

So accelerating manufacturing performance is working and working exceptionally well, but we will have these occasional events. Hats off to Doug Matthews and his team at Gary Works. I think we had about the best March in years and they're very focused on this discipline and the hot strip mills were running very well and the mining operations that Larry Sutherland runs are performing exceptionally well too, but we will have issues and do have issues.

But when we put in place the asset revitalization program, I frankly get amazed and delighted because we don't just get them back to their original shape, we get them in the best shape ever, and we had a number of success stories with that. So we feel pretty good about the program we're working on, but there will be events from time to time. But overall, we'll offset those as we get further down our asset revitalization program, and we're on target. We're doing everything we said we're going to do with the program.

And Chris, just wanted to follow up a little bit on the other part of your question about Q3. Some of the commercial impact will spill into Q3. Right now, we're kind of estimating that at just below $10 million in Q3.

And then, just on 2Q, the guidance of $400 million, I guess the Street was at around $460 million coming into that. And you've talked a little bit on the earlier question about the mix and the way your contracts work, et cetera. If we take out the $30 million for Great Lakes, is there anything else in there that you can talk through or potential conservatism within that number?

Chris, this is Dan. I think really, as Kevin pointed out earlier, a lot of it, I think, is just a timing difference on lagging prices. We're looking at lead times for us because we're running a little bit of restricted footprint of 8 to 10 weeks. So even that spot price increase takes a lot of time to get into our numbers. So I think probably the biggest difference other the Great Lakes discrete event is probably just a timing difference on prices actually flowing in.

Your next question comes from the line of Jeff (sic)[Seth] Rosenfeld from Jefferies.

The question please on the European business. You obviously saw a very robust performance this past quarter. However, looking at the waterfall chart, it looks like the majority of this strength came out of this, the FX tailwind. And so when I look at spot metal spreads in the region, they appear to be up quite strongly both year-over-year and quarter-over-quarter in euros and especially strong in dollars. So can you walk us through any pressures that you'd be seeing in the European region preventing your full realization of that spot market strength?

Hey, Seth. No, I don't think so, because that facility runs well all the time. It's very consistent. The only quarter-to-quarter variability we ever see once is when we're taking planned outages there. So no, we don't see any real headwinds there related to realizing the market prices in Europe at this time.

The European operations have been running consistently for the last 8 quarters. We've been counting on them. They are newer operations and they're well led with Scott Buckiso over there and a fantastic team that's very focused just on making sure we're after this safety, quality and delivering of costs like the beating of the drum. So this is -- if it's not our best operation, it is certainly at the top in terms of the work that's going on there. So hats off to the folks in Europe.

Great. And just one follow-up, obviously, we've seen European prices kind of stabilize at quite high levels over the past couple of months, while raw materials costs have come down. In the past, you commented about Europe's being something kind of a spread business and just for yourself, but across the whole market given the lack of vertical integration. Do you have any expectations for sustainability of prices going into the second quarter in light of falling raw materials? And perhaps, any spillover impact from Section 232 with higher imports into Europe?

I don't know that we can speculate on 232, but I think we've seen pretty consistently, there's a more of a cost push cost pull relationship in Europe, usually about a quarter lag. So I don't think we see anything that distorts that right now. You're right. Something related to trade could, but I don't think we could speculate on that right now.

I think the Eurozone, I think, everybody knows it's continued to expand in Q1 supported by the global economic activity growth and export demand. And what we see is the main force behind the expansion in economic activity was investment driven by favorable financing conditions and still upward trending capacity utilization. So we think the whole region is in better shape, and I think this kind of pro-business climate that the U.S. has started is finding its way elsewhere in the world.

Your next question comes from the line of Novid Rassouli from Cowen and Company.

So first, we saw the uptick in your cost per ton on the U.S. Flat-Rolled side. I think the expectation was for more stability on the cost side the last time we spoke. Can you just give us a sense of cost trajectory for the balance of 2018? And if we should expect costs to be more volatile than we had previously expected?

This is Dan. One of the big factors in that first quarter numbers was seasonality in mining. That seasonality impact is embedded in those numbers. So certainly, if you look back and sort of examine, our first quarter numbers reflect that. It flows in the costs. But other than that, we don't see anything that creates any more volatility than we've seen in the past from an import cost side, whether you're talking materials. Operating volatility is what we're working hard to address, and I think that probably has created the most fluctuations in the past. But we're focused on trying to minimize that with our asset revitalization program.

And again, as we said in the opening comments, the first quarter is plagued by the weather conditions this time of the year, but the waterfall, particularly around the Pittsburgh area, was really tough and that had our problems with barge traffic and that impacts the processing of coal and so on. So of course, those things are, again, in a low point here in the first quarter. That will get better through the balance of the year in terms of costs.

Got it. And then is the incremental Granite City tonnage, is that included in your $10 million shipment guidance? Or is that incremental?

That would be incremental, Novid. So we expect to do about 100,000 tons a month when we're up and running. So assuming we get to hit our target and get it running in the back half, you can see 600,000 tons from there. So that would be incremental for the $10 million.

Got it. And then your average price per ton on Tubular was down $30 quarter-over-quarter, but OCTG index prices have been kind of steadily rising. I just want to see if you could help us understand what drove the move down.

Sure. We had an outage, a planned outage at our Fairfield seamless pipe mill, so we had a mix shift in the quarter. We did more rolled the pipe than we did in prior quarters. So that's really the mix effect there.

And that outage was more challenging than what we expected it to be. So we definitely had -- the month of January was really tough on the Tubular folks because of that outage.

Your next question comes from the line of David Gagliano from BMO Capital Markets.

Actually, just a quick follow-up to the prior question on the Tubular side. So that mix shift shifts more favorably in the rest of the year? And obviously is that mix shift, favorable shift embedded in your guidance? That's my first question.

Yes, Dave. You're absolutely right. Now that the outage at Fairfield is over, we would expect the mix to include more seamless within the first quarter and that's definitely in our full year thinking.

Okay. And then just on -- a lot of my questions have already been answered, but on the 232, you did highlight that you are actively engaged in this country and production exemption process. So I do realize it's bit of a tricky fluid situation, but if you could just tell us in somewhat general terms, in your view what's the -- what's sort of the most likely outcome from the negotiations that are happening ahead of this May 1 expiration for the exemptions?

Well, I'll just say, I'm optimistic that the President will continue his strong stance on protecting the national security of the United States. And we know that there's a lot of activity going on at this point, but having spent time in the White House and been with him face-to-face about how strongly he feels about this issue, I'm quite confident that we're going to get to a right conclusion.

Obviously, there's always the socialization of what's going on, but we have to get that utilization up to a minimum of 80%. And the President knows that if he gives exclusions, it could be a lot of exclusion. It could be problematic. And that's why we have to have a disciplined approach to remain at 80% utilization and I have every reason to believe that, that's what he said and that's what he will do.

Your next question comes from the line of Timna Tanners from Bank of America.

Would you mind, on the Tubular side, reminding us a little bit about what's their capacity you might be looking at either restarting or where you are regarding utilization in light of the improving market conditions as you know, spot prices and this haven't maybe formed through yet, but have shot up in recent months. And the Korean outcome seems pretty favorable. So can you just give us a little bit more thoughts on the market into the second half and your potential to increase exposure to it?

Well, Timna, I would say that for Fairfield and Lone Star, those facilities, they're very much aligned with the onshore rig count, so they're running at better levels and they're seeing the benefits. Our Lorain capacity is really tied to deepwater in Gulf, that really hasn't picked up. So if you look back historically, we've seen our pipe mills run in good market, 70%, 75% of theoretical capacity. That's probably not a bad target to see upside for Fairfield and Lone Star, but Lorain is going to continue to run at very low level. So yes, I'll remind you to keep that in your thinking when you of volumes for Tubular.

As far as to the Korean stuff, we'll see what happens when it actually get deployed but right now, imports are still very, very high in Tubular, and we don't see any relief from that at least in the next month or so that we can -- so when we see what happens, but imports are still biggest in Tubular. We'll see how effective the Korean piece of that is or not.

Okay. And then, I was wondering if you could elaborate a little bit on what you're seeing with regard to cold-rolled and galvanized premiums? I know it was mentioned when you updated your guidance, it's something that we maybe need to recalibrate in our models because cold-rolled premiums have about $200 a ton over hot-rolled and that's narrowed with recent trends. Are we concerned that there's too much galvanized tonnage being added? Is there enough demand for all of it, and on your own upgrades? So just how do we see that trending and why relative to hot-rolled?

Yes, Timna, I think that spreads have narrowed, but I think it's narrowed because actually hot-rolled has come up, not that many cold-rolled and galvanized are pressured, it's just hot-rolled has moved up so quickly. I think that's the real reason that spreads narrowed. We're seeing it in the $130 range. That's actually I think a pretty, in our view, fairly sustainable number. So I think it's more of the benefits of hot-rolled seen in the hot-rolled market probably they are as opposed to pressure on the cold-rolled and galvanized markets.

Your next question comes from the line of Phil Gibbs from KeyBanc.

I was just curious in general, Dave, what happened to the Carnegie Way in terms of the disclosure on it? I mean, I know that you did put out some prepared slides and there didn't appear to be any color on this. And just curious if you were shifting away from talking about it.

I think what we're focused on is the revitalization of assets and the Carnegie Way is built into our DNA. It's a Six Sigma methodology. It is define, measure, analyze, improve and control. It's across all of our facilities. It helps us in terms of running our projects, and since we're moving in the next phase of our pivot to the people and our culture of caring and our asset revitalization and all those things, Carnegie Way, part of our DNA, we launch projects that help us achieve the goals. So we don't need to talk about it so much anymore because that's actually the how we get to the asset revitalization, and we can report on those things. But what we found is, we weren't getting many questions about it anymore and it was time for us to actually pivot toward asset revitalization and reliability-centered maintenance and, of course, our mantra of safety, quality, delivery and cost. So Carnegie Way is alive and well. It's a way we accomplish goals, but it's not something that we feel we need to report on because it's, again, embedded in our DNA.

A question on cash conversion cycle, Kevin, are we still thinking that, that moves to close to 40 days this year? Is that a good kind of benchmark to use?

Yes. Obviously, we were very pleased to be able to hold at the 30 days level in Q1. But clearly, yes, we're expecting it to move up into the mid- to high-30s. We still think it'll be upper quartile against all of our peers on performance, but we want to have the right amount of inventory to service our customers. And so right now, we're thinking it will still travel higher, but still be in the upper quartile performance relative to peers.

Your next question comes from the line of Alex Hacking from Citi.

Dave, you mentioned that the progress and success that you're seeing with the asset revitalization, and I think you guys have visibility into that, you can see reduced downtime and whatnot. But it's very hard for investors sitting on the outside given all the moving parts. Is there any sort of metric or something that investors should be looking at in order to sort of assess the success of the asset revitalization? Or more realistically, do we have to wait until 2020 until we can see the whole thing come together?

You'll see this in the slide deck, we actually have a chart that tells annually how we update on that when we report out at each quarter with notionally where we're headed. But just to give you some stats on this, the reliability of our priority assets has improved about 12.5% over the 2016 base. That's kind of a headline for us. And with each project, we're delivering on the promise, on each one of those. So you see we have metrics for EBITDA, we got metrics for the capital spend, and we have metrics for quality, and we got metrics for the reliability and delivery performance.

So we're all over that and we're actually seeing substantial improvements in throughput where we exercise the asset revitalization program. And we have -- some of these assets are really old and when we fix them, frankly, I'm not that -- I'm relatively new to the steel industry, and I'm impressed with how much better the assets run once we do that. So clearly, we are monitoring the assets we have, our operating equipment effectiveness measures that we go through and cascade to the organization. We put in a new incentive scheme for senior leaders that cascade to the organization and we're doing a better job of linking that with employees and so that they see their rewards and recognitions more clearly, and I think we're in just the second year of this. And frankly, I'm really pleased that we're able to demonstrate that we're on track even this early in the game. And I think we have the performance throughput.

But again, the priority assets are already better than where we were in 2016, and we continue to gain momentum. So I'm -- in each of these categories, the iron making, the steelmaking, the hot rolling and the finishing, we do measure that and we do make sure that we report to you guys with surety at the end of the year. What we're trying to do is not show you volatility by quarter. It just feeds the beast. And we tell you we're on track, we're on track, and we're disclosing frankly more than I think most any other steel company that I've seen in terms of guidance and we'll continue to be a leader in transparency. The asset revitalization program, it's a success so far, a lot of work to do, the 15% to 20% return is certainly on track. So I hope that helps a bit.

This next question may be a little premature, but can you give us an update on how you're thinking or what market conditions you're thinking about to restart the second blast furnace at Granite City?

Well, that's a great question because all these things depend upon demand. And of course, we're working hard, ready to go and with the right demand situation and we'll see how the 232 plays out. We'll see how our customers respond.

Let's face it, if they want more volume, we'll give it to them. We've got the capability to ramp this up and do it quickly, and we're impressed with the speed by which we're moving Granite City ahead. Now we have some costs pull forward because, frankly, we're bring back people faster. And I tell you, when I was there just a couple of weeks ago, meeting with the people, there's a really incredible energy that we have there. It's impressive.

And I hope that when we get to the point, we can open up blast furnace A, that enthusiasm continues. And I can tell you, it's not just our employees, but the steelworker leadership. They've been great partners in this kind of stuff, and I'm impressed with them. They are completely aligned with us on safety. They're completely aligned with us on trade. They've done some great work on trade, and we look forward to resolving the contract later this year, and I think we've got a great relationship with them and we're trying to do things simply, more simpler and more aligned, and we understand it. We got to ride right cycles in good times and bad.

But I should feel -- frankly, it feels like renaissance for me, and we just got to make sure we keep our heads down and not get distracted by short-term noise. And I know that's really hard, because we've got quarterly reporting and all that, but we're making the progress on the things we said we're going to make the progress on and the closer we get to 2020, the greater the business we have.

Your next question comes from the line of Andreas Bokkenheuser from UBS.

And you just mentioned demand. You said earlier on, you were saying that auto was stable and construction is showing signs of strength. Are you able to quantify this in any way? I'm not sure how to think about that. I mean, auto stable, does that mean that demand growth is stable or does it mean demand is actually growing? Construction, do you have a sense, I mean, the range to quantify that we're talking 3% to 5% there? Is it more, is it less? Just trying to get some numbers on the overall demand strength.

This is Dan. I mean, yes, we're looking at the same market studies everyone else is... automotive builds look, like I said, pretty steady. We're not seeing much disruption there. So on the construction and energy, you're seeing growth, those are probably the faster growth on total. I'd say we're still thinking along the lines of the overall U.S. consumption up 2% to 3% is I think -- I mean, that's what we're seeing out as far as most of the reporting. I don't think you'd disagree with that.

Yes. I think actually in our slide deck, Page 16 does a pretty decent job of laying that out and maybe that will help provide some detailed color that you're looking for.

That's very clear. And on growth in general, are you also -- are you seeing any inorganic growth? Are you seeing yourself capturing market shares in some segments as well? Obviously, with Granite City opening up, that's certainly something to think about going forward. But at the moment, how are you looking at organic growth, which is organic growth of your overall sales volumes?

I would say we are -- as we improve our operating performance, our customers are telling us, if we do better, we will win more business. So that's our strategy, that's our focus. The incremental tons from Granite City, that's probably -- majority of that is going to be a spot opportunity for us. Some of that will help support our contract customers, but that probably does give us a little more spot opportunities, which in these kind of markets is a good thing.

Your next question comes from the line of Karl Blunden from Goldman Sachs.

I know the revitalization program is going on for some time now. I guess 2 questions on that. Is there a way to just simplify how much of your asset base has now been revitalized? And as you think about the issues you've uncovered at Great Lakes, does that change the way you think about it going forward? Is there any thoughts of broadening it? Or is that CapEx increase just for this year and just for the issues you've uncovered so far?

The way we think about revitalization, if we could move it faster and get the benefits faster, we're going to do it. And clearly, we stay in this disciplined approach. We do have some distractions from time to time, but as far as when we put the projects in place, we deliver on those projects. So we feel, again, really good about where we are today and where we're headed on that. But we're not going to be shy about increasing CapEx as we see an opportunity to move faster. And then in this climate, this, I think, pro-business climate, we feel pretty good. You think about this, U.S. steel demand, it remains quite good with most every major industry segment consuming more steel than a year ago. And so if there's an opportunity for us to move faster, we will.

Got it. And then just on the first part of the question. Do you have a sense of how far along you are in the process? And do you feel like you've looked at all the assets at this point in time and are pretty comfortable with your initial CapEx and cost outlook on the (inaudible)?

What we've looked at so far, but if we find other things, we'll go after that as well. Remember, this is North American Flat-Rolled that we're focused on and if we see opportunities to expand this to the Tubular business or even in Europe that's performing very well or even the mining sites, we'll certainly do it. But we're focused on North American Flat-Rolled because this is just where we see the best benefit. But again, we're going to let market conditions help guide us in terms of how we deliver the value because if we can get the value to be greater by 2020 and help us manage the cycle, we want to make money in the trough. We're going to prove to people that we're going to be able to make money in trough. And when you do that kind of thing, that's when you get the kind of EBITDA multiple that you can be proud of. And so we've got some work to do. This is a hard journey, but it's a very focused, disciplined journey and we're doing everything to get us there.

And Karl, the only thing I would add to that is with the possibility to expand to the other segments is one thing, but the plan we put in place for Flat-Rolled segment was very, very comprehensive across the Flat-Rolled assets. So these Great Lakes assets, they're in the program. We just -- there's timing. We can't do everything at once, where we have to measure our downtime versus making sure we take care of our customers, that's kind of the limiting factor, so those assets were definitely part of the plan. We just haven't gotten to them yet.

And we got a really great team. We've got Christie Breves who leads these initiatives. She's the SVP and Jim Dudek, and Malisa Sommers. These people are good, solid, high-performing individuals that know how to leverage the collective wisdom of the organization with disciplined projects to succeed. So you know what, it's been settled out. First, the who then the what. We're getting the right people in the right seats and I'm pretty impressed with the folks we've got leading these things.

Your next to question comes from the line of Piyush Sood from Morgan Stanley.

I also have a couple of questions on asset revitalization. So at this point, where do you think you've completed a lot of asset revitalization projects? Any facility that's ahead of the others and you would expect fewer unplanned outages? Or any possibility that's behind the others?

I'll take a shot at that. I actually think Gary is doing a really great job here. We've had some success in Great Lakes Works in the B2 Blast Furnace and in the Mon Valley operations we're making improvements as well. We've been focused a lot on the iron making and steelmaking processes at this point, and you see the schedule in there in terms of where we're spending the money. But I would say, across the board, where we've indicated how much we're spending, that's what we're trying to do is stay as close to that -- stay as close to those things as we possibly can and then we'll update with the detail at the end of the year.

Yes. I will just echo that, so Gary, probably in terms of the amount spent so far in the program, it's reflecting probably the highest benefit year-on-year. The Gary strip mill consumed a fair amount of capital. It's one of the most critical assets we have in the company in terms of sheer tonnage that goes through it and we're seeing marked improvement in yield and production throughput.

So to be clear, this is not all about just the spend. This is about leadership development and employee performance. And we're doing our best to hold people to high accountability standards, personal and professional accountability. It's important to us. We try to create this appropriate culture so that people can succeed. It's a tough place here. It's not always easy every day, but we're getting more and more focused every day on the vital few things that have to be successful, and this revitalization of assets. It's vital to our future. It's going to help us ride the economic waves. I'm very confident that we're going to get this done.

Just a little bit more color for perspectives. Some of these assets, we talked about the Q3 work on the blast furnace in Great Lakes Works. You go in 52 days later, a lot of the work is done from a revitalization standpoint. But a lot of these other assets, and you're talking about dozens of projects that are happening over many quarters, and so when you declare the asset being fully revitalized, it is actually happening over time. So it's not always discrete on/off. We should see the improvement. It's kind of a migration through a number of projects that improve the throughput.

That's a useful color. One related question, Granite City restart. How operationally reliable do expect that site to be, if you were to compare it with the other operations?

The Granite City, the steelmaking facilities are in very good condition. We've had really no issues. Start-up's going really well. So we do expect those to run well when we get them up and running. They were maintained very well while they were down, so we do not anticipate any kind of issues there. Those are ready to go.

And just a reminder, a lot of the people that we're bringing in are returned, experienced employees. And so that should add to their reliability as well.

And we're spending a lot of time on safety. We're working hard so there's no injuries here and there's a 4-day training program and then kind of field informed type session and our folks are responding very well to that, and we're bringing in dozens of people back every week. And frankly, it's going much better than I thought. I mean, sadly, a lot of these people didn't have jobs and they're back in, and once we get greater fairness in this country and get to this pro-business climate, I think, it's going to get better for the whole United States, all of manufacturing will be uplifted.

We'll go to the line of Matthew Fields from Bank of America.

I know you mentioned you want to sort of upgrade to -- not upgrade, but be eventually sort of a solid, middle of the road BB credit. And right now, in the single B range. Do you think that you can sort of just back into that with all the progress you've done, especially taking out the secured notes? Or is there anything else you can sort of have to actively do to get there, whether it's voluntary pension contributions, maybe an early take out of the 2020 bonds or sale of any other assets or JV interest or something like that?

Thanks, Matt. Obviously, we're doing a lot of work. Q1 was very busy in strengthening balance sheet and improving capital structure. We really are happy with the work in refinancing our ABL, the $1.5 billion, more flexible, better rates. We are also really happy with the execution by our bank group, so really good support.

I think de-leveraging, taking out the secured debt, the $780 million and replacing it with $650 million, so we had $130 million deleveraging in the quarter. Certainly, that's -- we think that's good work. At the same time, it was over 200-basis-point reduction in interest rate. So now we're up to roughly secured capacity available of $1 billion. Candidly, from a metrics perspective, we believe we're already a solid BB.

The key is sustainability, right? Through cycle. And that's really a lot of what we're focused on, is how do we have a more predictable operation and make sure that what we think is really strong credit metrics on net debt and every other measurement is sustainable. And so we feel really good. We're not done, and we will look for other opportunities to deleverage. We've made great progress on our unfunded pension liability last year, and we expect that work to continue. So we're focused. We're making progress, and constantly looking for ways to strengthen the company.

And Matt, the only thing I would add is, I mean, we're pretty proud of, if you look take a look at Page 7 of the presentation, from where we hit the kind of low watermark in '16 when we had to go to the secured debt market, with improving our capital structure we think is really impressive. We encourage everybody to take a look at that slide. We think that's a really good story for us.

Yes. When we reduced our debt, but an important element of this, if you look at what we've done in the last couple of years, we now have approximately 80% of our debt does not mature for at least 7 years or longer. That hasn't happened in this company in a very long time. So we've got some real strength, but we're not done.

You have a follow-up from the line of Piyush Sood from Morgan Stanley.

So going back to Granite City, how would you think about starting up those second furnace? And then using those volumes to help take bigger outages in the other operations effectively getting through the asset utilization more quickly?

Piyush, that does give us more flexibility. We'll see how much steel customers need. If it gives us opportunity to move faster on asset revitalization, we will certainly take that opportunity.

And again, I think Dave touched on this, right. What we need in terms of the other blast furnace in order to turn it on is just to see the demand that's sustainable. We'll have no hesitation in bringing on that capacity once we see sustainable demand.

All right. That is -- we are through the queue. So Dave, some final comments for us?

Sure. Thanks, Dan. And thanks to everybody for joining today. We're working really hard every day and are focused on delivering long-term value without being distracted by the short-term market volatility.

We believe our intense focus on our operations and improving safety, quality, delivering costs 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. We are pleased with the progress so far, and we won't take our eyes off the 2020 prize for our employees, customers and stockholders.

Thank you. It's time to get back to work.

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