美國鋼鐵 (X) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to United States Steel Corporation's Second Quarter 2018 Earnings Conference Call and Webcast.

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

And 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 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 turn the conference over to your host, U.S. Steel President and CEO, Dave Burritt, please go ahead.

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

We appreciate your interest in U.S. Steel.

I will begin today's call by highlighting the strong state of the business including several noteworthy accomplishments from across our operating segments.

Next, Kevin will review our financial results for the second quarter and will provide some context on our third quarter and updated full year guidance.

As we disclosed yesterday, we delivered another strong quarter of performance, proof that our strategy to create value is working, our intense focus on operations is helping us create a more stable foundation for a stronger U.S. Steel.

While we are still in the early phase of our asset revitalization program, we are seeing improvements in the assets in which we are investing.

We are moving quickly towards the prize, $300 million of EBITDA and 15% to 20% return but we will not jeopardize the safety of our employees, our commitment to the environmental stewardship or our strong relationships with our customers.

Strong execution increased capabilities and improved quality and reliability have remained the focus of our work.

I want to highlight a few successes in each of the areas, execution, capabilities and quality in delivery.

First, execution.

We effectively managed both our challenge at Great Lakes Works and our opportunity at Granite City.

As we disclosed during our first quarter call, we began the second quarter with an unplanned operating issue at the steelmaking operations at Great Lakes Works.

We were able to minimize the impact of the outage at the steel shop by getting the vessel back in service quickly and efficiently.

And at Granite City, the focus and execution demonstrated by the team was remarkable.

As a result of their hard work, we restarted B blast furnace and steelmaking operations without any safety incidents and ahead of schedule.

This allowed us to respond to our spot customers needs sooner than expected and provided an opportunity for us to rebalance our footprint to better support our strong order book.

This is the type of execution that is required to win and we are winning.

Next, increasing our capabilities.

Our customer-driven value focused business model has been extremely successful in identifying value-added commercial opportunities for our products.

When we work closely with our customers to understand and solve their strategic issues, we win together.

I've said it before but it's worth repeating, we are the market leader in Generation 3 advanced high-strength steel, the investment we are making at our PRO-TEC joint venture is on track and we are confident that our proprietary Gen 3 product will meet the demanding needs of our customers.

Last, improved quality and reliability.

Our asset revitalization efforts have been focused on the facilities that are vital to achieving long-term success with our customers.

We are seeing the benefits from improved quality at our highest value-added Flat-Rolled facilities and improved reliability at our 13 priority assets.

And now, we'll turn the call over to Kevin Bradley to cover our second quarter results and our third quarter and full year guidance.

Kevin?

Thanks, Dave, and good morning, everyone.

We continued positive momentum into the second quarter.

We reported adjusted EBITDA of $451 million, which exceeded our expectations.

This brings our first half adjusted EBITDA to $706 million, a 50% improvement over the first half of last year.

All 3 of our reportable segments had improved earnings compared to the first half of last year.

Revenues in the quarter of $3.6 billion increased 15% on a year-over-year basis, reflecting our ability to capture benefits in today's strong market.

We are seeing favorable trends in the markets we serve.

End market demand has been strong in all 3 segments, benefiting from the increased prices and shipments in 2018.

We are also seeing benefits in our -- from our asset revitalization efforts through the expanded capabilities as we are now participating in steel applications that we could not previously serve.

On the operational side, I want to briefly highlight a few of second quarter events in our Flat-Rolled segment.

First, as Dave mentioned, we were able to minimize the adverse impacts of the unplanned outage at Great Lakes.

Second, we also completed a planned maintenance outage at the Gary Works No.

8 blast furnace in mid-June, both ahead of schedule and under budget.

These 2 positive outcomes along with the expedited restart of B blast furnace and steelmaking at Granite City enabled us to exceed shipping plans in the second half of June and take full advantage of increased contract and spot market customer demand.

Our European operations continue to be our most reliable and consistent performer.

Europe also contributed to a strong finish to the second quarter.

Now shifting to guidance.

Our focus on execution is beginning to be reflected in our results.

Based on our confidence and this continued execution, coupled with the positive market backdrop, we are raising our full year adjusted EBITDA guidance to a range of $1.85 billion to $1.9 billion.

For the third quarter, we are currently expecting adjusted EBITDA of $525 million.

Our normal seasonal pattern at the enterprise level would have third quarter EBITDA higher than fourth quarter.

We are not anticipating that to be the case this year.

There are 2 primary drivers behind this shift.

First, as we communicated in our Q1 earnings materials, we had a significant planned blast furnace outage at Great Lakes Works in the third quarter.

This 52-day outage is part of our asset revitalization program and actually kicked off today.

This investment is targeting reduced operating costs as well as improved productivity and reliability of the furnace.

This major outage along with other asset revitalization projects scheduled for the third quarter will result in an increased maintenance and outage cost in our Flat-Rolled segment as compared to the second quarter of approximately $50 million.

The other primary driver for expecting a stronger fourth quarter versus third quarter is that the fourth quarter will be the first time in 2018 where we expect to have our full portfolio of U.S. blast furnaces available.

We are anticipating the restart of the second blast furnace at Granite City in October and do not have any planned blast furnace outages in the fourth quarter across the North American Flat-Rolled segment.

Looking at the back half of the year, we are now expecting adjusted EBITDA margins in the back half in the midteens.

Digging further into the third quarter, our third quarter guidance assumes lower sequential EBITDA in our European segment.

This reflects the lower seasonal pattern in the European market.

We take advantage of a lower demand each year to perform necessary maintenance outages to minimize customer impacts.

These seasonal planned actions will drive an increase in outage costs of approximately $20 million.

We also expect an unfavorable commercial impact of approximately $20 million related to lower volumes and changes in product mix versus the second quarter.

The financial performance of our Tubular segment has been negatively impacted by increased substrate costs.

We expect pricing increases to begin to flow through in the third quarter, driving positive adjusted EBITDA for Q3.

Before I turn it back to Dave, I just want to remind everyone that the work we have done on the balance sheet and the capital structure has put us in a position of strength.

Our cash and liquidity provide us the ability to execute on our in-flight initiatives as we focus on opportunities to drive sustainable, profitable growth for the business.

We still have a lot of work to do but I am encouraged by our progress and become more confident in our ability to execute our strategy each passing quarter.

With that, I'll turn it back to Dave.

Thank you, Kevin.

I have 2 additional topics before we open the line for questions.

First, we are delighted in the strength of U.S. economy as it was evident in the latest second quarter GDP estimate of 4.1%.

We see the U.S. embarking on a manufacturing renaissance with U.S. Steel as a part of that.

We are now making steel at Granite City with a restart of our B blast furnace and we're progressing toward the fourth quarter restart of the A blast furnace.

We are open for business and ready, willing and able to participate in demand increases on all of the products we make.

Hot-rolled, cold-rolled, corrosion-resistant, tin mill products, tubular and slabs.

Let me pause just a second here.

Did everyone hear that?

We are open for business and ready and willing and able to make and ship hot-rolled, cold-rolled, corrosion-resistant, tin mill products, tubular and slabs.

Contrary to the false information spread by those who import slabs quoted in the media, we have offered and remain willing and able to sell significant volumes of merchant slabs in the U.S. and at market prices.

Second, the investments we are making in our business are working.

The business is stronger, our balance sheet is flexible and we are committed to growing the business in a way that returns value to our stockholders.

We believe value creation is maximized when we invest to achieve sustainable and profitable long-term growth.

The foundation is in place and we believe that the improvements we are targeting through our asset revitalization efforts combined with additional growth-oriented investments will establish a pattern of stronger and more consistent cash generation across the cycle.

We still have a lot of work to do, but we are encouraged by our progress and become more confident in our ability to execute our strategy each passing quarter.

Dan, let's move to Q&A.

Thanks, Dave.

Kevin, can you please queue the line for questions?

(Operator Instructions) First question is from the line of Seth Rosenfeld, Jefferies.

Good morning, thanks for taking my questions today.

I just like to better understand the outlook for volumes and mix in your U.S. Flat-Rolled business given the ramp-up of Granite City.

A couple of quick questions.

I guess, Granite City, can you confirm the contribution to volumes in Q2?

And how we should expect the ramp-up of both furnaces in the coming months?

Should it be an immediate or more gradual ramp-up we should be forecasting?

And then going forward into 2019 perhaps, how should we consider the product mix and also contract mix for U.S. Flat-Rolled business shipping as Granite City hits full utilization?

Thank you.

Well, there's a lot in there.

Let me just first say, that we're not probably not going to be talking a whole lot about what's going on with 2019, it's a little bit premature for us to give a lot of details on that but I'll pass it to Dan if he could help provide some color.

Yes.

Sure, Seth, so we've got about 30,000 tons in June, by getting our -- hitting the ground running faster than we expected.

So yes, we've said before we expected about 100,000 a month, we should be at that run rate starting July.

So good progress there, good performance there.

The A blast furnace hoping to get bring that on October 1, around October 1 about 75,000 a month contribution from that furnace.

So certainly in this year, more of that -- that will give us a little bit more spot exposure than we had and a lot of those new tons will wind-up being spot, certainly our contract customers will take as much as they need.

Like Dave said, a little bit too early for '19, how much of it becomes spot versus contract next year is really going to determine what our customers particular, our important contract customers want from us.

Thank you.

And on the products suite side, you have obviously been quite clear on the call earlier that you are willing to sell slabs to third parties but based on just your internal optimization or your internal downstream capacity, bringing online Granite City, recognizing the downstream was already running at Granite City historically, how should we expect your product mix?

Thank you.

I think as Dave pointed out, we do have capacity to sell slabs.

We've been commercial sellers of slabs all along but we do with all blasters -- all our blasters running, we have more capacity than we had before to the extent that we have more slab demand, we'll fill it.

Great.

Thank you very much.

The next question is from the line of David Gagliano, BMO Capital Markets.

Please go ahead.

All right great, thanks for taking my question.

I just have a quick question on the contract versus spot mix given the time of year.

Can you just remind us again, you got 31% of your Flat-Rolled volumes under firm-based contracts, 41% of your European volumes under firm contracts.

How much of those volumes actually roll off at the end of 2018, both in the U.S. and Europe?

Sure, Dave.

And actually when you look at our distribution, the ones that we labeled cost base, those are also firm contracts.

They very rarely would adjust there.

They're not very sensitive to the cost buckets or tied to.

So about 40% of Flat-Rolled volumes are annual fixed price contracts, about 3/4 of those are January 1 restarts.

Most -- all the rest of them are in April.

Europe -- the Europe contracts tend to be more 6-month contracts not full year and they would generally be January, July.

Okay, that's helpful.

That's it for me.

Thanks.

Next question is from the line of Curt Woodworth, Crédit Suisse.

Dave, given your comments, your bullish views on sort of sustainable free cash generation at the company, bullish view on the market.

When you look at or think about capital return options for the company, you've already pre-funded the majority of your revitalization spend and based on the guide for 4Q, you'd be at an exit rate of EBITDA close to $2.5 billion, $2.6 billion and that's before you reprice 40% of your contract book.

So can you comment on free cash flow usage going forward?

Do you plan on implementing a share buyback program?

Have you discussed that with the Board?

Because I think you do not have an authorization in place today, if I'm correct.

Well, thanks for that question, Curt.

I think it's pretty clear to everybody, we've earned the right to grow and we spent many years here working on the balance sheet and putting the balance sheet in a pretty good and I'll have Kevin Bradley respond to what's going on there but I think you can look at our first priority now is to pursue profitable growth.

We have some opportunities here and if we can move faster on revitalization, if we can make the right investments in order to improve the company faster for the long-term benefit of our stockholders, we will do it.

We have looked at other priorities and certainly keeping the pension fund essentially well-funded, which it is now, we don't really see much contributions in there for the foreseeable future.

So it does give us an opportunity to pursue other avenues but I want to be abundantly clear, it's about profitable growth and certainly, repurchase programs or dividend increases would be lower priorities.

We want this BB type credit rating and we think when we invest in these assets and we improve the capability of these assets, sometimes we amaze and delight the team here who's been around for a very long time, when they put these things in place and perform at all-time record best.

And so if we can move faster, if we can do better, we want to be a strong competitor not just with integrated mills but we want to be able to compete with the mini mills as well and that's really what we have to do.

We have to figure out a way that we ride the cycle well from peak to trough and everywhere in between where we're throwing off cash, Kevin?

Yes, Dave said it right.

I don't want anybody to be confused, Dave and his management team are all about driving long-term shareholder value.

We've done a lot of good work on the balance sheet.

We put ourselves in a good position.

It's a generational shift in maturities.

We've shrunk the debt, we've made it more efficient.

We feel really good about the position we put the company in to now pivot to investments in growth and create real, sustainable, long-term value for our shareholders.

We want to be an equity friendly capital allocation company but in terms of direct return to capital, we think that's not the time right now.

Right now, we're about revitalization.

We're not even halfway through and looking for other ways to accelerate value creation through smart investments for our shareholders.

And our preference there, of course, is with organic growth and you see what we're doing with revitalization of assets, where we're going to get the extra tons when we complete this program and, of course, Granite City, that gives us extra tonnage as well and with PRO-TEC, the advanced high-strength steel, that also with an opportunity for some upside.

So clearly, we're focused on those areas of business -- the high-end of the business that creates the most value for our stockholders and we're making progress.

It's purposeful, it's deliberate and step-by-step, we're getting it done.

Okay, understood.

And then, I guess, just to that point on revitalization ROI and capacity creep in the business at Granite City, you're at a run rate first half of this year of close to, I think, 10.6 million tons of shipment volumes.

Granite City will get you another, call it, 2.2 million maybe more.

So do you think into '19 that you could be at a shipment rate of 13 million plus?

And you're 2 years into revitalization, so I assume you would be getting some -- harvesting some capacity benefits from that by next year?

Well, look, we're halfway through the second year of our asset revitalization program and we are already seeing the benefits, but we're not going to spend, again, a lot of time talking about 2019.

I know, Dan, you want something to add there?

Yes.

And remember Curt, the incremental benefit -- increase from Granite City will only mean about 1.5 assuming markets are still there because we're going to ship this year at a certain level.

I think when you look at the pattern on the asset revitalization, clearly, to hit our 4-year target, we're going to be spending more next year than we did this year.

So we're probably going to take some additional outage time at the assets.

So those would be some givebacks there.

So I'd say, yes, if Granite City stays a full run rate till next year, that's going to add 2.1, we were expecting 10 from Gary, Great Lakes, Mon Valley this year, whether that stays at 10 or creeps a little bit, we'll have to wait and see what happens when we get our outage plans all lined up for next year for the asset revitalization projects.

And next we have the line of Piyush Sood, Morgan Stanley.

A few questions for me.

First one, there was an article in a reputable trade rag yesterday talking about weaker OCTG prices versus a month ago.

Some grades down, maybe $50 per ton, input prices in some instances down more than that.

Could you comment on why pricing is falling despite 232 tariffs and quotas, is demand weaker than anticipated?

Piyush, this is Dan.

We haven't seen that in our order book.

So I -- well, I don't know where their sources are but we have not seen that in our order book at this time.

Let's say, if it were to sort of permeate through the industry, what kind of lags are we looking at in terms of when would those weaker prices possibly flow through your order books?

Generally for us, we have a lot of one quarter lag on most of our Tubular business.

But I think to reiterate again, we're not seeing that impact in our order book right now.

Yes, from my opening remarks we're actually seeing in Q3, some of the pricing actions we took earlier starting to flow through and so turning us EBITDA positive in Tubular in Q3 in the back half.

All right.

That's helpful.

And the next question, seems like in 2Q, you had moved about 22,000 tons from Europe to the Flat-Rolled segment.

We saw that last year in the first half and then we haven't seen in the last 3 quarters.

Just wondering what's changed?

And that you, again, had to start these imports?

And also, if you're paying duties on these and if that will continue?

Well, I think, Piyush, periodically, we brought some slabs over from Europe to help balance here typically with all the work we're doing on the assets here.

So it was small volume but that's all that was.

Certainly, if we're moving steel across borders and there are tariffs in place, we're going to be paying them.

All right.

And last one for me.

This is on pensions.

Your funded ratio is now above 90%, maybe closer to 95%.

Any possibility you could shift the whole burden of your pensions to an insurance company by topping it off with some additional onetime funding?

Yes, I appreciate you bringing that up.

We're pretty excited about the improvement we've made in our funded coverage.

We're looking at all options related to that to make sure we're further derisking the company.

So nothing on that today, but I can promise you we spent a lot of time as a management team looking at optionality to further derisk the company in that area.

Yes.

I think If we look back 5 years, Kevin, we were $2.7 billion ...

$2.5 billion unfunded back in '13.

And now we're seeing a line of sight to 100% here.

So we feel really strongly about the way that -- good about the way the pensions are managed.

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

I wanted to ask a couple of things.

In terms of the upcoming labor discussions.

I didn't hear you touch on that, I'm sorry if I missed it.

Anything you can remind us about regarding the timing of that?

Or tell us regarding color of how that's progressing?

Sure.

Yes, September 1 is when the contract becomes due and we're actually having some excellent discussions.

We had a sound off meeting here with the U.S. steelworkers, it was just pretty much as expected.

And I think we have a pretty good meeting of the minds of the kinds of things that we need to look at and frankly, I'm pleased with where we are at this point.

We've got, of course, some more work to do.

I feel pretty comfortable that we're going to be able to work through this without much disruption.

I think that was one of the key learnings, we're both committed to helping this company succeed.

And I think everybody knows that we're completely aligned with USW when it comes to safety.

We work very closely together and they've been great advocates as it gets to trade.

And they can rally the membership very effectively and the relationship that we have there is important to our company.

So we're encouraged by where we are and we're looking forward to completing the negotiations this year.

Okay.

That's helpful.

And then I was really hoping we could drill down on the 19 -- Slide 19 to understand what's at stake into 2019?

And I fully appreciate you've said you don't want to talk about 2019 but just to think about, again, the percentages of your business that are up for renewal, for contracts and so just if you could remind us, the timing of discussion of those contracts, is that usually October, November?

And then is it -- you said it was 75% of your annual contracts on Flat-Rolled, I think, we start at January 1 and the rest are in April but then on Tubular and on Europe, it looks like you have a decent amount of what might be annual.

So just wondering if you could through into a little bit more color about what's coming up for annual in the next several quarters?

Yes.

Sure.

Timna, this is Dan.

On Tubular there really aren't annual as far as pricing, there are volume commitments but volumes -- volume arrangements but not pricing, pricing tends to be quarterly.

Like I said, the ones in Europe that are fixed tend to be no more than 6 months.

So I said, yes, on the Flat-Rolled side, I said about 3/4 of the fixed and cost-based we said January 1, the -- most of the rest in April.

On the quarterly monthly adjustables, those also have negotiated restarts to go with those.

So I guess, that there's a fair amount that we'll reprice.

I think these questions also mean what's the cost curve going to do next year?

And that will determine kind of how our spot in monthly play out more than anything else.

Okay.

But October, November time frame is that when we should be expecting the bulk of those Flat-Rolled discussions then?

Is that fair?

We -- usually our conversation will start in the fourth quarter and depending on what's going on and how things are doing, and how stable the markets are, probably to stay tough till we get them done.

Okay.

Next we have Matthew Fields, Bank of America Merrill Lynch.

Appreciate your earlier comments to Curt's question on free cash flow priorities and focus on that BB credit rating.

I saw that you purchased some of the 2020's in the quarter and in the third quarter, I know you mentioned paying these down in cash, is that your intention to sort of pick up these along the way out to 2020 rather than waiting until maturity to pay them out in cash?

Matt, thanks for the question, it's Kevin.

Yes, that's our the highest cost debt, at 7 and AAAs.

It goes current next April anyway.

So it's our -- we try to be proactive on these kind of things, so we did go in and took out about $30 million in June and we put up about $75 million through the end of July in reductions on those bonds.

So we got about $357 million left.

Again, they go current in April so we're paying a little bit of premium to get out our highest cost debt, we think it was prudent and that's basically our strategy.

Okay.

And then I think one of the hardest things for me -- for us to model this out is the sort of interaction between Flat-Rolled and Tubular, with your comments about Tubular growing profitable next quarter and the rising OCTG prices, can you give us a little bit of help on how kind of Flat-Rolled and Tubular are expected to interact?

And how maybe -- will there be some extra pull through of tons from Flat-Rolled?

And how the spread kind of is expected to increase or decrease, stay the same?

Sure, Matt.

This is Dan.

So for our Tubular business, right now, there -- for the seamless part of the business, which is the bigger piece of the business, they're sourcing their rounds from third-party sources.

But on the welder part of the business, they do source from the Flat-Rolled segment.

We're doing that at market pricing, adjusted monthly, the volumes really won't move a whole lot.

Our welder operations have been running pretty stable along with rig counts.

So for our Tubular in the back half, it's more of a price upside than a volume upside because the facilities that really service the onshore markets have been ramping up with those rig counts that have been pretty high for a while now.

So it's a -- it's more of a price flow through benefit coming for Tubular but on the welder pipe, those tons do come from Flat-Rolled at market prices.

Yes, there's a margin compression that we've been saying and then we should that alleviated as we get into the back half and we should be positive.

But will be challenged to be able to hit the outlook that was provided previously.

Yes.

Let me just to add to that, so when we originally came out in January with our outlook, we had talked about Europe at about $400 million and Tubular at about $50 million.

Tubular for the full year, we expect to be positive but probably a little bit light of the $50 million.

And then but offset by being a little bit strong on the $400 million in Europe.

So kind of a push between the 2 segments.

All right.

That's helpful.

And then one last sort of bigger picture question, if I may.

Without jeopardizing the great progress you've made on the balance sheet, how do you kind of further intend to separate yourself from your peers whether that's integrated or mini mills?

Obviously, asset revitalization seems like your highest priority in terms of IRR investments but are there other product lines, other capabilities, other materials that you think U.S. Steel should be in the business of going forward?

Yes.

Well, I think for us a differentiator is the Generation 3 steel, this construction of our new Generation 3 can continue with galvanizing line at PRO-TEC, as I said earlier, it's on track and we are the leader there and in this space, we do very well.

Recently, we won an -- we won the Altair Enlighten Award for enabling technology for automotive at the management briefing seminar presented by the Center of Automotive Research, so that's just one example of the kind of things we're doing.

So this advanced high-strength steel strategy, this is a great focus for us.

That's at the high end and I think we've got this right and we need to push hard on this and if we can move faster, we certainly will but this is where the money is to be made.

And so we want to continue to have that leadership moving forward.

And next we have the line of Matthew Korn, Goldman Sachs.

So lots of repair works scheduled for Great Lakes in the upcoming quarter which you have been warning us about.

Could you quantify at all the improvements expected as you lay out the project there in Slide 11?

For instance at the facility, where costs, reliability, quality measures now relative to your goal?

And what would you project in terms of either additional throughput or lower cost as a result?

Matt, this is Dan.

That project is all part of that total asset revitalization scorecard we're talking about.

That's where ultimately, we'll get additional tons as we complete more of the projects through the entire system.

So this is just one part of that entire system improvement we're going to get through asset revitalization.

Yes, we're really not talking about discrete numbers for any one project.

What really matters is how much better the entire system gets.

All right, Dan.

Got it.

And let me ask this overall thinking about '19, what should maintenance and outage expense look like next year relative to these last couple of years?

And is there anything on the schedule there that we should be sure and account for?

Matt, I'd say and honestly, it's too soon to tell, certainly, when you look at our asset revitalization pieces, the expense piece of that probably stays pretty flat but in total, that's a pretty small percent of our total normal maintenance.

So I think we really don't have that kind of planning done yet for what all the normal maintenance will be, which makes up a bulk of the expense.

The only thing I would note is that certainly, Granite City hot steelmaking running for the entire year, we'll have maintenance cost there that we didn't have this year.

But since too soon to really get our hands on that number for what's actually going to wind up on the schedule.

Just additionally, Matt, '19 is the -- would be the peak year right now for revitalization on the capital side.

That's pretty clear to us.

And next, we have the line of Chris Olin, Longbow Research.

Just want to do a quick follow-up question on contracts.

I know it's a little bit early but I'm curious if you are starting to hear from your customers maybe on the automotive side or anybody else that they would like to limit the terms on those contracts may be moving to 3 to 6 months instead of 12 months?

Has anything changed there?

Chris, I would just say, we really don't go into that kind of detail.

We'd like to respect our relationship with our customers and also, that -- a lot of that is very much competitively sensitive.

So I think we're going to pass on the answer on that one.

Okay.

Fair enough and then how about a question on Tubular, just looking at the import dynamics within this OCTG market.

I'm under the assumption that South Korea producers have already bumped up against their import quotas that were agreed upon during that -- within that trade deal.

Hearing that some of this excess material that has landed was diverted into some of these warehouses and it can't be touched in 2018.

I'm trying to understand what that means going forward?

How should I think about that material that's been put away once that gets released in 2019, does that disrupt the marketplace or anything you can help me with?

Chris, I don't know that there -- that we think there is some direct impact to us because as I said, we're running our facilities pretty much as hard as we can.

We think we have enough demand from our customers to stay there for the most part.

So I'm not sure what happens next year.

Certainly, there's going to be a quote on them next year unless the agreement changes.

But when it shows up, it shows up inventory fluctuations in that market aren't unusual.

But yes, we'll have to see what happens but we're pretty comfortable that our facilities are running, like I said, we don't see a lot of volume upside for us at this point.

We're running pretty well.

There is no impact if -- when South Korea hit that quota?

Like I said, for us, we were running pretty full already.

So we didn't really have the room to take on more volume.

But we did see some price benefit.

Yes, prices -- that's why we expect prices to perform better in the back half through the fourth quarter.

Okay.

Next we have the line of Michael Gambardella, JPMorgan.

Just regarding your new guidance.

The new guidance that you put out last night, implies a fourth quarter EBITDA annualized run rate of nearly $2.6 billion including some of the startup costs that you still have coming from Granite City in the fourth quarter and also, obviously, assuming that you don't have the repricing of the contracts that which doesn't happen to largely at first quarter.

So with the $2.6 billion annualized EBITDA run rate in the fourth quarter, which is only a couple of months away and the stock kind of stuck in mud here since April and we're in the $35, $36 range.

Obviously, there is a lot of uncertainty surrounding trade and the Trump administration's view on trade that's holding the stock back, markets assuming a lot of uncertainty kind of assume almost a worst case scenario.

What's your view on how you think the trade situation will end up?

And how that will free up some of your value creation in the form of higher stock price?

Well, thanks for that question.

And we had an incredibly exciting -- a visit from the President and actually, his daughter was there as well and I can tell you the commitment that he has to steel is unprecedented.

And the notion that this guy would blink I think is just not going to happen.

He knows that this kind of unfairness should have been taken care of long ago.

He's got this, he's with us and we're going to do everything we can to support him because this is not just good for U.S. Steel, this is great for the United States of America.

You've got to be able to make steel if you want to have a strong country and you want to have a strong manufacturing presence.

So my view is that he will continue to be supportive, he gave every indication of that, we've had other discussions with the Commerce Secretary and other advisors in the organization and the administration is fully committed and we expect him to be so for the foreseeable future.

This trade situation requires a lot of courage and we have courageous leadership now that's addressing it now rather than kicking the can down the road as it's happened, so many years and years and years.

And here we are, we're finally seeing it take hold and I expect it to continue.

We don't expect the President to blink.

And next, we have the line of Chris Terry, Deutsche Bank.

Just wanted to get a bit more detail on the 4Q implied guidance.

It's about a $120 million step up, I guess, at the midpoint.

Just stepping through the moving parts there, the outages, the Granite City and then the EU that you've spoken about, I think $50 million for outages shouldn't be there in 4Q versus 3Q.

Furnace A starts and then I think it's about $40 million from the EU contribution.

So you get too close to that $120 million.

So assuming on the pricing, you're close to flat on that?

Or can you comment at all on what you've put into your guidance for the full year from a pricing perspective?

We do have a fair amount of work going on in the fourth quarter in Europe.

So I think, yes, the step up you're referring to is probably not going to be the case in Europe in Q4.

I know there's at least one blast furnace outage in Europe that's planned right now -- has been planned for the full year.

But yes, your math is accurate on the Granite -- on the Great Lakes Work impact as I've explained in my opening remarks.

Yes, again, (inaudible) went through it, right, extrapolating out from Q4, that's not something we're recommending.

You know we've got the Q1 impacts, seasonal impacts from the mining business, et cetera.

We don't know where pricing is necessarily going to be although fully agree with Dave's comments on the administration support being continued.

So we're not going to really talk about where we expect next year to be but the Q3, Q4 cadence is really driven by having really all the North American Flat-Rolled furnaces on in the fourth quarter and in the big outage in Great Lakes Works in Q3.

And next, we have the line of Phil Gibbs, KeyBanc Capital.

Dave, I just wanted some thoughts on the Fairfield EAF, should we expect to hear anymore about that?

Because it seems like it could be a key pillar in driving down the cost structure in Tubular on the seamless side?

Yes, that's a great question.

I think we've said before, it's not a question of if but when, but we also have a number of stage gates, and one of the stage gates is we want to see this positive EBITDA and make sure that we're confident it's a positive for the foreseeable future.

And the other thing we want to get through this labor agreement with the separate labor agreement for the Tubular business.

They're very different businesses and we need alignment, we need to make sure that the folks working at Tubular are aligned with the business and its performance just like we need to have the North America Flat-Rolled aligned with its business.

You can't have kind of one big agreement that everybody goes to because it dilutes the performance of one organization over another.

And I think we need to make progress on that in order to turn on the electric car furnace.

But we have about $150 million left to spend, 20, 24 months to complete it and we're ready to go as soon as we get through this stage gain.

And in terms of just a segue, you talked about alignment, I thought I saw last night in your bridge, Q1 versus Q2, you had a step up in cost in the Tubular division related to increased maybe incentive comp and how is that if that business hasn't really changed in terms of its profit stream?

In terms of actually being in a money-losing situation?

I would think that, that would actually be going in the other direction, not stepping up.

Phil, I think, that's the point Dave was making.

Right now, all the U.S. operations are covered under one agreement.

So for our U.S. employees right now, it's all one big calculation.

There's no differentiations between the segments and as you noted, the segments have very different results right now.

But it is one calculation for the entire U.S. population for us right now.

Yes, this is the alignment issue and we need nonrepresented and represented to have the same metrics.

We need to pull on the rope together and we have situations where management will get a reward and the represented workforce won't get any and vice versa.

And we need to just fix that.

And so that's what we're working on through this labor agreement.

There is a lot of benefits when everybody's pulling on the rope together.

And when we do that like we're doing on safety, like we're doing on trade, that -- there isn't anything we can't accomplish together.

And next question is from the line of Andreas Bokkenheuser, UBS.

Quick question on the European market, obviously, you had a lot of EBITDA growth in the European market in Q2.

I think you're talking about, I think, a bit of outages, planned outages in Q3.

But how do you look at the market going into the second half of the year in view of the new EU safeguard measures in response to Section 232?

Do you think this is going to be an opportunity for you to basically generate higher prices in Europe in second half?

Or do you basically think that all these or this trade war -- all these trade war elements between the U.S. and the EU ends up being a problem for volumes at this point in time?

That's the first question.

And I guess secondly, there's also been some talk that the White House might actually end up dropping tariffs with EU, if they settle on a good trade agreement and how would you view that?

Would you view it as a key positive or potential challenge in terms of prices?

Well, there is a whole lot in there, so let me take a shot at it here.

When you think about the EU safeguard in the trade cases, the preliminary measures here are going to be applied in a form of a global quota that is per product, not per country.

This has been questioned by several of the member states, which supported country quotas in line with our position for definitive measures.

The commission reacted that it will evaluate these comments for the definitive phase and the imposition of provisional measures is expected here very, very soon.

So I think as far as the impact on our operations there, we pretty much said that we expect the outlook to be better than what we said earlier in the year as Kevin just illuminated.

But the reality is, we just don't do that much between the EU and the U.S.A.

So it's not a big impact because USSK sells within the EU, within the V4.

Yes, I think that's it, completely agree.

The way we look at it is the EU caring about free trade and caring about their market is probably good for everybody just like it is here.

So we see that as a positive for our European business to the extent that they are conscious of making sure free trade is what's incentivized.

Yes.

As you think our President has it right.

We got to get everybody to the table thinking about this stuff and if you sit passively on the sidelines and you don't do anything, you don't resolve anything.

So he ended up having a habit of his -- putting his finger in the most important priorities that this country should be working on and sometimes, they can be a bit disruptive.

But we're getting people to table, people are talking about it and certainly, we'll get to a more fair trade environment as a result of his leadership.

I don't think there's any doubt about that.

And in this case, as we said earlier, the European thing is not going to be as big a deal for us there as the trade implications here that he's going through with 232 in the United States.

But all said, it's a plus for the globe what the president is doing to get everybody to the trade -- table.

Especially the bad actors who have been unfairly trading forever.

And one thing I would just say in relation to the -- our queue is pretty long run, we're running out of time.

So we're going to try to pick up the pace a little bit, so I hope you guys understand that I might move you through a little faster, so we can everybody a chance to talk today.

Okay.

And next is Alex Hacking, Citi.

I'll be quick.

The first question, just on Granite City, the revitalization work that's required there, was that done while it was closed or is that something that will have to be done subsequently?

No, I'll just say on Granite City, those facilities were newer assets, they were in better shape, not as much revitalization and we really didn't have a lot of money allocated to the Granite City asset, well, maybe $10 million or something like that.

But that doesn't mean we won't invest further in these assets if we can bring them along faster and better and figure out a way to grow the assets.

Okay.

And then on Tubular, you mentioned that 3Q is going to be better, given some of the catch up and lags between OCTG and substrate, would you expect that trend to continue into 4Q, that 4Q would be better than 3Q or at stable pricing?

Yes, better.

Yes.

We expect that trend to be upwards to both quarters.

And next we have John Tumazos.

What do you expect the operating rate will be in the fourth quarter with Granite City up?

And do you still keep any capacity on the books for Fairfield?

John, no.

The Fairfield platform has actually been physically destroyed.

It's been dismantled.

I'd say Granite City is sort of fitting to our overall order book.

Like I said, basically in our anticipated shipments we're talking about.

That would imply that our system probably in good assuming the customers are there and demand doesn't change, we'd be systemwide close to 80%.

And next question is from the line of Charles Bradford, Bradford Research.

A couple of questions.

First of all, with the revitalization program, what will that do to your capacity in 2021 when it's completed?

And what about the number of employees?

Yes, Chuck.

This is Dan.

So our expectations are that when we look at Gary, Great Lakes, Mon Valley, the primary focus right now that we'll be able to ship 1 million -- an incremental 1 million tons more out of those facilities that we have now.

It really doesn't change the headcount.

It's just production efficiency that drives that.

And more -- less downtime, more reliability, more consistent performance.

But does that affect the stated capacity or just the operating rate?

Just the operating rate.

The capacity, we're not adding new capacity.

We just expect to be able to utilize our existing capacity at a higher rate.

Okay.

Second question, in Japan, there has been a report that you hired a ship from NYK to move 120,000 tons of iron ore from Québec to Oita.

Where did that iron ore come from?

Because it seems a little far for that to be intact for it.

Where did that information come from?

Well, and Chuck, I would just say we've been clear that we do -- we are a commercial seller on iron ore -- seller of iron ore and we do have international business.

So I mean we've talked about it and we do.

We have international contracts, we sell iron ore out of Minnesota into the seaborne market right now.

All right.

$32 freight rate, that's pretty expensive.

Next question is from the line of Karl Blunden, Goldman Sachs.

Just quick one on the balance sheet, here you spoke about a desire to get to BB, you've been chipping away those 22s as we discussed earlier, is that along with an immunization of the pension fund?

Do you think that's enough to get to BB rating?

Or based on your agency conversations, you also need to show further progress on reducing cost of the business?

Thanks for the question.

Technically, we're there already in terms of the performance of the business, right?

It's really making sure that we're comfortable that we're meeting those criteria on a through cycle basis.

So we're spending a lot of time thinking about how do we make sure that as things cycle and they will cycle that we're maintaining that level.

So there's work to do there in terms of variablizing our cost structure.

And that's why we're probably going to go slightly beyond in current market BB rating type credit metrics.

So that we can sustain it on a through cycle basis.

Got you.

And then on the longer-term organic investments, as you assume steel price or a spread, how do you go about that calculation when you're looking at your hurdle rates, just given the volatility we've seen recently?

I would say, Karl, any time we're evaluating projects, we're focused on cash, something's worth what the cash generates.

We're looking at DCF-type values.

We make our assessment on where we expect market spreads to be.

That's just part of our job.

But certainly, we are looking at hurdle rates, will be on our cost of capital.

We're here to create value.

Got you.

And then just the hurdle rates that you're baking in, are those consistent with current spreads or?

I assume higher than our cost of capital but that's going to vary by how strategic the project is and how discretionary it is.

And in the spread rates, are those kind of consistent with current levels or down a bit?

We're all -- we have to make assessment on where we expect the market to be in the future but because that's when those investments are going to generate their returns.

Next, we have the line of David Lipschitz, Macquarie.

Just a quick question in terms of with your stock price here and things like that, there was rumors a while back of you selling Europe or things like that, what are your thoughts on either selling the Tubular or the European asset?

Well, we think we've always said all of our assets are for sale at any time at the right price to create stockholder value.

But I can tell you this that the assets that we have right now, we're happy with them and they're performing very well.

In particular, USSE at Europe is a fantastic asset.

It's reliable, it's consistent quality delivery.

It's the best asset, I would say, for sure in Eastern Europe and continues to outperform.

So we're -- and through the cycles, it makes money.

So that's an absolutely great asset.

And the Tubular business, it's coming back.

We've already talked about it's getting hit a bit with the substrate costs now but we should start to see that delta improve and we've been this business be a heck of a lot better in the past and we expect those days to come back especially when you see the rig counts improving.

I think that rig counts are over 1,000 now pushing toward 1,100.

So it's getting back to better investment time.

So both those assets are good assets and we're running the assets and unless somebody comes with a compelling offer, we're going to continue to do that and make those assets perform.

At this time, we have no further questions in queue.

Dave, you want to have a closing remarks for us here?

Okay.

Yes.

Thanks everybody for joining us today.

And I think you all know this, but we're working very hard day in and day out and are focused on delivering the long-term results without being distracted by short-term market volatility.

We believe our intense focus on operations and improving the 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.

We're pleased with the progress so far and we won't take our eyes of the 2020 prize for our employees, our customers and our stockholders.

Thank you.

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

Thank you.

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