美國鋼鐵 (X) 2018 Q4 法說會逐字稿

Good morning, everyone, and welcome to the United States Steel Corporation's Fourth Quarter and Full Year 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, David Burritt; Executive Vice President and CFO, Kevin Bradley; Dan Lesnak, General Manager of Investor Relations; and Kevin Lewis, Director of Investor Relations.

After the close of business yesterday, the company posted its earnings release and earnings presentation 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 and in the earnings presentation 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 call over to your host, U.S. Steel President and CEO, Dave Burritt.

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

These are the headlines for 2018.

Strong earnings and important progress on strategic objectives including: one, we delivered our best return on capital employed since 2008, over 20%; two, we returned over $100 million of capital to stockholders in 2018, including $75 million of share repurchases in Q4; three, we made excellent progress on our asset revitalization program, exceeding all of our 2018 targets.

But let me start the call with a few comments on our core values, the safety of our employees and the safety of the communities in which we work and live.

I am pleased to report that 2018, we achieved significant improvements in our already industry-leading safety performance.

We had 9% improvement in our OSHA recordable rate and a 23% improvement in our days away from work rate.

A strong collaborative effort by all of our employees, both represented and nonrepresented, is the driving force behind our continuing safety improvement.

As with safety, we are committed to continuously improving our environmental performance as evidenced by the significant investments in environmental improvement projects we continue to make across all of our facilities.

As you may have seen in the press, we had a fire at our Clairton coke-making facility on December 24.

No one was injured by the fire or the efforts to extinguish it.

We're thankful for that as well as for the efforts of our employees, local firefighters and other first responders early on Christmas Eve morning.

The fire damaged a portion of the facility that is a key element of the coke oven gas desulfurization process.

We acted quickly to mitigate environmental impacts while we are making the necessary repairs to the facility.

We continue to communicate with the appropriate regulatory agencies and update them on our progress.

We take our environmental responsibilities very seriously.

In fact, in early October, we completed significant environmental improvement projects at Clairton and other Mon Valley Works facilities.

These projects were developed in cooperation with the local regulatory agencies to help the region meet its new federal SO2 air quality standards.

We're focused on completing the repairs as safely and quickly as possible in order to return the facility's desulfurization process to normal operations.

We've launched a dedicated website, www.clairton.uss.com, and would encourage you to visit that site for additional details on the incident and updates regarding the repair process as they are available.

Before I turn the call over to Kevin to discuss our results and guidance, I'd like to highlight some of our important accomplishments during 2018.

As mentioned at the beginning of my remarks, we showed a strong improvement in our safety performance in 2018, and we are grateful to all of our employees for their commitment to safety.

We achieved a return on capital employed of just over 20%, our strongest performance since 2008.

We continue to make good progress on our asset revitalization program and exceeded our 2018 scorecard goals.

We safely and efficiently restarted the steelmaking operations at Granite City, positioning us to benefit from strong spot market conditions for most of the year.

We reached agreement with the USW on a new 4-year collective bargaining agreement, providing our represented employees with well-deserved rewards for their hard work and dedication.

We continue to strengthen our balance sheet by opportunistically eliminating our highest cost debt and extending our debt maturity schedule to provide a solid foundation to continue investing in our assets.

As a result of our stronger balance sheet and improved earnings, we were able to enhance our capital allocation strategy, returning $100 million to our stockholders in 4 months through our stock repurchase program.

I will now turn the call over to Kevin to provide an overview of our financials and our guidance.

Kevin?

Thanks, Dave, and good morning, everyone.

Adjusted EBITDA was $535 million for the fourth quarter, up 2% sequentially and up 66% versus the prior year quarter.

Full year adjusted EBITDA was $1.76 billion, an increase of $612 million or 53% versus 2017.

Revenues for the quarter, up $3.7 billion, were 18% higher than fourth quarter '17.

For the full year, revenues grew by 16% and finished at $14.2 billion.

Q4 adjusted EPS of $1.82 was $1.06 higher than the prior year quarter.

Full year adjusted EPS of $5.36 was significantly higher than 2017 adjusted EPS of $1.94.

Moving to our segments.

North American Flat-Rolled generated 16.1% adjusted EBITDA margins in Q4 and finished the year with adjusted EBITDA margins of 12.6%.

This represented margin expansion of 400 basis points versus 2017.

Europe generated EBITDA margins of 13.8% for the year, but we did see a pronounced pullback in Q4 to margins of 11%.

Margins in our European steel market continue to be challenged due to falling steel selling prices and increasing raw material costs.

Tubular Q4 EBITDA, while positive for the quarter at $8 million, was below our expectations, as selling prices for both seamless and welded pipe decreased in the quarter.

The strong financial performances for our business in 2018 allowed us to make significant progress on our balance sheet and capital structure.

Let me go through some of the highlights.

In the year, we retired $322 million of debt and extended our maturity profile.

Our next senior note maturity is not until 2025.

This further de-risked our execution on the asset revitalization program and gives us a good runway to continue to execute our strategy.

In the quarter, we began executing on our previously announced stock repurchase program.

In Q4, we repurchased $75 million worth of stock.

In January, we repurchased an additional $25 million.

Since the announcement of the program on November 1, we have repurchased just over 2% of our shares outstanding.

We continue to believe stock repurchases are an attractive value opportunity and remain committed to our balanced capital allocation framework.

Turning to guidance.

Given the high levels of volatility the industry is currently experiencing, we are modifying our guidance methodology.

While we provided quantitative first quarter guidance, we will transition to guidance cadence, consistent with other large domestic steel producers, beginning in Q2.

We are also providing full-year projections for several operating income statements and cash flow statement items that we believe will be helpful for our investors and analysts.

We currently expect first quarter 2019 adjusted EBITDA to be approximately $225 million.

This excludes the expected first quarter impact of the Clairton fire Dave discussed earlier in his remarks, which is expected to be approximately $40 million.

For our Flat-Rolled segment, we expect Q1 EBITDA to be higher than first quarter of 2018, primarily due to higher average realized selling prices, partially offset by higher raw material cost.

We expect Q1 EBITDA for Europe to be lower than Q1 of 2018, primarily due to lower volumes, higher raw material costs and an unfavorable change in FX.

Tubular is expected to increase Q1 EBITDA compared to Q1 2018, primarily due to higher average realized selling prices and increased volumes, partially offset by higher cost for steel substrate.

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

Thank you, Kevin.

Before we move to Q&A, I have 3 things I'd like to discuss.

Capital allocation, strategy execution and steel markets as we enter 2019.

First, I want to remind you of our capital allocation framework and 3 priorities for cash: maintain a strong balance sheet, supportive of the company's strategic objectives; invest in operational excellence, technology and innovation to reduce cost and increase capabilities; return capital to stockholders through consistent dividend payments and opportunistic stock repurchases.

Second, we are encouraged by the execution of our strategy in addition to continuing our progress on asset revitalization program.

We're also improving our ability to serve growing markets by investing in new finishing facilities in both the U.S. and Europe.

Progress on the new state-of-the-art continuous galvanizing line at our PRO-TEC joint venture to produce coated Gen 3 advanced high-strength steel products for automotive customers remains on track, with the first production from this line expected in the third quarter.

We also recently announced the construction of a new dynamo line at U.S. Steel Košice to produce sophisticated silicon grades of non-grain oriented electrical steel products that will serve growing demand for electrical vehicle and power generators with the first production expected in the fourth quarter of 2020.

We have strong customer support for both these facilities and are focused on increasing our exposure to these very attractive and growing markets

Third, turning to steel market, we believe the fundamental demand signals remain positive as we enter 2019.

Auto sales finished 2018 at or above 17 million units for the fourth consecutive year, which has never been done before, and we expect 2019 to be another good year for the auto sector.

We currently expect that 2019 will be the continuation of the 2018 demand recovery in the yellow goods sector.

Energy markets continue to perform well, supported by the continuation of line pipe products in 2019 and many new projects in the bidding process as we speak.

Construction markets have been a bit choppy heading into the winter, but the 2018 trend was better than 2017.

Our construction customers have indicated that we might finally have a more normal construction season that starts slowly in the first quarter and then picks up momentum as the winter weather dissipates, which has not been the case the past few years.

Based on the trajectory, the prices in the U.S. spot market have been on since August peak, January scrap prices falling for the first time since 2006 and a lack of clarity that the rest of the winter brings with raw material cost, buyers are continuing to play their hands very carefully.

We expect a slight growth in steel consumption in 2019, and we also expect import volumes to decrease in 2019.

Given this combination of supply and demand changes, we have every reason to believe that the buying activity will accelerate as the quarter progresses.

In fact, we are already beginning to see this take place in our Flat-Rolled segment as our January daily order entry rates are running above fourth quarter levels.

Like every new year, we are faced with new opportunities and challenges, and I'm pleased with the progress we have made, but we have more work to do.

As the market continues to change, we remain focused on the things we can control.

I have no doubt that 2019 will be yet another meaningful year of progress for our company.

With that, let's move to Q&A.

Dan?

Thank you, Dave.

Greg,can you please queue the line for questions?

(Operator Instructions) Your first question comes from the line of Chris Terry from Deutsche Bank.

A couple of questions for me.

I just really wanted to focus on cash flow.

Firstly, on the $1.2 billion of Capex for 2019, can you give a bit more detail on what's included there?

Just interested in anything that relates to the Fairfield EAF, and what's included for European spend?

The second question also related to cash flow.

In the asset revitalization program, I believe you spent $584 million to date.

You got $300 million to $350 million for this year and then a pick up to $600 million for next year.

On our numbers that would mean that for the next 2 years, depending on steel prices, you'd be free cash flow negative.

So just wondered how you talk about the buyback and capital returns, dividends, et cetera in that context?

Chris, this is Dan.

I'll take that CapEx piece.

So the CapEx projects, we've gone out there -- as Dave mentioned, we do have a dynamo line in Europe, and we'll have probably maybe $40 million or so spending this year related to that.

We also have some additional outage work, maintenance outage work in Europe this year.

We have some higher maintenance -- normal maintenance capital for Tubular this year.

And then also, you're seeing Granite City Works, the steel-making operations at Granite City Works have been offline for 2 years.

So you hadn't seen that in the last couple of years, so now that we're operating those, we'll have the normal maintenance capital that goes into supporting the hot end at Granite City.

So those are some of the bigger moving pieces, the PRO-TEC facility Dave mentioned is actually funded by the JV itself.

So that's where the big change for CapEx year-over-year for us is.

I don't know, Kevin, you want to talk about the AMP spending?

Yes.

So you'll see -- you're seeing 2019 overall CapEx up, as Dan just explained, but on an AMP standpoint, fairly consistent year-over-year.

We're following our program, and we look to finish that on time and on budget, so AMP spending, now we're not going to get into, kind of, long-term cash flow kind of consistent with our change of methodology on guidance.

We're not going to speculate on longer-term EBITDA and cash flow, but CapEx at $1.2 billion, we feel very comfortable with, and we feel like our balance sheet and our capital structure are in great shape and can support the kind of investment we need to and want to do in our business.

And I guess, Chris, anything that I'd add to remind everybody is back before we started the asset revitalization program is (inaudible) program, we consciously went out and pushed our cash balances to much higher than their historic levels, so we created ourselves a lot of financial flexibility.

Our expectation when we started the program was, we may well burn some of that back.

But let's say we're starting to point well below the historical cash levels of the company.

And Chris, this is Dave.

You had also a question in there about the EAF and you've heard me say before, it's not a question of if but when.

If you think of the criteria that we are working through in order to make sure that we did the electric arc furnace, it was -- we needed to add 232 checkmark.

We needed to have a good balance sheet and ability to finance it easily, checkmark.

We needed to be positive EBITDA for the foreseeable future, checkmark.

The thing we're working through now after we've got the labor agreement, we're working through some local issues because it's important to us that we have common metrics and incentives for the local represented employees as well as with management and we're not quite done with that.

But I believe I'm optimistic that we will find a path forward and would like to be able to announce that this year.

Last year -- this time last year, your guidance said that 1Q was $250 million.

And then you went in slightly above that, I think you reached $255 million, when you actually reported.

This year at $225 million adjusted EBITDA, you talked about the cost pressures on some of the raw materials.

Just wondering if you can go through some of the puts and takes of the $225 million guidance.

We just -- before I turn it to Dan here, the big issue here in terms, if you think about 2019, Europe is under a lot of pressure.

And that's a big change for us.

We're seeing margin compression, prices are down there and input costs are up.

We do think this is the same kind of thing we've been going through here in the states with trade, and we believe that Europe is going to be sorting through this throughout the balance of the year.

They've got some measures that they put in place but we're seeing a lot of pressure on Europe that wasn't anticipated, and we saw some of that pressure coming in late last year, and you guys all saw it too, when you were doing your analysis.

And it's definitely bigger than what we thought it was going to be.

But as far as the actual bridge, Dan could you take us through that?

Yes, I think -- Dave, I think that really hits it in Europe.

As you said maybe the only -- else Europe is, there's some energy inflation that's part of being a steel maker in Europe, the cost of CO2 credits per credit is moving up.

So there's a little bit energy and then CO2 headwinds.

FX, we'll see how that plays out, but right now that would be a little bit of a headwind.

On the Flat-Rolled side, I think certainly that the significant drop in spot prices we've seen, is impacting a lot of our tons.

So we're going to see price realizations down.

Unfortunately, that magnitude of that spot price is more than offsetting the gains we made on our annual fixed-price contracts because we did see margin enhancement on the annual fixed, but there are smaller percent of our tons, and the spot market is just overwhelming, at this point, the rest of our volumes.

Raw materials pressures in -- also in here, particularly, we called our $20 per ton increase in coal.

We had some higher outages, as we mentioned, we said we are going to do more asset revitalization work this year than last year.

So compared to last beginning -- compared to fourth quarter, outages are up.

These are more against fourth quarter for you guys.

Mining, seasonality in Mining, that generally will be about a $30 million headwind.

So I think what we're seeing is, we're seeing pressure in just about every sector from 4Q to 1Q, every piece of the puzzle from 4Q to 1Q.

But those are kind of the big drivers.

Tubular is starting to see a little bit uptick in pricing, which is helpful.

That pretty much gives us a pretty balanced look quarter-over-quarter for Tubular.

Yes, and I'll just also add, typically the first quarter is all low bar.

We're not here on fire concerned about what's happening with the business.

We feel good about those areas of the business that we can control and our area of focus.

So we're comfortable that we'll have another good year.

It's just that we do have these headwinds, particularly the unexpected headwinds here in the fourth quarter related to price that are carrying into the first quarter, and we'll have to see how that plays out.

But meanwhile, we have a great balance sheet, and we're executing on our strategy as we said we would for the things we control.

Your next question comes from the line of Curtis Woodworth from Crédit Suisse.

First question just on Clairton.

From the most recent release, it looked like you're extending coking times and injecting more gas into the boilers to I think diminish some of the SO2 emissions.

So can you just talk to -- do you expect to buy merchant coke the next several quarters?

Is there a scenario where you may have to idle a few batteries?

And then could you just say what are the components of the $40 million cost you outlined for 1Q?

Sure, Curt.

This is Dave.

First, I just want to highlight once again that we are committed to our community and our shared environment.

And our role as an employer and good corporate citizen, this is an unfortunate incident, and the people have -- who have worked through this and kept people safe, I'm immensely proud of.

And meanwhile we have some work to do to get this behind us.

We are confident that we will be able to get it behind us, and we're working very closely with the Allegheny County Health Department as required in making sure that we're staying close to whatever improvements we need to be in compliance.

So Dan, if you could take the balance?

Sure.

I'll take that.

Curt, as to you look at our volume guidance for the year for steel shipments, and seasonally, the first quarters are lower shipment level for us.

But as we look at our projections for shipments, steel shipments, even given the extended coking times, which is certainly important to help mitigate the activity, the environmental activity at Clairton.

When we look at those plus the commercial range, start-by ranges we already have in place.

Right now our expectation is that we will not need to go beyond what we already have in place.

So we're pretty comfortable there.

I said our focus is on getting that facility back to where it belongs.

So I don't think we'd go speculating on too many hypothetical situations.

Where we are going to get the facility back in compliance and on the timeline we have in place, we think we're okay on our coke needs.

And, Curt, just to give you a little bit more color on the breakdown of the $40 million, probably in between $15 million and $20 million of that would be kind of the physical repair cost.

The bulk of the remainder is the natural gas purchase cost in lieu of the coke oven gases we would have been utilizing.

Okay, that's helpful.

And then just a follow up.

I guess back to the guidance question that Chris sort of triangulated.

If you -- based on our numbers, the mining delta is usually $30 million to $40 million headwind in the 1Q.

We see spot pricing down roughly $110 million in terms of your spot book.

But to your point, auto reset higher, so that mitigates that.

So it still seems like it's a pretty significant sequential delta, down $310 million from 4Q.

And I hear you on Europe and Tubular, but it's hard to see how those could be -- account for the rest of the $200 million.

So is there anything more specific than that, that maybe we're missing or is there outage cost baked into 1Q.

Do you see 1Q as very low on volume relative to the cadence you see for the rest of the year to get to 11.5 million just because it seems like a very high delta.

Yes, Curt.

1Q volume is definitely not a 1/4 of that 11.5 million yes.

So you got lower volumes in Flat-Rolled 1Q.

In total, between Flat-Rolled and Europe, your outage cost versus 4Q are up $40 million, $50 million.

So that's a big piece of it.

But I think the other thing is, it's not just our spot tons because even when you think about the adjustable contract that generally has some time lag on them.

A portion of those get a fresh renegotiated starting point the beginning of year.

So on a piece of those contracts, the spot price drop is more immediate than you normally see the lag throughout the year.

So I think that's part of it too.

So how much of your contract book reset Jan 1?

And is there a lag in that?

So are you not seeing the benefit of the auto resets?

We have not completed all the negotiations for the 30% of our book that was Jan 1. So some of them are carrying over right now till we agree to a new number, which will then cover from the start of the year.

But the ones that are in place, remember, they're not just auto.

They're other -- some other ones where we have annual fix.

The ones we had completely negotiated, they are margin accretive.

We believe we did well on them, except when that's -- when you're looking at 60% or 65% of our tons being really exposed to spot, it's hard to offset that with just 35% or 40% of your volumes.

Okay, and then just to clarify, the Fairfield EAF CapEx, is that embedded in the $1.2 billion?

I think it's not, no.

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

I wanted to dive into Tubular a little bit because when you talk about the portion of your business that's sold at spot some of that is your own Tubular assets.

So I was wondering, a, why that doesn't look a little bit better?

Isn't it bit more of an offset into the first quarter or beyond?

And then just taking a step back on Tubular, like what is the right EBIT per ton that you see right now given -- assuming flat substrate costs like assuming flat hot roll, like can you give us a rough amount to help us navigate when, up or down, what you think the run rate earnings are on that business?

Timna, to be honest, we haven't done that calculation because that's really not what we expect to happen.

So I don't want to guess.

It's not fair for you guys for me to guess the things we haven't actually done the analysis on.

And Timna, just a little bit of color on the substrate cost because obviously, steel prices were dropping.

A lot of what we ended up shipping in Q4 was actually based on Q3.

So they had inventory coming into Q4 but they consumed and that inventory was at kind of higher prices.

So it's kind of the delay factor in terms of the margins we saw in Q4 from a substrate perspective.

So you have yet to realize the benefit of lower cost into your Tubular division for Q1, Q2.

We didn't totally realize, but yes.

Got you.

And there was still some pretty good price pressure in 4Q.

That's -- we think that's going to turn the direction for us, but it was pretty significant price pressure in 4Q.

Yes, a lot of the -- we announced that pricing increase in May of last year.

We benefited, we talked about that in the last call in Q3, just about all of that reversed out.

That commercial benefit that we saw in Q3 reversed out in Q4.

That was the biggest issue we had.

You'll remember, I'd estimated that we'd be positive Q2 -- Q3 and 4 but also for the full year, and obviously, we didn't accomplish that.

We were disappointed in the Q4 performance, and we need to rectify that.

Okay.

Second question is regarding your volumes going forward, a couple of things.

One is, you talked about additional 1 million tons from your asset -- investment program, and I just wanted to understand was that rolling, is that hot end, is that get you to -- assuming another 1 million tons when we add up all the volume coming on, should we be adding that, or is that offset elsewhere?

And then getting asked about Granite City, obviously we started at given stronger market conditions, is there a price, or is there a premarker at what point you would consider maybe idling it again?

Yes, sure Timna.

So again, the volume benefits from that asset realization work, we're seeing that on the assets we worked on, but we're taking more outages this year, so net out of Gary, Great Lakes, Mon Valley, we get less this year than last year just by the amount of outages we're taking.

As far as -- I think, as far as in general, I think, we have a very, very good track record over the last decade or so of doing a good job of matching our production to order book.

We've been -- we've made the adjustments we've had to make very consistently over the years.

So I would say, if we saw a change in the order book that said we have to do something about our steel making levels, we would.

The one thing I would caution you is that, it's not about price, it's about demand, and it's not about Granite City.

It really depends on where the order book would move on what facility we may need to reduce production.

But I think we've shown, we will reduce production when it's appropriate for our order book, but I -- but don't assume that Granite City is a flex facility.

That's more about where the demand is for which products and how that fits in our footprint.

Your next question comes from the line of Seth Rosenfeld from Jefferies.

A couple of questions.

First on the asset revitalization plan, and then, moving over to Europe.

Just for the revitalization spend, you commented, really nothing has changed with the schedule of investment.

But I believe the past guidance for the 2019 would be peak CapEx, whereas now it appears pretty stable year-over-year.

And to hit that full $1.5 billion budget, that would imply an 80% increase in CapEx for 2020.

So just like to better understand how you're thinking about the staging of the revitalization spend, perhaps there've been any changes with what's been capitalize versus expense in 2019.

I'll start there, please.

Yes, so this is Dan.

I think the changes -- when we talk of project schedule, there's -- I mean the project schedule is one thing.

How the capital actually flows through the cash flow statement is based on when it's paid.

And I think our procurement team has done a tremendous job on getting us very good payment terms.

So I think our -- the projects are getting done on the same pace, but actually some of the payment is going to fall into maybe the next year, and I think that's going to happen next year too.

So it's more a timing of payables, not the pace that we're actually executing the projects.

And I would just -- let me add.

I think, Seth, you were talking about the expense side too.

I would say the -- on the increase in CapEx, the profile, the kind of projects we're doing, we will see a slightly higher amount of expense associated with that CapEx for things that obviously aren't capitalizable under our policy.

So the ratio, I would say, of expense to CapEx is unfavorable in '19 relative to '18.

(technical difficulty)

sharply lower year-over-year, appears to be the lowest since 2014.

Can you just walk us through the drivers that drop the mix between, if you're saying, weaker demand for finished goods, or if it's primarily just weakness within semis?

And then with regards to the timing of outages, can you confirm in what quarters we should expect the biggest hit to volumes in Europe?

Yes, Seth.

You actually broke off a little bit in the beginning, but I -- what I noticed from the rest of the question, you're asking about the volume change to the volume guidance for Europe.

And the biggest change is in the demand for semi-finished.

If you go back, every year, we -- in our 10-K, we disclose our breakdown of shipments by product.

If you go back, starting in '15, there was a pretty noticeable jump in semi-finished sales for U.S. Steel Europe.

That was -can mark additions here that sustained it itself for last couple years.

That demand for semi-finished is now reverted to more historic levels.

So that's a very big driver.

The cadence of outages, we try to match up with seasonality, so 1Q, 3Q would be typically, when you might take a little more outages, but they're probably not as nearly wide as disparity on shipments by quarter in Europe that you might see here.

But it is -- there is a noticeable change in demand for semi-finished in Europe, which is really the biggest driver behind that volume change for us from the last couple of years.

With regards to the finished sales in Europe, though, are you seeing any change in demand trends there of note or still relatively stable?

Those are pretty stable.

The only -- obviously, the impact in Europe now are the imports the safeguards, the preliminary safeguards didn't help on imports, so imports are still high, which is why you're seeing the anomaly where selling prices are going down, the raw materials are going up as opposed to the more -- much more traditional cost push, cost pull you saw in Europe.

Your next question comes from the line of Matthew Fields from Bank of America Merrill Lynch.

Is it your intention to keep the $228 million outstanding on your European revolver outstanding through the year?

Or do you intend to pay that down over the course of 2019?

No.

We're not intending to pay it down.

It's a very inexpensive source of capital for us at Euribor plus 1.7%.

We may in fact choose to draw further on it.

So that's not -- that wouldn't be something -- we're not looking to pay that down anytime soon.

We're happy to access that capital, it's very efficient.

Okay, great.

And then given the great work you've done on your balance sheet in 2018.

Do you feel like your balance sheet is, at this point, in a good enough state to weather the next steel downturn whenever that is or do you think that there is any additional work to do before you, kind of, get to that place where you'd like to be before an eventual next downturn.

Yes.

No, Matt, we feel really good.

It's not just that we've shrunk the debt.

But more importantly, we've extended all the maturities.

So there's nothing coming at us.

In fact, the first thing we have is really the 5-year European revolver.

Beyond that 2025, where all of our high yield debt, interest rates are down for us.

We've got much more flexible covenants in all of our facilities.

So we feel really good about our opportunity here to do what we need to do on revitalization, execute our strategy.

I think there's been some good work, I think we put this tailwind of 2018 to good use on the balance sheet and capital structure.

Okay, and if you indulge me one more, building on Curt's earlier question about Clairton.

Are there any contingency plans in place at this point in case you have any outsized liabilities either environmental, operational or if you have to engage in some increased CapEx in any meaningful way at that facility?

Yes, absolutely.

We have a team addressing these types of issues, again working closely with the community as well as with our supply, so that we make sure that we meet our customer requirements and also take care of the community in which we live.

So yes, absolutely, we're all over this.

Your next question comes from the line of Matthew Vittorioso from Jefferies.

Just on the back of Matt's questions on the balance sheet.

Just curious, you ended 2018 with about $1.4 billion of net debt.

You're calling for higher CapEx this year, steel prices are down.

Just trying to think what is your comfort level as far as pushing net debt higher for the sake of executing share repurchases?

Or maybe if you could just talk about sort of your comfort level in pushing net debt higher.

Is $1.5 billion the right level, $2 billion, what would you think the right level of net debt for this company is currently?

Yes, Matt, we -- so we're not solving for a specific net debt number.

Obviously, we're really comfortable with where we are today.

In terms of the share repurchase, we're happy that we got out of the gate pretty fast, right, we're $100 million into a $300 million program in the first 3 months.

So it's a 2-year program, but we wanted to demonstrate that we're obviously serious about this, and we think that's been the case in the $100 million so far.

But we're not going to really speculate around anything beyond that until we fulfill the program.

Do you feel obligated to fulfill the program?

I mean I guess as creditors or bondholders, I mean, how would you view share repurchases in the context of a declining steel price market.

I mean I guess you can exercise some discretion there or do you feel...

Fair question.

No, fair question.

Obviously, part of the reason, we chose share repurchase as the method for returning capital to our shareholders, we do have flexibility, and we do have control.

But as we said, we want this to be a regular component of our capital allocation strategy.

Our liquidity is strong, the balance sheet is strong.

So at this stage, we're pretty comfortable with our ability to execute on that program over the 2-year period.

Obviously, any outflow of cash for the company is always going to consider the health of the industry, the health of our company and our free cash flow.

But given the balance sheet right now, we feel very confident.

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

I just have a few follow-ups, trying to get a little more detail.

On -- first of all, on the $875 million of non-ARP capital spending this year, it's a pretty big jump, it's over $200 million versus 2017 up.

I know you flagged a few of the bigger ticket items.

There was a lot of detail behind that.

I guess the question is how much of the jump in '18 versus '17 would you call, kind of, onetime in nature type of jump?

Or perhaps another asked, more directly, what should that number be -- expected to be beyond 2019 in the non-ARP capital spending?

Well, this is Dan.

Dave, that really depends on what kind of other projects we would -- growth project that we get into.

But the bigger growth project that's flowing into '19 is the dynamo line in Europe.

So -- I mean, it's going to depend on growth projects.

If EAF gets restarted, that would certainly show up but I think -- when you think about our spending absent any growth project, you probably should be looking at a baseline of $500 million to $600 million for a company of our size.

And then as we would announce new growth projects, you'd need to layer those on top.

Okay, all right.

And then just regarding the first quarter, questions around the first quarter, what are the specific volume assumptions in the Flat-Rolled segment?

And what is the weighted average price assumption in that segment included in the first quarter guide?

So that's a detail that none of our competitors ever giving, and we're not going to either.

The volumes are down in 1Q because of the outages.

So we'll say that, so sequentially volumes are down if you look at it that way from 4Q.

Okay.

Okay, and then...

And I mean we're there -- we said there's definitive price pressure because of the reset, but we're not going to get to specific on quantifying what it does do, but definitely prices are going down, there's no doubt.

Understood.

Just trying to obviously calibrate, given the change in the communication moving forward.

Just trying to figure out how we calibrate a little better but...

And I guess I would say, in all of those categories beyond just price and volume, when you talk to maintenance and outage expense and raw materials and seasonality in mining, I mean all of those categories are also pressures versus 4Q.

I mean the biggest 2 elements of the drop from Q4 to Q1 are the outage related tons and expense or that combined, a very big portion of it, and then -- and the other part is the variable and spot tons that Dan has referred to are significantly down, well more than offsetting the benefit we're getting on the fixed contracts that turned over at year-end.

Totally understood from a qualitative perspective.

I just don't really understand why -- just don't tell us the specifics.

But I guess, moving on, the last question regarding the lack of free cash flow versus the buyback, that was asked earlier, I didn't quite hear, how do you plan to fund the buyback, given there's really -- looks like there's a lack of free cash flow over the next few years?

You mean the remaining $200 million?

Exactly.

Yes.

So, again, we've got pretty strong cash position today at $1 billion, completely $1.5 billion undrawn U.S. revolver, still a few million, $100 million undrawn on our European revolver, so we're in really good shape.

And we're not going to give cash flow expectations for the year consistent with the new guidance methodology.

We'll have to see how that plays out.

Your next question comes from the line of David Lipschitz from Macquarie.

Just in terms of Fairfield, once you do give the go-ahead, what's the CapEx that's left to build that?

The CapEx for the furnace itself is about $150 million, and you're looking at probably about 18-, 20-month window.

The additional CapEx for air separation unit and there is some work that we need to do on the rounds caster on -- so the number would be higher than what Dan called out.

Okay.

And the stuff you're doing with that and other stuff, is that assuming -- is there anything you're doing now assuming Section 232 continues?

Or are there any thoughts if that were to get pulled back, what would happen?

So we're optimistic that 232 will continue.

We don't see the administration blinking on any of this.

This is absolutely essential to national security, and we need to make sure we have this level playing field.

So we have a high degree of confidence that 232 will not be pulled back.

And then just my final question, will ARP be definitely done next year after 2020?

Right now, our expectation is that physically projects will be completed, timing of payables may have some of that cash flow hit the cash flow statement in '21, but we fully expect these projects done by the end of '20.

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

Should we expect on Europe that, that business will be in the black for the first quarter.

I mean I know there's been a lot of pricing weakness there particularly in the last 3 to 6 months and so just trying to calibrate that net fall because it looks pretty staggering right now.

We should be profitable, sure.

On an operating...

Pretty strong -- you're still seeing a pretty strong margin squeeze.

Yes, even the EBITDA level, the EBIT level, also, yes.

But that -- it's a strong margin squeeze from what we've seen the last several years.

Okay.

And then just a follow up on the Clairton coke batteries.

Any sense of magnitude you could provide us in terms of what those assets are running at in terms of the utilization standpoint versus normal?

And should we expect some carryover relative to that $40 million in the second quarter as well as you work through some of these remediation plans?

So I mean we're -- our coking times are normally run 18 hours.

We're probably up to about 22 in general.

So that should get you about, right about 20% reduction or so.

Yes, I mean, obviously, we said we were hoping to have the repairs done by May 15th, so there will definitely be some second quarter impacts.

There'll also be some capital requirements associated with the repair from the fire that we'll give some more color on in Q2.

Is that included in the guidance, the $1.2 billion?

There's an estimate in the $1.2 billion.

Your next question comes from the line of Tyler Kenyon from Cowen.

Just with respect to the Flat-Rolled volume guidance, I was just wondering if it were possible to flush out your anticipated impact just from the maintenance and outage throughout 2019?

And any more color you could provide for us just as to the sense of magnitude on the step-up in maintenance and outage expense would be helpful.

Like Kevin said -- just specific to amp, we probably see more pressure, but total maintenance outage, I don't think we've gone to that level.

But certainly, we have more -- I'd say, we have more facilities running this year than we did last year for the full year.

So general maintenance outage will be up just from the fact that we're running a bigger footprint than we did last year, since we're going to be running most of the facilities for full year here at this point where we ran part of the year last year.

Okay.

And then just on the volume guidance for Tubular, 10% growth pretty healthy.

It sounds like you have some solid book of business just on the line pipe side, but are you expecting any growth just within the OCTG shipments.

I'm just asking in light of some of the E&P budget cuts that we've seen year-to-date and trying to flush out your optimism just for that segment.

I would say, Tyler, that -- our guidance range is very much where we shipped last quarter, 4Q.

So it's just -- it's really not much more growth from where we already are.

Our facilities are running pretty full, the ones that are aligned with the onshore rig count are in pretty full launch.

Our rig counts are still holding up pretty well.

So at this point, we're not seeing -- we're not expecting a big change from kind of where we shipped in 4Q, that's how we got to that full year number.

Just a little bit of clarity, our line pipe volumes show up in North American Flat-Rolled, not in Tubular.

Well, the shipments to line pipe producers show up in Flat-Rolled.

We do have some sale off the Tubular mills than is line pipe, but most of it's OCTG.

Your next question comes from the line of Derek Hernandez from Seaport Global.

I wanted to check in on how Flat-Rolled demand has recently received the price increases this week?

And if you see buyers stepping off the sidelines here and going forward?

I -- we announce them when we expect to collect them.

I think it's too soon to tell it, takes a while for the system to digest them, but our expectation is, we're going to collect that $40 we announced.

How soon?

That remains to be seen, there's also market impact on that.

As I said, we don't make announcements we don't expect to collect.

And then how are you seeing demand for iron products overall following Vale's announcement this week?

Well, this is Dave.

First, we have to acknowledge the tragedy that happened, that was there.

This is something that we all need to be cognizant of.

And we need to take a moment just to reflect on what this means and do everything we can to support the people that are there because this is an incredible event that's happened across them -- the whole organization there and the community.

So that should be the first priority.

But for us, we are doing what we can to make sure that we'll support and certainly will have an impact on the pellet supply and our situation is here in North America where long pellets and of course we buy pellets in Europe so you think about how that works but tactically, speaking, we don't see a lot of impact on the first quarter commercial or cost.

And we do have the flexibility, commercial flexibility to increase our participation in the global iron ore market, and of course, we continue to evaluate the market dynamics of what this shortfall is going to have.

It's really early in the process, clearly, there will be impacts but given our footprint, and where we are today, we're going to have a probably a positive here in North America but there would be a negative impact on our European operations.

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

Just a question on demand.

You always mentioned that you expect demand to be strong this year, and you expect the imports to be down.

When we look at apparent demand for flat steel in the U.S. last year at least on our numbers, demand seems somewhat flattish but mill sales were up as mills captured market share from imports.

Do you effectively agree with that?

And is that how we should think about 2019 as well that demand is somewhat flattish at a high level but the mills or you will keep capturing market share from imports, is that the right way of thinking about it?

Yes, Andreas, this is Dan.

I would say, yes, we expect consumption in the U.S. to move up slightly.

We're not talking about a big change but we expect to be up a little bit, 1%, in that range, 1% or so, but we also do expect particularly, how narrow the arbitrage is now, that the imports are going to be lower.

So there's an opportunity for domestics to pick up some of the volume from imports.

That's kind of how we got to our assumption of we're going to be about that 11.5 million ton range for the Flat-Rolled segment.

Okay, that's very clear.

And just follow-up on the previous question.

You always are confident, you can push through the $40 a ton increase in prices.

Are you guys commenting on from what base that is?

I mean obviously that -- latest prices we've seen is $670, $680.

are you commenting on that?

Is that a $40 on top of the $680?

Or is it just a $40 on a price that's closing.

No, we're talking about $40 from where we were with our customers, and I may -- everybody saw it little bit difference.

Typically, only one of our competitors ever we saw take the approach of actually saying what the base was, and we haven't done that historically.

So I would say general markets are where they are, and we're just going to push $40 higher than we had been asking.

We -- maybe we are in a little bit different position from some, but we're running on restricted footprint because all the work we've done on the assets.

So we may be a little more selective about what we book and what we don't book.

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

Couple of questions.

First, when you look at your asset revitalization plan, the 150 to -- Sorry, the $125 million to $150 million in EBITDA increase you expect this year, would you -- do you think it's more back half-loaded?

Is it like a exit rate?

Or is part of it already included in the 1Q?

It's going to be much more back end-loaded because as you do projects, the early you get some done, you get benefits sooner rather than later, but it's definitely skewed towards the back end of the year as you're doing a lot of the work and certainly, we take advantage of when there's a lulls in our order book, so we have outages in 1Q piled up for that reason.

So it's just on the cadence of when we get them done and when it flows through, but it shows up more later in the year.

And another question on asset revitalization.

I think the total used to be around $1.5 billion in CapEx and maybe $0.5 billion in the OpEx.

So do you think you're still within the ballpark?

And is there room for the total to go either up or down?

We still expect to say within that.

Certainly, we're always reevaluating the work to be done.

If we get it done more efficiently, absolutely.

But we do not at this time expect to go over that number, no.

But if we can go faster on this, we absolutely would.

And when you say, faster, would that be maybe this year?

Or is that more of a 2020 kind of comment?

Well, we'll be done with the program in 2020.

So to the extent we can accelerate anything to get value more quickly over the longer term, we would accelerate projects, and we frequently revisit our footprint, look at where the opportunities are and again, look at where the outages are, and so if you could actually move some of these things up we definitely would do it.

But for now, we're on the path as described in the material we sent to you.

And your final question today comes from the line of Karl Blunden from Goldman Sachs.

Just a quick one here.

You mentioned on liquidity it's strong, and you don't have very high cash needs relative to your balance.

Could you quantify what your minimum cash level is that you're comfortable running with?

Yes, we've kind of said, while we're playing out the revitalization program, I think $750 million is probably a good area.

Anything above that, we're pretty comfortable.

Got it.

And then comments earlier on Granite City and the rest of network were focused on, to some extent, where your customers are and serving them.

Could you comment a little bit on what your thoughts are regarding the new capacity announcements that we've seen from steel peers in the country, and how you network is positioned relative to where the capacity could come online?

Yes, sure.

I think obviously we have a great deal of respect for our competitors, and it does look like they are going to be adding capacity over the longer term.

What we're focused on here is making sure that we're delivering on our promises.

It's not about capacity additions for us.

It's about utilizing our assets in the most effective and efficient way possible, and that's why we're able to do the revitalization program, and how we're getting the extra tons, not by adding excess capacity but instead capitalizing on what we have.

And as far as the opportunity to lose business, we certainly see that as a challenge.

But I think we're up to that challenge given the improvement that we've seen in our mills in Gary and our mills in Great Lakes Works and the improvements that we're making at Mon Valley.

Each and every one of our facilities, Granite City are doing much better, and that has shown up in our ability to meet or exceed every one of our targets related to asset revitalization.

So as it comes with competitors, we welcome the competition, and we believe that we're up for it, and by the way, we have been capturing some market share here along the way and a big chunk of that, of course, is related to imports, but people shouldn't count us out.

We're focused, we're disciplined and we're going to focus on the things that we can control.

So that was -- that's the end of the queue there.

So, Dave, you have some final comments for us?

I do.

2019 will be another strong year of investment and operational improvement on our path to building a stronger and more profitable U.S. Steel.

We're focused on creating long-term sustainable value for all of our stakeholders.

We have made good progress so far and see many more opportunities ahead of us.

Thank you.

We'll now get back to work with safety and environment as our core values.

Thanks, everybody.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive TeleConference.

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