美國鋼鐵 (X) 2019 Q1 法說會逐字稿

Good morning, everyone, and welcome to the United States Steel Corporation's First Quarter 2019 Earnings Conference Call and Webcast.

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

I'll now hand the call over to Kevin Lewis, General Manager of Investor Relations.

Thank you, and good morning.

On the call with me this morning will be U.S. Steel President and CEO, Dave Burritt; Executive Vice President and CFO, Kevin Bradley; and Sara Greenstein, Senior Vice President of Consumer Solutions.

Sara has responsibility for the Mon Valley and the new technology we announced yesterday.

After the close of business yesterday, we posted our earnings release and earnings presentation under the Investors section of our website.

Yesterday morning, we also posted an investor presentation highlighting our announcement at the Mon Valley.

On today's call, we will walk through via webcast select slides highlighting our investment and first quarter results.

The link to the webcast can be found on the Investor Relations section of our website.

We also posted this morning's slides to our website.

Before we start, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results may vary materially.

Forward-looking statements in the press release that we issued yesterday along with other remarks today are made as of today, and we undertake no duty to update them as actual events unfold.

I would now like to turn the conference call over to U.S. Steel President and CEO, Dave Burritt, who will begin today's presentation on Slide 4.

Thank you, Kevin.

Today is a great day for U.S. Steel.

I could not be more excited for our employees, for our community, for our customers and for our current and future stockholders.

Before I get into our strong first quarter financial results, I want to take a few moments to provide context for yesterday's state-of-the-art high-tech transformational announcement.

We have all seen the headlines.

Some on this call have even said "U.

S. Steel's competitive position has weakened.

U.S. Steel can't compete with recently announced capacity additions." We know the competition.

We live it, and we welcome it.

We don't fear it, but we respect it.

We love to compete.

It's our competitive spirit, our unwavering commitment and our relentless focus that has brought us to yesterday's announcement.

First, before we get into the materials, I want to talk about some facts, then I'll talk about the future.

These are the facts.

U.S. Steel is special and you know this.

U.S. Steel is the most recognizable steel brand in the U.S. and the only U.S.-headquartered steel company that can mine, melt and make steel in the U.S.A.

That's a fact.

We have world-class safety performance.

You all know that.

That's a fact.

And here's what's been changing.

Our last few years have allowed us to build a balance sheet with no major debt payments until 2025, a nice runway to keep us nimble.

We also have the best cash conversion cycle time in the industry.

We understand cash is king.

That's a fact.

We are executing projects better.

Here are a few examples.

In the last 2 years, we spent $800 million on North American engineering capital projects.

90% were on or under budget.

On the last 5 major projects, we underspent them and had an internal rate of return greater than 22%.

I'm talking about projects like galvanizing line upgrades at Midwest, pipe mill and threading line projects in Tubular, caster upgrades at Granite City, pickle line upgrades in Europe.

We completed 9 large infrastructure projects and underspent the budget.

These projects include multiple blast furnace steel rebuilds at various facilities and steel shop environmental projects at Great Lakes Works and Granite City Works.

On finishing projects, all the can-do projects for our tin business were right on budget.

We are executing projects better.

That's a fact.

Typically, first quarter is always a lighter quarter for financial results.

You know -- you now know these first quarter issues well, weather like the polar vortex this year and of course, we can't ship pellets from Minnesota mines because the Soo Locks are closed.

By now, everyone should know how difficult the first quarter is.

But we beat even our own expectations in the first quarter because we are performing better.

Asset revitalization is working.

Our performance and productive capability are better.

That's a fact.

We're now pivoting from playing defense to offense.

So let me tell you a little bit about yesterday's announcement and the enthusiasm surrounding the event.

Hundreds of U.S. Steel employees welcomed local government and community leaders to Edgar Thomson in Pennsylvania.

The support we have received for this investment and the value it will create for our company, our customers, our employees and our community is extraordinary.

I thank each and every person who has reached out to congratulate the company for bringing state-of-the-art, sustainable steel advanced manufacturing to Western Pennsylvania.

Following the announcement of the EAF in Alabama and the Dynamo line in Europe, yesterday's announcement is another step in our value-creation strategy.

Here are the highlights: We expect the investment to be approximately $1.2 billion.

We are investing in the first state-of-the-art endless casting and rolling line in the United States.

We expect to achieve a $35 per ton reduction in operating costs.

We are creating new product boundaries that create a moat around the most attractive markets we serve, gauge and width combinations not available today in the United States.

And we expect to deliver significant environmental improvements.

Turning to Page 5. We have been making significant improvements to our business over the past few years, enhancing our operational excellence, creating operating leverage through improved performance and investing in technology to improve our cost structure and expand our capabilities.

Our strategy is straightforward, and we continue to be guided by our critical success factors.

We will move down the cost curve.

We will win in attractive markets, and we will move up the talent curve.

Turning to Page 6. This investment is truly transformative.

Again, here's the proof.

The Mon Valley is currently a low-cost mill in the steel industry, and we are now combining the best of both: our high-quality integrated steelmaking process with industry-leading casting technology.

Again, we expect the investment to further reduce operating costs by $35 per ton.

And we are equipping this facility with best-in-class capabilities that significantly improve the quality and product attributes to meet the needs of our customers today and into the future.

This is a significant competitive advantage for our company, and it delivers enormous value to our customers as we will be able to provide sustainable steel solutions many thought impossible, the lightest, thinnest, strongest and most formable steel available.

Turning to Page 7. As part of our investment in this new technology, we are also building a state-of-the-art cogeneration facility at our Clairton plant.

This facility will convert coke oven gas to electricity and steam, delivering significant environmental improvements within our facilities and across the region.

Once completed, we expect our investments to significantly reduce emissions, including the following estimates: 35% reduction in particle matter 10 and 2.5, 50% reduction in sulfur dioxide, 80% reduction in nitrogen oxide.

Turning to Page 8. We've been listening to what our customers are telling us, and our strategy is clear.

We're creating a moat around the attractive markets through dimensions and differentiation and are expanding our capabilities to be the material provider of choice in growing markets.

We know that sustainable profitability lies with being a flexible and agile steel producer capable of solving 21st century material problems.

From asset revitalization to endless casting and rolling, our investment strategy expands our capability and cost profile to win share.

We are revitalizing and now we are revolutionizing.

From wide to narrow and from light gauge to heavy gauge, our footprint will be well positioned to win in the U.S. market and will help shape the future markets we will create with our customers.

To be clear, we are not adding steelmaking capacity.

Instead, we are transforming our footprint to capture market share.

I have never been more confident in our future than I am right now.

With that, I'll turn to Page 9 and Kevin Bradley.

Kevin?

Thanks, Dave, and good morning, everyone.

Given yesterday's announcement, Page 9 provides a helpful visual of the work we've done on our capital structure over the last 2 years.

We've made great progress reducing our overall debt and shifting our maturity profile.

We've reshaped our capital structure, having eliminated or refinanced over $1.8 billion in debt.

We've extended our maturity profile with no significant maturities until 2025 and beyond.

In addition, our strong liquidity at $2.5 billion, including cash of $676 million and $1.8 billion of availability on our U.S. and European revolving credit facilities, positions the company well for strategic investments like the one we announced yesterday.

Turning to Page 10.

Let's talk about the investment in Mon Valley.

At a $1.2 billion level of investment, we are estimating a return of 15% or higher.

You can see the expected cash requirements between today and 2022, with just over $1 billion being required between 2020 and 2021.

We are planning to fund the investment from a combination of vendor-supported financing and senior unsecured notes.

The vendor-supported financing will be approximately $250 million and will have flexible drawdown terms to match project cash flow requirements.

Slide 11 provides a summary of our recent technology investments.

In January, we announced the construction of a new Dynamo line at our European steel mill.

We expect that this $130 million capital investment over the next 2 years will deliver an annualized run rate EBITDA benefit of $35 million.

Full year EBITDA benefits are expected in 2021.

In February, we announced the restart of the Tubular EAF in Fairfield, Alabama.

We expect annualized run rate benefits by 2021 to total approximately $80 million from our $280 million capital investment to complete the EAF.

This investment makes our Tubular business self-sufficient on round substrate for the seamless pipe mills, resulting in significant cost savings.

Yesterday's announcement of the endless casting and rolling line is targeting first coil in 2022 with a full year $275 million EBITDA benefit expected in 2023.

The combination of these 3 technology investments total approximately $390 million EBITDA expansion over the next 3 to 4 years.

Before I turn it back to Dave, let's recap some of the first quarter highlights on Page 12.

Total adjusted EBITDA of $285 million was up $30 million over the prior year quarter and up approximately $60 million versus our expectations.

Overall, it was a strong first quarter.

We gained market share and continue to see opportunities to improve our competitive position.

The better-than-expected results in our Flat-Rolled segment were largely driven by increased shipments and strong operational performance.

I was very impressed with the team's execution across the Flat-Rolled footprint.

Our European segment performed in line with our expectations, while our Tubular segment capitalized on an improved commercial environment to deliver material upside.

First quarter adjusted EPS of $0.47 was significantly higher than the first quarter of 2018 at $0.32.

Please note our Q1 effective tax rate was 12.4%.

As you know, we released a significant portion of the valuation allowance against our NOLs at the end of 2018.

That action is resulting in a more normal annual rate for the company.

Our tax rate also reflects the benefits of the depletion deduction generated by our mining operations.

While our reported tax rate should be higher than prior years going forward, we do not expect to incur U.S. cash taxes for a few more years due to the NOLs.

As discussed in January, we will provide quantitative guidance later in the quarter.

But given today's environment, we currently expect Q2 adjusted EBITDA at the enterprise level to be similar to Q1.

The Flat-Rolled segment should benefit from stronger sheet and third-party pellet shipments.

However, our European business is being negatively impacted by increasingly challenging market conditions across Europe.

Overall, we feel good about the company's performance and our ability to execute our strategy and deliver results.

With that, let me turn it back to Dave.

Thanks, Kevin.

Before we turn to the Q&A, we've covered a lot today so I want to take a moment to recap.

As Kevin said, we are obviously happy with the first quarter.

We have some serious headwinds in Europe that we have to work through.

The market is certainly more challenged than anyone anticipated when we entered the year.

But overall, we feel good about the business and 2019.

Lastly, we had some really exciting news yesterday.

We think this unleashes value in so many ways.

It's a big-time capability improvement, a big-time cost improvement and it's a big-time sustainable improvement.

It checks all the boxes: strong, strategic rationale; high levels of value creation; and our capital structure is well positioned to support this investment.

I couldn't be happier for our employees, the community, our customers and the returns this will yield for our long-term stockholders.

Kevin, let's move to Q&A.

Thank you, Dave.

(Operator Instructions) Greg, can you please queue the line for questions?

(Operator Instructions) Your first question comes from the line of Martin Englert from Jefferies.

So for the Mon Valley project, you've highlighted potential sources of funding of $250 million, I believe you said, from vendors and then also unsecured notes as well as cash in the revolver.

Can you provide a rough breakdown of the remaining allocation and also remind us of your targeted leverage metrics and what comfortable ranges?

Yes.

So we're in good shape, and I kind of talked about the timing of the requirements.

So I think overall, we would look to fill most of it other than the vendor-supported with high yield.

But we're going to be opportunistic, pick the right time.

We want to make sure our message here is being absorbed, and so we're in no hurry to go out there until the market's right and we need to.

But I would say the majority ideally would be high yield and the vendor-supported financing.

Okay.

And the leverage metrics that you're comfortable with?

Yes.

I mean given where we are now, right, with this project and the Dynamo and the EAF, we're still very comfortably within our goal, which is kind of in the BB rank.

I don't think at any point we'd get to more than 3x the total debt through this lift, obviously, subject to market conditions as always.

Given where we're starting from in terms of total and net debt leverage, we feel really good about our ability to pull this off and stay strong.

Okay.

If I could, one last one.

The new Mon Valley project is potentially a significant support for the company.

Can you discuss from a high level if other similar transformational projects are potentially under consideration?

Well, of course, we're always looking at opportunities, but I will say this.

This is such a big transformational project for us.

This is one-of-a-kind.

We don't see another project like this coming on for anyone anytime soon.

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

Okay.

Great.

I'm sure a lot of people are going to have questions on Mon Valley so I'll try and focus in on just one piece of it.

Thanks, by the way, for the additional information on the longer-term targets here.

I was wondering if you can give us more details behind the targeted $275 million of EBITDA in 2023, that incremental contribution.

For example, what price is that based on?

Are there offsetting reductions?

Since I -- it looks to me like this is an upgrade to existing downstream production mix, that kind of thing.

And any other additional detail behind that $275 million would be great.

I'm not sure if we understood.

This is Dave.

But the way I interpret your question is what are driving these EBITDA benefits.

There's yield improvement.

There's reduced externally purchased energy.

There's more efficient staffing.

There's improved operational efficiency.

There's all those things that are going to be making the business stronger and better.

In fact, if you think about this investment, we're already low on the cost curve.

This will make us, from a variable cost perspective, the -- from our outside-in look, the lowest in the United States.

And maybe, Sara, you can provide a little more color on this issue.

Sure.

Thanks, Dave.

This is Sara Greenstein.

When you think about what this iconic investment does, it does a couple things.

It makes the Mon Valley Works one of the lowest-cost steel mills in the world, able to profitably compete with both domestic and foreign steel producers, delivering sustainable profits through cycle.

The other thing it does is it enables the Mon Valley Works to be the producer of choice for the lighter, wider, stronger and more formable steel.

So the combination of this advanced manufacturing technology when combined with our integrated steelmaking process at the Mon Valley enables us to do what no other North American steel producer can do today.

We will be able to produce our proprietary advanced high-strength steel substrate at the Mon Valley, making the strongest, most formable products available to allow our auto customers to continue to lightweight their end products previously incapable -- when we were previously incapable of doing this at the valley.

We will continue to support our appliance, our construction and our industrial customers from the valley and provide both our current and future product capabilities to them as they continue to lightweight their products, driving innovation and growth for them.

But the profitability piece, which was the core of your question, really lies in the fact that we, as Dave mentioned in an earlier comment, will be the material solution of choice for these end markets that we seek to serve while simultaneously reducing $35 a ton reduction in our overall conversion costs, reducing our overall sustaining CapEx and then all the things that Dave just mentioned: improving yield, lowering energy consumption and greater production efficiency.

Yes.

Thanks for that, Sara.

I'm just -- I'm sitting here holding a piece of steel in my hands.

It's a sample of a 0.6 millimeter thick hot-rolled strip.

And that's 0.0236 inches hot rolled.

That is a thickness nobody in this market comes close to making today.

We're going to unlock solutions for our customers that they've never thought possible to allow them to reengineer what they buy.

This is clearly breakthrough, folks.

And in addition to the investment that we're making at the Valley, our ability to be able to produce the thinner, lighter, wider product then frees up our Gary facility and all the investments that we've recently made in our hot-strip mill there to go after this thicker, wider, heavy-gauge product, especially focused on the API market.

So the thick and thin of things are we got the thin side and we got the thick side.

You know what we're doing in Gary, have $0.5 billion investment on hot rollings.

So we're building a moat on that side and a moat here on the thin side.

So we feel very good about where we are on this journey, and we're over-the-top excited about the possibilities.

So thanks for the questions.

Sorry for the very long answer.

One more thing, Kevin Bradley.

Just one thing, Dave.

It's a great question.

You mentioned the commercial piece.

Just so you know, we model the IRR on this at 15% or higher.

We're using a backward-looking through-cycle CRU.

So this does not -- based on today's market, this is a much more conservative assumption that the market would revert back to.

We always look at it on a backward looking.

So if you believe there's a new normal or that today's pricing is better and sustainable, the 15% would be much higher.

Okay.

That's helpful.

Just my follow-up question here.

Just curious, how much capital has actually been spent at Mon Valley as part of the asset revitalization program so far?

And how much additional CapEx at Mon Valley ties specifically to that -- the ARP piece?

So this investment that we announced yesterday is in addition to the revitalization investment that we've made at the Mon Valley.

And all in on ends across the Mon Valley, we will have spent a couple hundred million dollars revamping our primary end and our finishing lines.

But think of this as a technological breakthrough.

This is not revitalization.

This is revolutionizing the way steel is made.

Yes.

And specifically, the hot mill has not received very much capital investment the last couple of years.

So that's part of the question.

I want to be clear on that as well.

Yes.

The cold mill there is a significant, critical -- one of the 13 critical assets we talk about and is receiving capital.

As is our primary end.

Yes.

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

Just in terms of the technology, given you'll be the first in the U.S., can you just talk through your confidence on the reliability and the technology itself?

And then just I know you've touched on this in some of the earlier questions, but why Mon Valley specifically?

And how long have you been looking at this investment?

What's the decision time line that you've been doing the details on this process?

So this is Dave.

First, I just -- the way we approach this when we look at our strategy, of course, we look at our global footprint and make sure that we're optimizing the value we have, the rigorous capital allocation process.

And then through that process, we find out where the attractive markets are and we focus on those markets where they have sufficient size and the -- have adequate margins and are continuing to grow.

And then we look at our capabilities and say, "How do we fit those capabilities into the markets that we want to pursue?" And we looked at our footprint and we looked at the opportunities, it was clear that Mon Valley was the place.

We knew we need to be doing some upgrades on the 1938 mill team at that time, and this was going to be something that would take this not just to a good level but to an absolutely great level.

Thank you, Dave, and if I could just add a bit.

The state-of-the-art endless casting and rolling technology, while the first of its kind to be introduced in the U.S., is actually in operation and it has been for years in other countries around the world.

So this is a proven technology and capability.

We are bringing it to the U.S., and we are combining it with our lowest-cost facility already and the integrated steelmaking process and as a result, have the ability to make products that no one else in this country can.

So it's deploying proven advanced manufacturing technology with our integrated steelmaking process that allows us and positions us to really make a game-changing difference in this industry and this country.

But why the Mon Valley?

I talked about some of these things.

First and foremost, it expands our structural cost advantage at the valley.

We are currently a low-cost provider.

This moves us even further down the cost curve.

It provides us as U.S. Steel greater footprint optionality.

I mentioned what this allows us to do and focus on now at our Gary Works facility.

It upgrades a 1938 vintage hot strip mill and takes us from being more limited in what we can do to being the most capable steel producer in terms of thinner, wider, stronger product in this country.

And finally, it enhances the number of markets that we can and intend and will serve.

Well said, Sara.

And there's obviously going to be a lot more discussions that we have on this.

We have models that have built that will bring this to life to you.

But if you think about this technology and you think about the 4 processes of steelmaking, you got iron making, steelmaking, hot rolling and then finishing.

And where we've been challenged here is typically at our mills.

Liquid steel, we do exceptionally well, and integrated mills have this great cost advantage from our mine side and from our cokemaking because you can use that energy to power the facility.

So there's a lot of advantages that we have with liquid steel.

Where we've had trouble is providing the extra variety of steel, the extra capability.

And this now expands our capability and moves us further down the cost curve so that we can be, if not the leader, certainly one of the leaders in the U.S. because we are clearly in a great cost position when this is finished.

So it's really important to understand the benefits of this because it has the conversion cost benefits as we use our state-of-the-art PRO-TEC XG3 steel at -- in Ohio, where we'll be starting to run coils at the end of this year.

So all of this connects very well with the footprint that we've been working on for quite some time, and we're finally able to get it announced to you folks.

But it's going to take a while for you to digest it and understand it, and we have some models that we can be taking you through at the appropriate time.

Just a follow-up question on the CapEx and the layering of the asset revitalization program.

About $900 million still to spend at EAF at Fairfield and now Mon Valley.

Is there a way to maybe delay this?

Or you saw sentiments -- the time frame to get this in and you think the downstream can handle it?

I'm not sure I fully understand.

You're breaking up a little bit.

But we don't intend to slow down the asset revitalization.

We've always said if we can get the returns faster, we're going to go after them.

So we need to make sure that we get ourselves positioned well and the revitalization is well underway.

We're executing.

And so we don't want to move slower.

We want to move faster.

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

I guess on the side of funding here, when you think about funding all of the CapEx and organic investment out at Mon Valley, are there any noncore assets in the portfolio that you've taken a look at that may help you raise some of the cash there and reduce the debt burden you're going to take on?

We're always looking at our footprint, and you've heard me say this so many times.

Everything is for sale all the time.

But we certainly like our footprint currently, and we're basically doing our best to create -- monetize value from all of our assets and upgrading them and improving them so that we will be positioned here with this breakthrough investment for a better tomorrow.

Got you.

And historically, there was some discussion of the European asset.

Is the environment now just not conducive to raising capital from that market through asset sales?

Well, I think you know about the Dynamo line.

So that's an important investment for us, and that is an extraordinarily well-run asset, and it's been throwing off substantial EBITDA for the -- from well-run operations.

This is one of those businesses that makes money in the trough and so it's an ideal asset for us.

And we'll continue to make sure that we manage that well.

And with the Dynamo line, that also gets us additional EBITDA.

Okay.

And just a quick one.

You mentioned unsecured debt in your slides.

Wondering if you'd be open to secure debt as well if that's needed given the funding costs.

We're always going to be open to anything the company needs.

At the same time, we don't see that as a requirement, so that is not a preference for us.

We'd like to stay unsecured, and that's our intention.

And maybe that gets into a little bit here of our capital allocation strategy because what we're -- it's really important people understand this because we're always looking at -- throughout the business cycle and the way we manage this and we have these 3 priorities for cash.

And it gets into what you're kind of walking around here on the balance sheet.

We got to have a strong balance sheet that's supportive of the company's strategic objective.

That's first and foremost, and we'll do what's required in order to deliver that.

We're investing now -- second one is investing in operational excellence, investing in technology, investing in innovation that's aligned with these critical success factors that we mentioned or moving up the talent curve and moving down the cost curve and then winning in attractive markets.

We got to take share.

And then finally, this -- the third priority here is return capital to stockholders through consistent dividend payments and opportunistic stock repurchases.

This is what we want to construct here.

And with these types of improvements that we're making over the last few years, you think about the cleanup of the balance sheet, the cleanup of the operations and taking the operations to a better level, increasing our execution capability and demonstrating that we can perform, now is the right time for this announcement for us to accelerate and set the stage for people that we're -- we'll still play some defense.

But mostly, we're going to be pushing forward to show that we're a leader now and not somebody that's having market share taken from us.

We're going to be taking it from others.

Your next question comes from the line of Nick Jarmoszuk from Stifel.

I d had a question on the CapEx outlook.

We've got the Fairfield project.

We have the Mon Valley.

You provided how that's going to be spent over -- through '22.

The Dynamo line, you have the ongoing asset revitalization and there's going to be a line for sustaining CapEx.

Can you give us a sense for what those various line items are going to be for the next couple of years?

I'm not going to break it down.

Let me start by saying that you've got the new updated guidance on CapEx moving up to $1.3 billion.

That reflects all the projects that we've announced.

So in total and sustaining capital and all engineering capital.

So that's all in.

What we know today and what you know today is reflected.

Clearly, the icon, the project in the valley, et cetera, is going to increase that going forward.

Next year is our last year of revitalization and so it'll be -- you'll see the same level coming through.

There is going to be some spillover because of payment terms into the following year as well from revitalization, but we're not going to forecast beyond this year in terms of CapEx.

But as I shared earlier, very comfortable with our liquidity, our cash flow position, the balance sheet strength and our ability to handle this lift.

And then regarding the $275 million uplift from the Mon Valley project.

So if you're saving $35 per ton and the production is still going to be roughly 2.6 million tons, there I can account for roughly $90 million of EBITDA uplift.

Can you talk about the remaining amounts in terms of how to think about the buckets in terms of the thinner gauges, the better pricing on that regard, how we can think about, what was it, the lower purchases of energy purchases, better staffing?

How can we think about the bridge from the $90 million -- or from $0 to $90 million to $275 million?

Sure, Nick.

So you summarized the calculation on the cost reductions appropriately.

That is about approximately $90 million of the EBITDA benefits expected as a result of this investment.

Additionally, we're sizing the commercial opportunities about 50% of the $275 million.

So that's everything we're looking through for additional mix improvements and all the benefits that Dave and Sara have described here on this call today.

And then we have some other benefits from the cogeneration facility and just some overall efficiencies throughout the entire Mon Valley footprint.

So kind of to summarize, the variable cost is about 1/3 of the improvement with half attributable to commercial benefits.

So that should give you some good insight into the anatomy of where the EBITDA is coming from on a run rate basis.

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

I wanted to ask a little bit about the quarter if I could steer things that way.

First off, the decline in prices for the Flat-Rolled segment was a lot smaller than the spot price.

Obviously, you have annual contracts.

But just as you see the current environment, should we expect to see kind of the same kind of decline going forward given the recent spot declines?

And on the Tubular side, you saw prices go up when the PIPELOGIX price fell about $40 a ton.

So can you just provide a little bit more color on that kind of the trends you're seeing in pricing?

Yes.

So Timna, I'll talk a little bit first maybe about the 4Q to 1Q change in Flat-Rolled.

I think we saw a really good improvement in our mix.

We were able to capture some high-end hot-rolled and some other project business that kept our average selling prices pretty resilient in this spot market environment that we're in.

It also reflects the success we had in our annual contracts.

So we're pretty happy with where we came in for the first quarter from an average selling price perspective.

On the Tubular side, we did see some good improvements in pricing mostly on the seamless side.

So really, a mix -- a nice mix change there with seamless, which contributed a lot to the commercial uplift in the Tubular segment from a 4Q to 1Q perspective.

Okay.

Helpful.

And then I did ask a little bit about like if that's -- if either one or both of those are trends that you could see continuing.

And then separately, can you give us your perspective and the updates you're seeing on the air quality issues in Clairton?

I think I saw last night or this morning come through a lawsuit claiming $50 million in damages.

Just wanted to get your response to that.

So Timna, maybe I'll take the first question on the trends and then maybe ask Sara to give an overview about where we are at Clairton.

I think we all have seen the recent move down in spot prices.

So we certainly expect that to impact our commercial portfolio.

But we remain committed to kind of the mix improvements and going after those markets as described by Sara and Dave.

So you can certainly model through the impact of a decreasing price environment here on the business.

But overall, our strategy remains to make sure that our mix is strong and we can generate the right types of average selling prices in different types of through-cycle environments.

I'll now hand it to Sara.

Yes.

Thanks, Kevin.

And while we don't nor will we comment on any legal activity as it relates to Clairton, what I will comment on is, I think you all know, we experienced a catastrophic event on December 24 and couldn't be prouder of the people and the team and the community that came together to support us and getting us back up.

As of April 4, we restarted the desulfurization process facility at the Clairton plant.

We -- as of that date, we're desulfurizing 100% of the coke oven gas that we generate at that plant.

And in fact, on our January earnings call, we had forecasted about a $40 million impact from the fire.

And we had about a $31 million impact in the quarter primarily really due to the purchase of natural gas and inefficiencies that we experienced.

But we are back up, we are running, and that's where we're at.

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

Forgive sort of an equity question from a debt guy.

But I thought share buybacks were really sort of something you did when you didn't have anything better to do with the cash.

You guys have identified $3 billion of value-add projects.

What's the hurry in getting cash back to shareholders at this time?

Yes.

We're not seeing it as a hurry.

When we announced the program last year, what we're trying to do is make sure we've got a balanced capital allocation methodology.

So the $300 million over the 2-year period, we think, is an appropriate level and we're kind of committed to it.

So we're going to continue to do that.

Agree, we've got some very high and exciting opportunities, high-return exciting opportunities, but we want to make sure we're balanced as we go through.

And so for now we feel good about the program.

We're executing against it we think appropriately and you can expect that to continue.

Okay.

And then one quick follow-up is as you think about coming to the high-yield unsecured market, you'd mentioned sort of a leveraged cap, if you will, of around 3x and you've referenced a strong balance sheet a number of times today.

I mean is that your sense that up to a 3x levered balance sheet would sort of maintain that strong balance sheet?

No.

And I didn't mean to imply it as a cap.

What I was saying is what we've announced we don't think over the next coming years would put us above 3x.

So what we said is, and we talk with agencies regularly, under 4x we think is a BB, and that's our medium to long-term goal.

And so I'm not implying a cap at 3. I'm just saying given where we are and what we've announced in terms of investments, I don't think we'd go above 3 with that.

Your next question comes from the line of John Tumazos from Very Independent Research.

Could you give also a little more explanation as to the physical breakthroughs of the new rolling mill, how much wider is it?

You already gave us thinness.

Forgive me.

Could you describe the scientific measures of improved ductility or formability that you refer to qualitatively?

How much wider will the steel be for an automaker because it's thinner, stronger, more ductile?

Forgive me for my specificity and enthusiasm, please.

That's a very detailed question, and I think I'll keep it back to the is it strategic, we're going thinner and we're going thicker on the strategy and we can get you more details on those specifics at another time.

But I think today, we're talking about what the strategy is and I don't know if we can get you those details at this point.

Congratulations.

Thank you.

What I can tell you just very quickly, as you know, we can go down to 0.03 on gauge and we can go as wide as 77 inches.

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

I have just a question on the guidance for the second quarter.

I know European spreads have been weak.

Are we -- should we be expecting Europe to on an EBIT basis be in the red in the second quarter similar -- similarly, should we expect that for Tubular given a little bit of softness in that market?

And do you expect Flat-Rolled volumes to be higher relative to Q1 in the U.S.?

What I would say, we're not going to give specific quantitative especially at the segment level.

But given my comments, you can expect Europe to be down from Q1, and we do expect shipments in North American Flat-Rolled to be up in Q2 sequentially if that helps.

But we're going to -- later in the quarter, we're going to come out with more quantitative guidance and give you much more clarity around what to expect.

Yes.

But there's no question there is pressure in Europe.

We see the economic reports and we feel the pressure on margin, no doubt about it.

But as you look at this year and where we started this year and where we are right now, we feel as good about the year now as we did then.

Now the mix of where things are has been shifting a bit, but the first half will be about the same as what we thought it was at the beginning of the year.

And we're going to have a really good 2019.

That's where we are.

And then I just have a follow-up question.

I just wanted to be clear.

So the $1.2 billion investment on Mon Valley, obviously, you need to support that with capital.

Are we expecting that $1.2 billion to be syndicated right now?

Meaning, are you going out and raising those funds in the market today?

Or is that going to be staggered through time?

Yes.

So we went through this a little bit.

But the bulk of the requirement is in 2020 and 2021.

So we're in good shape right now.

We can be opportunistic.

We want to pick the timing.

We don't need to get out too far ahead of it.

So when the market's right and we're ready, we'll go in, but there's no hurry here for us.

Your next question comes from the line of Michael Gambardella from JPMorgan.

Congratulations on the quarter and more importantly, the project on Mon Valley.

My question is really around the strategy with Mon Valley and the rest of your projects.

A lot of other domestic steel producers have opted to import semifinished or intermediate steel and then do the downstream finishing in the U.S. With some recent announcements by the administration with exemptions being denied out of California Steel, I know you don't do stainless, gratings and some others, the administration is clearly saying we want domestic industry to invest in the U.S. and invest in U.S. jobs like you're doing at Mon Valley.

What assurances do you have from the administration that they'll be able to maintain that stance?

And how do you think they'll address trade in terms of trend shipping, which, in my mind, is the key to fair trade and eliminating trend shipping?

There's a lot in that question.

I'll just say first on the slab things, we're open for business.

And so if anybody needs slabs, we can certainly provide that.

As far as assurances, nobody can give anybody assurances on any of these things, but we have enough contacts and enough connections here that we just can't imagine this administration blinking at a time like this.

I mean there's a lot going on, and we know it's very heavy.

You got to get 3 different governments to agree on USMCA.

You got Canada.

You got Mexico.

You got the United States.

So this is a heavy lift.

And also the more important issue is related to China and China is the one with the excess capacity.

And to your point, until you apply these things everywhere, you're still going to have some linkage.

So we have some linkage of unfair trade.

That's happening in Europe right now, and that needs to be shored up.

And when that gets shored up, we will start seeing a better pricing environment in Europe as well.

But as far as assurances, I don't know that anybody could say that.

But we feel strongly that the 232 will continue and we're going to continue to operate our facilities and our business the best we can within the current environment and also continue to be more nimble, take costs out, so that if it does change, we're still going to be able to generate value.

So really a hard question to speculate on, but we're optimistic that we'll get to the right conclusion with this administration.

I agree, Dave.

Just want to add a reminder.

When we model out our strategy, we absolutely try to look at it from a standpoint of not depending on things that we can't necessarily predict.

So our strategy holds up on a through-cycle basis on a look-back.

But agree completely.

We feel the strong support from the administration, and we expect that to continue.

Yes.

That's a great point.

We're focused on what we can control.

We understand this whack-a-mole thing that you've been talking about for a long time.

You know the Vietnam case, and we have had changes with CBD and the whole trade situation.

So certainly, there are several provisions designed to increase the use of USMCA original steel and increased trade enforcement coordination among the 3 countries.

And we look forward to getting an agreement there that's in the best interest of all, and we think we will.

We absolutely think that there'll be always some type of appropriate measure maybe moving more toward quotas than tariffs for the USMCA, but we'll have to wait and see.

In any case, we're optimistic that it will be a good result.

The West Coast market is pretty much served for carbon sheet by your joint venture with POSCO, UPI and California Steel, which was recently denied exemption on the slabs they have to import to finish.

Are you shipping -- or intend to ship a fair amount of slabs, hot band out to the West Coast, which would move it out of the Midwest market?

Go ahead, Kevin.

Yes.

So I was just going to -- yes, we have been shipping to our JV, UPI, for a few years now and that's continuing this year.

So we're the primary supplier of substrate to that joint venture today.

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

A lot of questions have been covered.

A couple more for me.

Once you're done with the Mon Valley investment and maybe reusing some of that equipment elsewhere, is there a need to do something similar elsewhere down the line in a few years?

Good question.

Really, what we are putting in is brand-new technology.

And what we are -- we'll no longer use is a 1938 hot strip mill.

So I don't imagine that being redeployed anywhere else.

So you'd probably get rid of the old equipment, but just want to understand if the other operations need a similar upgrade down the line.

Yes.

So as Dave described earlier, when we look at our footprint, we look at the markets where we want to participate, and then we understand our capability to serve those markets.

So with that strategy in mind, that's what we found particularly compelling about this investment, the Mon Valley.

As we evaluate our footprint and the capabilities required to serve the markets we find attractive, we will choose the investment strategy required to kind of satisfy that strategy.

So that's the lens through which we look at these types of projects.

And similarly, the Gary hot strip mill.

We understood what its capabilities were, what markets we wanted to serve out of that facility, how they're best positioned to serve those markets.

So we'll continue to do that type of analysis on our footprint, and we will invest in those types of projects that return value.

Your next question comes from the line of Charles Bradford from Bradford Research.

Do you have any current blast furnaces off-line and are any about to go off-line?

We're planning right now for us to turn off any blast furnaces today with the exception of planned outages for revitalization, but there's no plans to take anything off-line today.

Yes.

I'm not sure I understand.

I think you're asking about major outages that we have scheduled for the second quarter because we have Mon Valley, the blast furnace #3, Great Lakes B2 furnace and a shorter-duration outage at #14 in Gary.

Is that what you're referring to because we have no plans to shut down any blast furnaces?

No.

I was thinking specifically about #14 and the state problem.

Oh, okay.

So yes.

We did have an outage in Q1.

Yes, which was normal, and that was a high-tech improvement.

That's a whole another discussion that we could have.

That was incredible, awesome work.

This was rehearsed.

The team pulled it together.

This is something you guys ought to come visit to see what the people did.

This was absolutely remarkable.

So yes, that was an improvement that we made there and then that's behind us.

Big success story for us.

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

Don't want to beat a dead horse on the funding issue.

But noted your preference for unsecured bonds for the $1.2 billion.

Is it -- are you willing to consider a short-term bond like a 5-year issue inside of your current maturities?

Or is it important to be at or beyond 2026?

Yes.

We like the runway that we've created so we want to preserve that.

So that's our intention.

Again, we're going to be nimble and flexible.

We're going to do what's in the best interest to have an efficient capital structure.

So we'll look at our options and pick the right option at the right time.

But I'm indicating longer-term high yield as the likely anchor tenant in the funding strategy for this project.

Okay.

And then what was the look-back CRU price through the cycle that you used for your IRR calculation?

Yes.

It's just mathematical so you can do it yourself.

But we're looking just above $600 that as kind of a multiyear look-back through-cycle average for hot-rolled.

Okay.

Great.

And then last one for me.

Appreciate the color on Clairton.

I know you can't talk about existing litigation but...

Operator, can we loop him back?

(technical difficulty)

Matthew Fields, your line is open.

Hello.

Yes.

Sorry, Matthew, I dropped off there for a moment.

Continue with your question, please.

Yes.

Just With regards to Clairton are you currently fully in compliance with your air emissions permit?

We are.

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

So appreciate all the color so far.

But my first question was just related to the Mon Valley investment.

And are you expecting any improvements, reduced bottlenecks or commercial optionality across the rest of your U.S. Flat-Rolled operations outside of Mon Valley?

And if so, can you talk a bit about those?

Sure.

The short answer is yes, we are, and I think you might have heard Dave talk about we're going to be able to go thinner, lighter, wider and thicker, heavier and build moats around the markets that we are seeking to serve in a very differentiated way.

So we've talked a lot about the investment and the technology investment at the valley.

And then at Gary, through our revitalization effort, have put significant money into our hot strip mill there and downstream assets there that have positioned us to be able to serve the API market, the packaging market in a very differentiated cost-competitive way.

We're leveraging the best of our footprint with the best technology available to deliver to the markets that we will serve and create moats around those markets as we do so.

And so are all of those benefits captured in your projected EBITDA contribution from the $1.2 billion?

Or could those be in addition to what it is that you've laid out here?

It would be in addition.

So we're closing up on our time here, 9:30.

On behalf of the entire leadership team here at U.S. Steel, we appreciate everybody's strong interest in the company and the investment we made yesterday.

And we are certainly available to take any additional questions that you have.

And so with that, I'm going to hand it back over to Dave as we wrap up today's call.

Yes.

Thanks, everybody, for your interest in U.S. Steel.

And as Kevin just said, we know there was a lot to take in on the call today.

So obviously, we're incredibly excited about this transformative announcement.

So for those not able to have their questions answered on the call, our team's available to continue that dialogue.

But before I sign off, I do want to recognize our U.S. Steel employees.

You finished the first 123 days of 2019 with all-time record safety results as measured by days away from work.

Thank you for making Safety First not a slogan, but a reality.

Your hard work has gotten us to today, and our announcement at the Mon Valley, this investment is a sign of our continued confidence in your abilities to deliver high-quality, sustainable steel solutions to our customers.

Competitive pressures are increasing but so is your fight and perseverance.

We have made good progress so far, but I know our best days are ahead.

Let's get back to work with safety and environmental stewardship as our core values.

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

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

You may now disconnect.