Dan Lesnak - United States Steel Corp. Mario Longhi Filho - United States Steel Corp. David B. Burritt - United States Steel Corp..

David Francis Gagliano - BMO Capital Markets (United States) Curt Woodworth - Credit Suisse Evan L. Kurtz - Morgan Stanley & Co. LLC Matthew Fields - Bank of America Merrill Lynch Karl Blunden - Goldman Sachs & Co. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc. Gordon Johnson - Axiom Capital Management, Inc.

Timna Beth Tanners - Bank of America Merrill Lynch John C. Tumazos - John Tumazos Very Independent Research LLC Philip N. Gibbs - KeyBanc Capital Markets, Inc. Brett Levy - Loop Capital Markets LLC Novid Rassouli - Cowen & Co. LLC Alexander Hacking - Citigroup Global Markets, Inc..

Ladies and gentlemen, thank you for standing by and welcome to United States Steel Corporation's 2017 First Quarter Earnings Call and Webcast. Now, at this time, all phone participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Now, as a reminder, today's call is being recorded.

I will now turn the conference over to your host, Dan Lesnak. Please go ahead sir..

Thank you, Kevin. Good morning, everyone, and thank you for joining us. On the call with me today will be U.S. Steel's CEO, Mario Longhi; and President and COO, Dave Burritt.

We posted our slide presentation and prepared remarks, as well as an updated Q&A document under the Investors section of our website when we released our earnings after the market closed yesterday to provide everyone with a better opportunity to prepare for the call.

We'll begin this morning with some brief introductory comments from Mario and then proceed directly to the question-and-answer session. Before we begin, I must caution you today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release, in the slide deck posted on our website, and included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

Now, to start the call, I will turn it over to our CEO, Mario Longhi..

Good morning, everyone, and thank you for joining us today. I would like to make a few brief comments on some of the current issues and events that could be significant for our country, our industry and our company.

Last week, President Trump signed an executive order, which begins an investigation by the Department of Commerce into the implications of foreign steel imports in America's national security under Section 232 of the Trade Expansion Act of 1962. Steel is a core industry to our nation and a critical building block of our economy and national security.

And we cannot afford to be undermined due to unfair and illegal trade practices that target our steel markets and steel jobs.

For too long, China, Korea and other nations have been conducting economic warfare against the American steel industry by subsidizing their steel industries, distorting global markets and dumping excess steel into the United States.

Tens of thousands of workers in the American steel industry, the industry's supply chain and the communities in which our industry operates have lost their jobs due to unfair and illegal practices by foreign producers.

President Trump also signed an executive order that is a positive step in ensuring full enforcement of existing Buy American laws in ensuring that steel industry remains competitive. The foundation of a strong Buy American program is the longstanding requirement that all iron- and steel-making processes occur in the U.S.

for the product to be Buy American compliant from the actual steel production to the finishing processes. This melted and poured standard, or what we call mined, melted and made, has been successfully applied since 1983 and must continue to be the standard using federal Buy American rules for steel procurement.

We applaud the President for affirming his commitment to full and effective enforcement of our laws and to addressing the issue of unfairly dumped and subsidized steel. We look forward to working with the administration on these matters.

Turning to items specific to our company, during the first quarter, we restarted the hot strip mill at Granite City Works and the mining operations at our Keetac facility. Both restarts were completed in a safe, timely and efficient manner and we are beginning to see the benefits from having these facilities back online.

Running the Granite City hot strip mill enabled us to take a 10-day outage at the Gary Works hot strip mill, one of our most critical assets, to complete several projects that will improve the reliability, quality and product capabilities of that mill, including improving and expanding our ability to supply substrates to domestic welded pipe producers for pipeline projects.

Keetac has started shipping pellets to third-party customers, including our former Canadian operations. We believe that the sale of our former Canadian operations to Bedrock Industries will be completed soon and our five-year pellet supply agreement with Bedrock will commence.

We are also in the process of restarting the welded pipe mill at our Lone Star facility and expect production to resume in May as the energy markets continue to improve.

Last quarter, we discussed the comprehensive asset revitalization plan we're implementing to improve our profitability and competitiveness and to meet or exceed the increasing expectations of our customers.

This is a multi-year plan that will take three to four years till full implementation and is not just sustaining capital and maintenance spending. These projects will deliver both operational and commercial benefits. As we get deeper into our asset revitalization efforts, we are seeing opportunities for greater efficiency in implementing our plan.

We believe we can create more long term and sustainable value by moving faster now, and we have made a strategic decision to accelerate our efforts, to address some of the issues and implement improvement that will enhance our ability to achieve sustainable long-term profitability.

As a result of this acceleration, we now expect our investment in asset revitalization in 2017 to be approximately $300 million higher than it was in 2016. We will be taking more downtime at our facilities, which will limit our steel production volumes.

And with the restart of our Lone Star welded pipe mill that I mentioned earlier, we'll resume shipping hot rolled bands to our Tubular segment. Based on these factors, we will have fewer tons available to offer into the spot market after taking care of our strategic customers' requirements.

We currently expect our flat-rolled shipments to third-party customers will be approximately 10 million tons this year.

The disciplined process and cooperative culture established by our Carnegie Way transformation efforts give us more confidence that we can implement our asset revitalization plan safely, efficiently and effectively even at an accelerated pace.

Executing this plan is a critical milestone in a Carnegie Way journey to move faster from earning the right to grow to driving and sustaining profitable growth..

Thank you, Mario. We provided more detail on many of the topics Mario just mentioned in the earnings presentation and the Q&A documents we posted to our website. We'd encourage you to review those materials when you have time. At this point, Kevin, can you please queue the line for questions..

Thank you. And first question's from the line of David Gagliano, BMO Capital Markets. Please go ahead..

Okay. Thanks for taking the questions and thanks for the brief update. I think I've got a few questions, obviously. I think a lot of people do. The changes from last quarter to this quarter, it's a pretty big change and it looks to me like it's about the obviously the accounting change.

And I mean you cut your guidance by 35% on the EBITDA line in a rising price environment, in an improving environment. So, I think it's really important for the investment community in general, to get more color, little more information regarding the things that you highlighted here. Obviously, you told us you're taking downtime.

If you could put some numbers around each of these moving parts, number one. And number two, what's different than when three months ago you guided to $1.3 billion of EBITDA? Where is the biggest change, if you could bridge that arguably $400 million reduction? That's my first question..

Hello, Dave. I guess, the one thing I think that is the biggest factor is, based on our assessment of how we operated and now are accelerating to take more downtime, we had a pretty big adjustment in our volume assumptions, which is what Mario pointed out.

We expect we're going to be around 10 million tons, which is below where we were for both reasons; our assessment of our current operating performance and our decision to take more downtime proactively to get after our assets..

See, Dave, when we designed a few years ago the journey, we always mentioned that we needed to get our assets up to a better condition. And after 2014, 2015, 2016 have been pretty challenging, but we did take the time to create the balance sheet condition in order to help us maintain a more aggressive level of investment.

When you couple that up with what I believe is a market that is stronger and has all the ability to remain stronger, it's the right strategic decision for us to move quicker.

This accelerated level of investment will better couple with the foundational improvements that the current assets need to achieve in order for us to fully benefit from the growth initiatives that are taking place.

We have already filed for permits in a few states and we're moving ahead with investments that will improve our tin capability for packaging.

It will improve our capability for our automotive development of new products and will enhance our ability to much better benefit from the development of the premium connections that we've introduced in the marketplace and are having great acceptance.

So when we think about this market being stronger, we believe that it's the right thing to do to make us more capable to benefit in the mid to long term than just focusing on the shorter-term plans that we had before..

I appreciate that and that all does sound very encouraging from a longer-term perspective. But again, specifically, where is the money going? What facilities? What exactly are you doing in terms of the investments, specifically? And then, secondly, just – and I'll let other people ask a question.

Can you give us a sense as to when you expect this to be done and when you expect to – and what you expect the profitability to be of the company? If you were to do the same mark to market that you do, what would be, say, for example, the fourth quarter exit rate EBITDA run rate that we should be thinking about? Those are my few questions. Thanks..

Well, the investments are going pretty much throughout all the facilities, Dave. If you think of the footprint that we had before five years ago, we had a significant larger number of assets that even if we poured money into it would not deliver the additional capability to support the downstream improvements that we were considering then.

So, we did address that. The footprint now is one that merits the investments that we're going to make. They are going to become more efficient. I think we're providing you with some level of reference on how these improvements are going to deliver on quality, reliability, delivery performance and all of that.

But it will also be more capable so that we can benefit from the downstream investments that we're going to be making here. If you remember, last year, we got additional debt and we repositioned the profile of it. And we also did some issuing of shares that were solely dedicated for the support of this asset revitalization initiative.

What we are doing really is assessing that we believe that this market is going to be good and it's going to be better so the more acceleration that we put in place, the better we will be to deliver economic profit, which is the sole purpose of what we are trying to do here..

This is David. I think that's absolutely right. But let's go back to one of your earlier questions. When you look at the fourth quarter to the first quarter, that delta, that change was not completely unexpected as we prepare for the first quarter, because there is a lot of activity that goes on year-over-year.

And if you look at kind of the trends fourth to first, we know the Soo Locks are down and that creates some absorption costs for us. We also had the hot strip mill start-up at Granite City. We had the Keetac start-up.

And we also improved the Gary hot strip mill, which is a big project and actually accelerated some costs in that area so that we can make the improvements longer term. So the delta change from the fourth quarter to first quarter was not completely unexpected. And if you look at the total company, we weren't all that far off from what our plan was.

Admittedly, Europe, much stronger. Admittedly, North American flat roll, lighter. That was more outage, more focus. And as we continue to study what needs to be done, it's a good learning experience for us, to Mario's point.

We've got the firepower now with our balance sheet to accelerate and we need to accelerate so that we can take advantage of these things sooner. As far as what type of returns we're going to get. We're going to be well above the weighted average cost of capital longer term.

But this year is a year of investment, a year for us to put money into capital expenditures, a year to put money into expense and take more downtime. We're going to give up some spot market. We're going to give up some volumes.

But we need to do it now, because we have to strike when the iron's hot and make these tough calls now so that we position ourselves for a better future longer term. As we say in the Q&A document, it's a three, four year journey. We'd like to move it faster. We'll move as fast as we can.

And there are some encouraging things with the things that we learned about this first quarter. And as Mario like to say, it is a journey, and we're going to stay on this journey and move as fast as we can to get the benefits. But there was clearly a delta change from the fourth quarter to the first quarter.

It was more than what the estimates of the analysts thought. It was somewhat – we were somewhat disappointed with North American flat rolled, but very pleased with Europe. And we're focused on making sure that we do better by taking the assets down to make a longer-term future achieving weighted average cost of capital.

I don't know if that helps you or not..

David, last thing I would add is, yeah, more of this is right now focused on the upstream, or steelmaking, to our strip mills, that's where we're focused on getting that up to a higher performance. And I will point to a slide deck we posted.

We've slide that shows over the next three years the magnitude of improvement we're going to get at Gary hot – we expect to get at the Gary hot strip mill. So I mean we want to make sure everybody understands, we're not just fixing stuff. We are upgrading these facilities to a higher standard, and that's really most important thing..

Thank you. Next question's from Curt Woodworth, Credit Suisse. Please go ahead..

Yeah. Hi. Good morning..

Good morning..

Yeah. I sort of have a different take on Dave's question. I mean, I think that we acknowledge sort of the need and the long-term benefits of upgrading the facilities.

But I think it's a question of kind of quantifying the impact and understanding sort of the magnitude of the disruption, because it does look like between what prices have done on tubular sheet as well as a switch to unitary depreciation, the base line for EBITDA will be closer to $1.5 billion, $1.6 billion, versus say the $1.1 billion.

So, this $400 million to $500 million implied cut is a very large number. And even if you say we're going to take 1 million tons out of the guidance for flat rolled and you assume, say, $100 per ton contribution margin, it's still $100 million relative to a big gap.

So, I think, are there other things to think about or can you quantify, I guess, what the volume impact you think was on your guidance? And do you see any – you mentioned some operational challenges this quarter. Can you quantify what that was and whether that lingers into 2Q? Thank you..

Yeah. Curt, So, yeah, I said, the operating challenges, you look to bridge chart we've put out there to help show this. We had a deal. We called out raw materials. We called out LIFO, which is something you really couldn't forecast.

That other bucket of about $95 million – the single biggest thing in there is, as Dave Burritt mentioned, is a normal (17:16) mining. So that should have been not a surprise to anybody. The operating inefficiencies, operating challenges part of that, is probably $20 million to $30 million.

The rest of that's going to be your higher planned spending and restart costs. So, I think as we accelerate our spending and our efforts, you're going to see higher levels there. Even with the cap change, you're still going to see more spending.

But you're also going to see more operating efficiency, because when we take volumes down, we not only lose the margin, but it creates operating inefficiencies and absorption issues to go with it..

The other thing that probably people overestimated was the flow of the additional prices into our system. Some of it did flow a bit into the first quarter, but we should benefit from those more in the second quarter..

Okay. And just a follow-up with respect to Lone Star.

I guess how much hot rolled substrate do you expect to ship into Lone Star this year? And are you saying that, effectively, you're going to have to take more profitable tons at your third-party business to supply effectively a lower agency substrate into Lone Star this year?.

No, I think the (18:31) at Lone Star makes sense for us, because we take the benefit of shipping to them and then their profit on the back end. It's a good tons for us. But I mean, even when you count those tons, our total tons are well below where we were before. As far as that mill, a pipe mill is a very – stated capacity is very theoretical.

If you look back historically, in very, very strong markets, we've maybe run at 70% to 75% of stated capacity. Certainly, these markets are improving, but they're not back to those historically strong levels. So if you think about that, that will give you a feel for maybe what level we could run at for the next seven months..

Do you think you can get to breakeven by Tubular – in Tubular by year-end given the trends you're seeing?.

By run rate?.

Run rate..

By run rate, I think we see this possibly that, yes..

Okay. Thank you..

The other thing and as we're talking about the Tubular side, I probably skipped mentioning. Remember, we started our EAF project couple of years ago, and because of market conditions, we decided to halt it a little bit.

There are serious studies going back to that to see what it would take for us to accelerate restarting that project that will not only benefit Tubular side, but given the fact that the Tubular business will not consume the full capacity or that will give us a lot more flexibility when it comes to making additional slabs for the flat-rolled side, as that capability has been protected down there at Fairfield..

Thank you. Next question's from Evan Kurtz, Morgan Stanley. Please go ahead..

Hey. Good morning, guys..

Morning..

So, a couple of questions I was hoping to drill down on with respect to the guidance as well.

Just on pricing, we look at all these indices and it seems like if you look from where the guidance was put out last quarter to this week, in general, hot rolled prices were up maybe $15 a ton, but it all depends on which index you're looking at and which day specifically you're marking these things.

So, I just wanted to hopefully nail down at least whether or not you actually factored in a higher price into this new revised guidance or was it more flat or can you give us any color there?.

Sure, Evan, this is Dan. Yeah. What we use, the CRU because that's what our adjustable contracts are primarily tied to. And so, CRU comes out every Wednesday, so we would have used last Wednesday's. If you go back to when we gave guidance before, it all was going to be the CRU the Wednesday before we gave the guidance, the outlook..

Okay..

If you go back, hot-rolled was $644 last Wednesday on CRU. So, that was the base of that. That CRU sheet was what we used to calculate these numbers..

Okay. Great. I'll check that. And then on the tubular side, I think you said last quarter that you had done some sort of year-to-date run rate on how volumes and profits were trending there.

Is that the same methodology that you're using this time around or how should we think about how tubular is included into the guidance this time?.

Everything – in flat-rolled tubular Europe, everything is based on current conditions. So we've been using where tubular prices are now. We've been basing our kind of volume assumptions on where rig counts are now. If things get better, that wouldn't be built into there. It's all based on point in time.

And I think maybe just follow-up a little bit on tubular, because I think some of the things I've seen are maybe a little bit out ahead of us. You think about our particular assets, that onshore rig count moving up is certainly providing benefits to our Fairfield operations. And it's why – obviously, it's why we're restarting our Lone Star operations.

When you look at our Lorain seamless mill, our number-three mill that we have at Lorain now is a large diameter mill. It's much more aligned with offshore. So you really haven't seen an improvement in offshore.

So when you think about our potential in tubular this year, if offshore doesn't move, this change in rig count really only applies to our Fairfield and Lone Star operations..

Got it. Okay. That's helpful. And then maybe one last one for me. Just on the accounting change, it sounds like you basically moved a bunch of OpEx into CapEx with that move. Correct me if I'm wrong.

So it kind of led to question in my mind that CapEx guide for the year went up about $150 million, although it seems like you may have added $175 million to CapEx just from the OpEx to CapEx accounting change. And so, with respect to the asset revitalization program, it seems like you're spending the same or maybe even $25 million less this year.

Just wondering, it seems like I might be missing a piece to that, something you can explain..

Sure. So, yeah, so I mean, our total investment, we said, is going to be more like $300 million than $200 million. And that change with the – with capitalization change, operating expense goes down $175 million, or $150 million is the increase in CapEx related to that. So, that's why you see that increase in our CapEx guidance.

The other piece is the increase in depreciation. And so, when we think about that – so I mean, that's how that works. We think about how as we spend – I said, money we'll spend going forward now becomes capital where it was expense, which actually (23:47) makes us consistent with everybody else. So....

I think this is – this is David. I think this is a really important point here, because now we're comparable with other industrials in terms of how they do their capitalization process.

This has been incredibly conservative approach and with a lot of study and look-back, we are clear to – with working with our partners, PricewaterhouseCoopers, and working with others, it was clear that this was a preferential method, and now we can compare with others in a better way.

So, it's clear that we have a better approach and this is consistent across the industry..

And along that is our change on how we spend going forward, the impact in the first quarter was only about $10 million..

Okay. Next question is from the line of Matthew Fields, Bank of America. Please go ahead..

Hey, guys..

Good morning, Matt..

Good morning..

So asset revitalization investments, $300 million this year, and you mentioned in the Q&A that this would be a three- to four-year program.

Is this a $1 billion program over the next several years?.

It's more..

It's more than that..

I mean, we're ramping up right now. So, as Dave Burritt said, this is an investment year, but this is a ramp up. We're accelerating where we thought we'd do this year, but we're still in a ramp-up phase. It takes a lot of advanced engineering and planning for a lot of these projects.

So, we would expect going forward that the numbers get bigger before they get smaller..

And there is a lot of rigor into the dollars they're going to be spent, the KPIs that are going to be associated with it to ensure that they're going to deliver improvement over the cost of capital. I mean, the pursuit of the earn-the-right-to-grow concept is now deployed to the level of detail for each project.

And there are plenty of projects that are – the way that this has been designed, this is not several-hundred-million-dollar projects. These are projects that will mostly vary – with the exception of the growth ones, these are projects that are going to be ranging, let's say, from $10 million to $20 million.

They're much more manageable in that regard, much easier for the control, both from a timing and execution as well as being able to assess the improvement to the proper KPIs as we begin to operate them. It also gives a lot more flexibility.

When you start a $100 million project, for you to maneuver in this volatile environment, it's more complicated I mean, remember how complicated it was to kind of get to a point of being able to halt the EAF. It's really much more complicated. So this gives us a lot more flexibility in how we maneuver throughout this very significant effort.

And how do we preserve the flexibility required, if need be..

And this is an important opportunity for us, and kind of this is what's happening. We've implemented projects to revitalize our assets throughout the first quarter.

We learned a lot more about our assets and more about our ability to complete projects efficiently and more about our capability to increase the number of projects we can manage concurrently.

And so as we evaluated our first quarter performance and the impact of the projects we completed, we determined that we have the capability to move forward faster. And that moving forward faster will increase the value that we can create and sustain over the long term. So, yeah, we could move at a slower pace, we could chase this spot market.

But we need to have the courage to strike when the iron is hot and take some extra downtime so that we can get more reliable faster for our strategic customers. And we've built that balance sheet and have the cash to do so.

It's in the best interest of our stockholders, frankly, to move faster, deliver more reliably to the customers since we've gained the confidence to do so. We learned a lot in this first quarter and we need to accelerate..

So, I understand the need for it and I certainly understand the operational improvements and profitability improvements from going down this road.

From the scope of what it sounds like, this multi-year multi-billion-dollar project, do you think you'll be able to finance it within the confines of your existing balance sheet, or will you need to come to market to supplement operating cash to finance this multi-year project?.

Well, I think, Matt, the fact that we're doing it in some decent market conditions, in addition to the cash we've built by improving working capital and the equity raise we did, no, we're comfortable that we have what we need to do this..

We need to perform. We need to execute. And to Dan's point, you look at our balance sheet, we do have the firepower on our balance sheet to finance this thing. But we have to perform and we have to do better. And that's why we need to move faster on this.

And we need to take advantage of the opportunity we have now when the market conditions are good, because we know at some point, hopefully, in the distant future, things would head in the opposite direction, but we will be in much better shape to manage the downturn. So, this is not a quarter-to-quarter play.

We're in this for the long haul and we have to make sure that we're focused on the assets. And even in this first quarter was the Gary hot strip mill, the Gary blast furnace, Irvin hot strip mill and your Thomas BOP, Great Lakes Works hot strip mill, the Great Lakes Works, the BOP, just going down a list of things that we went after.

And these things continue on. We have capital projects in flight, some 23 capital projects, over 100 total spend projects that have been launched. This is a big deal for us, but we've got to do it faster.

We have to have the courage to do it faster and we have the confidence now, especially after the things we've learned in the first quarter, to push on it..

Thank you. Next question, Karl Blunden, Goldman Sachs. Please go ahead..

Hi. Good morning, guys. Thanks for taking the question. I just had a couple here on the asset revitalization plan. Sounds like you've increased the spend on that by $100 million this year, and potentially a small number relative to the full program.

But does this mean that that has just been pulled forward and so the out-year spend should be $100 million less, or is this just incremental spend that was identified and needed?.

No, that's correct that we're pulling forward..

Okay. Got you. And then on the acceleration, so you've brought it forward based on what you've learned during the quarter.

Should we read that to understand that you're very confident about future market conditions, because you're taking downtime now at a pretty profitable stage in the cycle? How should we read into that?.

Absolutely. Yes. We do have confidence that the markets will be good going forward. And it's really a combination. We had projects, for example, that were slated to come after this outage, let's say, in the next quarter. But as we got in there, we saw that there was an opportunity to accelerate them, because it just made sense to do it.

As you open up, think of a hot strip mill, when you open it up, and you find situations that you can clearly benefit from a productivity standpoint, because you're already down and you already have capabilities. So significant pull ahead, but also meaningful make up for things that we found because we were down..

Okay. Got you. That's helpful. On to the next question I had. Just a smaller one here, it hasn't gotten much attention on the call. On raw materials, you do mention in some of your slides that that was a headwind in the quarter.

Is there a way to quantify that? And then also give us a sense as to whether you expect that to be temporary or sustained?.

Yeah, Paul, this is Dan. For Flat-Rolled segment, it was $74 million, was the quarter-over-quarter change for us. Our coal costs in the U.S. were up about $19 a ton. That's really a fixed cost, fixed for the year number. The rest of the changes are more market based.

So depending on where scrap or gas, which would be two of the bigger inputs, depending on where they go or coating metals or alloys, that would determine how much that is quarter-to-quarter. Because the coal piece is fixed, the rest of it's pretty much floating at market..

Europe is a little different, though..

Europe is quarter-to-quarter pricing, so it's going to fluctuate much more than the U.S. probably is. And just so I don't want anybody to get offended, but we have a lot of people in queue, so we'll probably have to pick up the pace a little bit. So I don't want anybody to think I'm cutting them short, but we do need to pick up the pace, so..

Yeah. Appreciate the time. Thanks, guys..

The next question is from the line of Nick Jarmoszuk, Stifel. Please go ahead..

Hi. Good morning..

Good morning..

Good morning, Nick..

Regarding the reclassification of OpEx to CapEx, can you give us a sense for what that number has been historically for 2016 or maybe 2015, 2014, and how much of that's been for the U.S.

operations versus Europe?.

Nick, we really can't. And in fact our approval to do this was based on the fact that they – it is impractical to go back and try and reconstruct that. So, we really don't have that information..

So, how about going forward, is $175 million a pretty steady number or is that going to bounce around a little bit?.

I think – no, I mean, going forward is just going to be a matter of now, how big our plans are and what we spend. I said that the key is that a lot of things that we would have had to spend because we were on – we're on groups instead of units is going to change.

So, I said, the Q1 – so I said, it actually depends how much we spend, maintenance or CapEx, it's going to shift more, but actually as we spend more, you'd have a bigger impact than you had this year, or if we spend less, it should be less. Like I said, it is a method now that's very much consistent with all our competitors..

And then the last one, can you give us a sense for what the restart costs were for Keetac and Granite City?.

I think we're a pretty low piece of that total. They were really well done and efficient. They were probably in the range of $10 million..

Okay. Thank you..

The next question is from the line of Gordon Johnson, Axiom Capital. Please go ahead..

Thanks for taking my question, guys..

Good morning, Gordon..

Good morning..

Good morning. Just, I guess, two questions. Number one, when I look at your CapEx spend versus your D&A, the CapEx spend has been below D&A since 2013.

Could this be an indication that maybe some of the facilities maybe require higher maintenance than maybe some of your peers and that's why we're seeing some of these costs? And then I have a follow-up..

Actually, Gordon, part of the reason our CapEx – this accounting change explains part of the reason why our CapEx appeared low compared to our peak, compared to other people who actually spends a lot more things that normally would have flowed to that.

So I said, we couldn't go back to recalculate it, but our CapEx would have been higher under this new capital depreciation method. So I think the perception – that may have helped fuel a perception that we were under-investing and our operating costs were too high, just because we were accounting for things differently.

But, so if you did, it wouldn't be – maybe it wouldn't look as this. It appear the investment was quite as low as it was..

Okay. Thanks. That's helpful. And then, just one last question, when you guys talk about looking forward and some of the demand trends being stronger. We're looking at things like clearly SAR data, I saw those kind of rolling over. Non-resi construction spend looks like it's rolling over, both when looking at Dodge data and census data.

Construction employment – unemployment, rather, is really high. So, can you guys talk about maybe some of the things you're seeing that give you confidence that we're looking at an up-market rather than a potentially neutral to down-market? Thanks for the questions..

Yeah, I think you can consider that we see it as a market getting better. Take automotive, I think even though it may not be at the level of what it was last year, but it's still going to be fairly high and our opportunity in that market is real substantial. Same thing applies with construction, same thing applies with the yellow lines, white lines.

The energy side, we believe that they're trying to find a base it to grow. There's certainly a global conditions taking place that impacted. But even on the energy side, with our ability to have – we've brought more products that gave us an opportunity to have a full line to be able to now pursue the international markets.

We just opened our office in Dubai. We're having contacts over there. And those are markets that we've had, first of all, zero market share for anything; and second, zero market share for the premium products.

So, I think that we see that our journey in the direction that we've set out to do is going to benefit from these markets remaining pretty good..

Our next question is from the line of Timna Tanners, Bank of America. Please go ahead..

Yeah. Hey. Good morning..

Morning..

So, I understand you're reinvesting in assets after some lean years here. But kind of trying to understand how to think about your production costs under the next three, four years of these heavy investments taking assets offline, tend to be a lot of inefficiencies as you've seen over the last several quarters of stopping and starting assets.

So, how should we think about the trend of your cost of production going forward over the next couple of years, if you could help quantify some of the benefits offsetting some of these inefficiencies and the cadence of that, perhaps?.

I don't know. It's kind of hard to quantify. I think we'll have a better read – we do have a few unusual items in 1Q. So maybe as we get through 2Q, we'll have a better read of maybe what a near-term run rate looks like.

But I think how fast we get things done and this slide we have shows – the slide we have in our deck showing how we expect improvement in Gary hot strip mill, the fast we get things done will determine how much we gain back on against our inefficiency. So, it's probably hard to project that too far out into the future at this point..

Okay. I can pop offline that, because I just think that it requires a little more explanation trying and understand like the stops and starts and inefficiencies that you've seen over the last couple of quarters, is that something that will be offset eventually by inefficiencies or by the efficiencies that you're expecting to see? But just to....

Yeah. Absolutely. Do you look at that chart on Gary. I think that's very instructive in terms of kind of improvements you'd expect to see on the projects..

Yeah. I have it..

Certainly, over the long run, yes, these efficiencies will show up and improve us. I think the more work we do that's planned, the better it is. Unplanned is really where you get your most pain on inefficiencies. So, the fact that we're planning and doing more planned work should help us as opposed to periods when we have unplanned..

Fair enough. All right, the 10 million tons that you talked about, I just want to understand that you talked about reducing tons to the spot market, but that like about actually an increase from your recent run rate over the past couple of quarters. Am I missing something or is there – I mean, it looks like you've been fairly flat.

No?.

Well, I think what we – no, I think in the context of – when we talk about the outlook and the outlook calculation, we expected our shipments to be well above that.

But based on where we are now, when we had to recalculate the outlook, we had to get, I said, a better assessment from where we operate in the first quarter and how many additional hours we plan to take, that brings us down to that range.

So, I think that's more kind of a calculation of how we did – how we calculated previous outlook, how we calculated current. From our perspective, we took a fair amount of tons out of our expectations..

Okay. Thanks. I'll follow-up later..

And next question is from the line of John Tumazos, Independent Research. Please go ahead..

Good morning, John.

Are you there?.

Thank you very much. In terms of your mix, several years ago, you had a lot of tube scalp, which is heavy gauge and easier to roll, and now you've got the evolution of the high-strength auto steels that are tougher to roll. So, the mix is different and I guess that has some influence on the productivity ratios.

Do these events argue more in favor of a toll agreement with ATI Brackenridge hot strip mill or even buying ATI where you might have better labor relations, better connections with steel distributors, a little more clout.

You could save a headquarters, if you ever lost the (40:47), or GE, Louisville as a customer and downsized at Mon Valley, you could flow into their hot strip mill or their Midland melt shop, if you couldn't keep it all going into Mon Valley, and there could be other benefits..

I guess, John, I would start with....

For titanium..

I guess, John, I would start with, we are capable of making the products on our facilities, particularly, with the work we're doing. So, we don't have anything out there that we would need their capabilities to make. We can make what we're doing on our facilities.

To go and make it somewhere else actually would probably be less cost effective, less efficient for us..

Okay. Thank you..

Either way, when it comes to headquarters, you know that, I mean, we probably have reduced our (41:40) by 30-some-percent last year. So the efficiencies have been looked after in this regard, too..

We know you're efficient..

Thanks, John..

The other guy might be as good as you too, we hope so..

Okay..

Okay. Next question is from the line of Phil Gibbs, KeyBanc Capital Markets. Please go ahead..

Good morning..

Good morning, Phil..

Hey, Mario.

Is fair to say, given all this commentary, that the biggest piece of the guidance cut was a combination of the accelerated asset revitalization timeline and lower flat-roll shipments?.

Absolutely correct, Phil. That's correct..

Okay.

And is there any LIFO expense in this new guidance, given the fact that you had that switch in Q1? And if so, how does that compare to what you were thinking before?.

We do our full year – we do our assessment based on our full year look and mark to that all one-time. And unless there is some real change in raw materials, we wouldn't expect anything different. But if materials change, obviously, it will change..

Okay. So, not too much in the bridge..

Actually, there'll be no assumption of a change at this point, because I said, we – look, we adjusted our full-year expectation, so there wouldn't be any assumed change in there right now. No..

So, is it fair to say that you expect $80 million in LIFO expense for the year then? Is that....

No, no. The way we do it is, we make our full year assessment and we record the full amount..

Got it. Okay.

So, you've already taken it essentially, then?.

Yes..

And then just last question, bigger question here.

How is the asset revitalization plan different than the Carnegie Way?.

Well, conceptually, the Carnegie Way is the umbrella for everything we do. So, if you look at the rigor that we've had in creating Carnegie Way projects for improvement, the rigor in implementing them, preserving the benefits that we get, the same rigor's being addressed into the asset revitalization plan.

The asset revitalization has a dimension of improvement in every single one of them. But the concept of the rewards we'll get from them to supersede across the capital is going to be done exactly the same way that everything is done in the Carnegie Way.

The Carnegie Way is a foundation of thinking, the methodologies that allow for us to really execute well on the stuff that we go after..

Thank you..

Just as a number, for example, the distinction is we've worked on 20-some projects of major caliper in the first quarter in the asset revitalization. There is more than 100 slated to go after. But we executed on more than 400 Carnegie Way improvements and we have about another 4,000 of them slated to go after..

And next question is Brett Levy, Loop Capital. Please go ahead..

In terms of the spacing, I saw the quarter, I saw the guidance. I know you guys have got a lot of CapEx projects going at various points, things that will be up and down. I also know that the steel industry tends to be second quarter strong, third quarter and fourth quarter somewhat weaker.

Can you give us some sense of spacing in terms of the second quarter, third quarter and fourth quarter, either volumes – I don't know that you want to get all the way down to the operating line, but some sense as to sort of what the timing of some of your projects are and how it will affect volumes for 2Q, 3Q and 4Q as we try to get to the 2017 guidance that you gave?.

Well, I think Brett, with our kind of perspective, this could be about $10 million total. We'd expect in next quarter, couple will be higher than 1Q. Yeah, seasonality is pretty much always there.

I would say that we will have – because of how spot prices have moved in our quarterly and our monthly adjustable contracts, we still have some uplift coming on pricing that certainly is there in 2Q. Probably hold a fair amount in 3Q, just based on how things reset. Probably too soon to speculate past that..

Got it. All the other questions have been asked. Thanks very much..

Thanks, Brett..

Next question is from the line of Novid Rassouli with Cowen & Company. Please go ahead..

Hey, guys. Novid at Cowen. Thanks for taking the questions. For tubular shipments, they have been lagging the rising rig count.

Want to see if you guys can help us understand the moving parts there and when you could potentially see your shipments start to more closely track rising rig counts?.

I guess, Novid, I would say that right now, the only thing we have really tied to rig counts is Fairfield, and it's been improving. I mentioned the Lorain number-three mill is really an offshore play, so that rig count hasn't changed. And right now, we're just in the process of getting the Lone Star welded up and running.

So, I think you'll see a better gain once we have Lone Star running because now we have that facility online. I think the reason maybe it appears we've been not moving as fast is because out of our capacities, Fairfield was really the only piece of capacity we had that would benefit from that rising rig count..

There is also some additional investment in premium products that are being made that should kick in around September timeframe. So, that will help..

Right.

And then how long do you expect the ramp to be at Lone Star number two that starts in May, I believe?.

Yes, that really depends on the order book. But that facility probably gets – I mean it probably will be capable of running pretty hard pretty quickly, but it's all going to be about order book..

Okay.

And then, lastly, achieving that kind of run rate breakeven that you'd mentioned to an earlier question by the end of 2017, what would that imply for your shipment run rate?.

Actually, it's about a lot more price. I mean the prices have to keep on moving. We're seeing that trend in the market, we need it to continue because, frankly, prices have moved up, but they're still well below historical levels. So, I think it's a combination of price and volume.

If prices don't move, it's going to be much harder to get enough volume to get there. So, we're going to need both..

And next question is Alex Hacking, Citi. Please go ahead..

You there, Alex?.

Hi. Good morning. Thank you for the question. I apologize if this is a little repetitive. But is there any way that you can quantify, as it stands today, what you envisage as the total spend on the asset revitalization program? You mentioned earlier it would be more than $1 billion.

But is there any way that you could quantify that? And then how is that going to be spread in terms of timing? Is it something that you'd be spending a consistent amount of money for the next 10 years or is this more of a finite kind of one- to three-year program? Anything quantitative that you could give us there will be extremely helpful..

Sure. So, currently, we're saying this is three or four years, incrementally $300 million more than last year. 2018's going to be higher depending on how much we pull forward. But, yeah, I expect 2018, 2019 certainly higher than 2017. How much is left for 2020? I think we don't know yet.

But when we think about our incremental from our incremental base, it grows the next two years..

Thanks, Dan. And then just – sorry, one clarification on the spending this year. You've moved – I think I'm just being slow here. But you've moved $150 million from OpEx to CapEx. CapEx guidance is up $150 million. But you said that you're spending more on accelerating the program.

Like where are we seeing the additional spending this year?.

The acceleration includes capital. That's the total number. And I guess, if you follow through from last quarter to this quarter, that $300 million is probably about a split – an even split between CapEx and operating expense..

Okay. Thanks..

And next question is from the line of the Evan Kurtz, Morgan Stanley. Please go ahead..

Hey. Thanks for taking the follow-up. Actually, it's related to the last question. I still am a little bit confused about it actually, and maybe we can take it offline. So the CapEx number, it sounds like, didn't really change since the last quarter, since $150 million of the $175 million of the accounting change was responsible for that boost.

But, obviously, asset revitalization is higher, so that mean something must have come down.

So I was just wondering if you can kind of walk us through how that all balances out, like why the number didn't really move?.

I think part of it is – and Dave talked about how much we learned as we went through the first quarter. By going faster, we're going to be more efficient. So, our spend should be more efficient.

So, hopefully, we'll do a better job of actually minimizing and beating our CapEx expectations on a lot of these individual projects, by accumulating them and maybe pushing them together, we get some net efficiency out of that..

Okay. Thanks. Maybe we can chat offline about it more. Thanks..

And next question's from the line of Phil Gibbs, KeyBanc Capital Markets. Please go ahead..

Thanks very much. I just noticed the SG&A went up pretty dramatically relative to Q4, the second half run rate of last year. Just curious if that's the right – that $97 million is the right number, I mean, moving forward or there's something unusual in that number? Thanks..

Phil, the big reason it went up was related to last quarter, we talked about we de-risked our (51:48) investments, so our pension, OPEB expense went up. And by de-risking, our expected return on assets go down, our expense goes up.

So that increase that we called out on pension and OPEB expense year-over-year, almost all of that's flowing to the SG&A line. So, that actually is a probably decent run rate with that adjustment for the higher pension, OPEB expense..

Thank you for the explanation..

Thank you. And final question is from the line of Nick Jarmoszuk, Stifel. Please go ahead..

Hi. Just a follow-up on the asset revitalization program.

Let's say we get into a lower steel price environment in 2017 and 2018, is this spend fixed in stone or would you adjust the spend over the next couple of years?.

We invested – we went to the market, you recall, to raise $500 million of equity. This is money we expect to get good returns on. We're going to protect this spend. We're going to deliver on this. And it gets back to we have high confidence that we're going to be able to do this.

And it takes a little bit of courage, more than a little, to take this type of action right now. But we wouldn't be – we wouldn't have gone to the capital markets to get the $500 million if we didn't believe this was necessary. So, clearly, we're learning a lot. We're moving it forward. But the $500 million that we raised is dedicated to this.

It wasn't dedicated to paying down debt. It was dedicated to getting good returns for investors, longer term..

Okay.

And then, can you give us a sense what the lead time is for most of these projects?.

I'm sorry, Nick, we couldn't hear you..

Could you give a sense for the lead time for most of these projects?.

It really depends. I said, some of the bigger projects, particularly, if it relates the blast furnaces can have a much longer lead time just because of the engineering and the materials – and getting materials on site. So, it's going to be a pretty mixed bag, but there are certainly some fairly long lead-time projects.

There are certainly a lot more of them that are more immediate. And those are ones we have the best opportunity to accelerate..

Thank you..

All right. Thanks. At this point, Mario has a couple of final comments..

Thanks, Dan. But before we sign off, I want to acknowledge and thank our employees. They've faced many challenges over the last couple of years and they have taken on those challenges and delivered tremendous improvements to our business model. And they have done so while maintaining their focus on our core value of safety.

Safety remains the foundation of the Carnegie Way. While we are already an industry leader in safety performance, our employees are continuously finding ways to become more efficient, effective and to further enhance our safety process. We still have challenges there and more work to do, and recognize we're making progress.

We have dedicated and talented employees that will continue to be the driving force behind our Carnegie Way transformation..

Thanks, Mario. Like to thank everybody for joining us, and we will talk to you again next quarter. Have a good day..

Thank you. Ladies and gentlemen, that does conclude your conference. We do you thank you for joining, while using AT&T Executive TeleConference. You may now disconnect. Have a good day..