David B. Burritt - United States Steel Corp. Dan Lesnak - United States Steel Corp..

Curt Woodwort - Credit Suisse Securities (USA) LLC (Broker) Seth Rosenfeld - Jefferies International Ltd. David Francis Gagliano - BMO Capital Markets (United States) Timna Tanners - Bank of America Merrill Lynch Philip N. Gibbs - KeyBanc Capital Markets, Inc. Alexander Hacking - Citigroup Global Markets, Inc.

Gordon Johnson - Axiom Capital Management, Inc. Novid Rassouli - Cowen and Company, LLC John C. Tumazos - John Tumazos Very Independent Research LLC Michael F. Gambardella - JPMorgan Securities LLC Charles Bradford - Bradford Research, Inc. Matthew W. Fields - Bank of America Merrill Lynch Lee McMillan - Clarkson Capital Markets LLC Sean M.

Wondrack - Deutsche Bank Securities, Inc. Karl Blunden - Goldman Sachs & Co. LLC.

Good morning, everyone, and welcome to United States Steel Corporation's Second Quarter 2017 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded. After the close of business yesterday, U.S.

Steel posted a slide presentation and prepared remarks, as well as an updated question-and-answer document under the Investors Section of www.ussteel.com to provide everyone with a better opportunity to prepare for the call.

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 the U.S.

Steel earnings release, in the earnings presentation and question-and-answer document posted on the U.S. Steel website and are included in U.S. Steel's most recent Annual Report on Form 10-K and updated in their quarterly report on Form 10-Q in accordance with the Safe Harbor provisions. I would now like to turn the conference over to your host, U.S.

Steel President and CEO, Dave Burritt..

Good morning. This is Dave Burritt, President and CEO of U.S. Steel. With me here today is Dan Lesnak, General Manager of Investor Relations. First, I'd like to thank Pipasu Soni, our Vice President of Finance, for the role he played the last couple of months as Interim CFO.

We are announcing today that Kevin Bradley will become the new Executive Vice President and CFO for U.S. Steel effective tomorrow and you will see that in a press release shortly.

Kevin most recently was the Senior Vice President and CFO at Terex Corporation, where we had previous roles as President of Terex Cranes and, before that, as President of Terex Financial Services. Let's begin. The second quarter was stronger than the first quarter, both operationally and financially, and we are glad to see the improvement.

We have a strong cash position to finance, revitalizing our assets. It's been a lot of hard work, but the discipline and focus that we're putting on our operations is beginning to show promise. We have two areas of focus, our operations and geopolitical challenges. An example of a geopolitical issue is unfairly traded steel.

We have a talented team that was put in place to deal with this and the process is in place. We're managing that very well. I spend less of my time on these issues. But as CEO, I will do what is necessary to help with the geopolitical challenges. But to be very clear, my primary focus is on operations. When we execute at our steels mills well, it shows.

Achieving operational excellence is what's going to make the difference for this company. It's about safety, quality, delivery and cost, like the beating of a drum, safety, quality, delivery and cost. I'm spending my time at the facilities with our people, making sure that we develop our talent and our assets to perform at their best.

While our operational performance was better in the second quarter, we remain very focused on the need to improve our assets, support our employees and deliver for our customers. When we do this, we will help our customers succeed and our stockholders will be rewarded. We are making capital investments of $1.2 billion to revitalize our assets.

This will help ensure we're able to achieve returns well above our weighted average cost of capital across the business cycle. We've modeled the numbers and we believe that we can get internal rates of return of between 15% to 20% on the improvements.

We are already seeing improvements from the first phase of our investments in the Gary Works hot strip mill. We're seeing better blast furnace performance, especially at Great Lakes Works, where we faced our biggest challenges. It's good work and I know we can do better.

These are just two examples of what we can achieve when we focus on our assets, our talent and deliver for our customers. The other thing we've done is we're putting in place more robust performance scorecards.

We're providing you with a performance scorecard for the implementation of our asset revitalization program, which we will be reporting to you on a regular basis.

We are going to provide targets for our EBITDA improvement and the capital spending related to our revitalization of assets, the quality improvements that we're going to be having as a result of our investments and the improvements that we're going to make in unplanned maintenance downtime.

We will be held accountable for reaching those targets and those targets are cascaded to the operations, where the real work – the important work gets done. We've also been investing in our employees, building capabilities. We are realigning the organization to make sure we have the right talent in the right positions, best talent wins.

We're getting the right people on the team to ensure we are succeeding. We are making sure that we're adequately supporting our employees.

When things go wrong at our plants, our employees work with a tremendous sense of urgency and their outstanding response time and ability to find and solve problems quickly and safely protects our facilities, our environment and our customers. But the real solution is to not have things go wrong.

And we are addressing that through revitalizing our assets and implementing a strong, reliability-centered maintenance program. In addition, we're also investing in product development. It's very clear to us that Generation 3 advanced high-strength steels are our future. And this is where we're going to be focusing research and development spending.

We are investing in R&D to ensure that we remain competitive through future business cycles. You will hear more about this in the near future. Finally, on geopolitical issues, we continue to monitor the progress of the 232 investigation.

We believe we have a compelling case of the harm that imports are having on America's economic and national security. In order to have a strong U.S. manufacturing base, we must have a strong steel industry, so goes our manufacturing base, so goes our country and we firmly believe that this administration understands the importance of U.S.

Steel to this country. This is in the government's hands. They understand what is at stake. They know what needs to be done. And we're confident this administration will come to the right conclusion. When the President announces his actions under Section 232, we are prepared to respond quickly.

We will make our assessment of the potential impact of the Section 232 actions taken and then make adjustments to our operations necessary to continue to support our customers and respond to new opportunities. Enough said about 232, but make no mistake about this. This country has been in a trade war for decades and it needs to end now.

Dan, let's go to questions..

Thank you, Dave.

Brent, can you please queue the line for questions?.

Certainly. And we'll go to the line of Curt Woodwort with Credit Suisse. Please go ahead..

Hi. Good morning..

Good morning, Curt..

Thanks for the additional transparency on the guidance and the asset revitalization programs. I guess, with respect to revitalization, you outlined a fairly significant increase in the capital spending for 2018.

And I just wanted to understand if that would create potentially any operational headwinds or even more downtime on equipment work that would potentially result in more maintenance spending because I would think you should start to harvest investments made this year and you're already facing a pretty big maintenance expense rise this year.

I think you outlined $1.3 billion versus $950 million last year. So, any color on that would be helpful..

Yeah. Curt, I think we are scheduling things carefully.

So, operationally, we're going to do a lot of projects, but we should be – we're going to maintain our operational levels, probably see some gains as you mentioned from some improved quality operations, which will probably help some yields and give us a little bit more room to get some funds in, as we move forward.

From the spending side, we are going to spend more next year than this year. We are ramping up through this year and next year. Next year is probably the biggest spend year of the program.

Once we get through the projects this year that we complete, we'll have a better feel for which ones will be on the slate next year and then we will be able to give you guys some better color on cost and capital for next year on the January call..

Would you think that maintenance expense would be about the same level next year then, given the acceleration? Or does that....

It's hard to say at this point, Curt, because it really depends on which projects get pulled forward into this year, which ones don't. Every project has some component of cost and capital to it. So, really, it's going to depend on what the project mix winds up being..

Okay. And then, just a quick follow-up. Regarding the guidance, keeping it flat, it looked like the crude price is off about $30, $35 a ton, so potentially $100 million, $150 million headwind on EBITDA.

Can you just comment on some of the offsets you're seeing relative to your prior guidance to keep it flat?.

Yeah. This is Dave. Thanks for the questions, Curt. What we're seeing is better performance on our assets as we saw in this quarter, very much focused on making the operations better. An example of that – for example is the B2 Blast Furnace at Great Lakes Works. This blast furnace is 65 years old.

And through some revitalization of that asset, we actually had been able to run that at all-time record levels of tons produced. We ran at an all-time record levels of ton produced.

And then, we did it on the next day and the day after that and the day after that and the day after that until we got to that point where he had a bottleneck on the hot strip mill.

So, when we get very focused on revitalizing our assets and we give our people the money to spend in those areas, we see the benefits through the rest of the year and into the future. So, we have a few good success stories on some big assets. And you saw on the advanced material, the four categories in which we're focused.

Well, there's 13 big assets that support those four categories. And when we do improvements in those areas, they actually carry through to other areas of the operation. So, one-by-one, we're going after them. And we're pleased so far with what happened in the second quarter. We need to repeat in the third and the fourth and again in the first.

And when we do that and we provide our people with the tools and the focus needed to do their jobs, I think we can be successful..

Understood. Thanks very much. Best of luck..

And we'll go to the line of Seth Rosenfeld with Jefferies. Please go ahead..

Good morning. I have a follow-up question on the asset revitalization plan. I'd just like to better understand how today's commentary compares to what we heard last quarter.

I think last quarter you talked about total cost of $300 million increase roughly split in OpEx and CapEx, stating that the CapEx increase of loan is $200 million, $250 million plus that $350 million increase on the OpEx out of maintenance and outages.

Is this a like-for-like increase, if I'm thinking about it right, in the $300 million to north of $550 million? Or how should we compare today's commentary to what we heard last? Thank you..

Thanks, Seth. Yeah. This is Dan. We've given incremental changes last time. I think it's more clear to give you guys the actual full year numbers. So, the CapEx is $200 million to $250 million. This year, we expect to spend not – think about the last year, what we actually expect to spend this year.

On that expense piece, that includes also some higher maintenance and outage expense outside of the program. If you think about it, last year, Keetac wasn't operating. And this year, we're going to have our normal maintenance and outage spending in Keetac. Granite City hot strip mill wasn't running last year. We're going to have spending there.

So, that $350 million increase in maintenance and outage is a combination of normal increases related to running more facilities and then fees related to all the work we're doing on the assets right now..

Okay. Great. Thank you very much. And second question, if I can.

On the European business, can you just walk us through the FIFO loss that you reported in the second quarter? Does this simply reflect the higher-cost iron ore and coal inventories held following the first half volatility? Or does that have anything to do with longer-dated mismatch between sales contracts and input costs? Any guidance you can give on what we should expect both on FIFO and perhaps margins into the back half of the year in Europe.

Thank you..

Yeah. On the FIFO, we had a benefit in the first quarter. We had a charge in the second quarter. It's all related to the extreme volatility we're seeing in the global raw materials prices. We are a buyer over there of all raw materials. If you – they net – for the first half of the year, they net only $50 million. So they net themselves out pretty well.

If you got those out of the way, I think you can tell from our description of where our gains and losses were as far as what drove the numbers. The underlying operations did better in the second quarter than the first. So, that FIFO movement back and forth on kind of obscures a little bit.

We were trying to call that out in the presentation a little more clearly. If you look at where we are, I mean, we said, under these conditions, we expect that Europe can deliver $400 million. So, that does imply a stronger back half, and we're seeing conditions that are leading us there..

Great. Thank you very much..

And our next question will come from David Gagliano with BMO Capital Markets. Please go ahead..

Hi. Thanks for taking my questions, and congrats on a much improved outlook versus the last quarter, obviously. So, my question is, really, I wanted to drill down on the Flat-Rolled segment a bit more. We've obviously – we've seen some massive quarterly swings over the last six consecutive quarters, up down up.

And obviously, modeling is becoming increasingly challenging in a certain respect. So, I wanted to see if we could drill down a little bit on the EBITDA bridge, which is on one of your slides from Q1 to Q2. There's two buckets that seem to explain most of the move, the $290 million improvement in the last three months.

One is commercial of $103 million. The other is raw materials of $128 million. And I was wondering if you could give us a little more color. First, on the commercial side, how much of that $103 million improvement was due to the Keetac pellet operations? That's my first question. And then – go ahead, yeah..

Yeah. So, we – there's two pieces. Keetac up and running helps us efficiency-wise, and there's two pieces going on there. Our mining operations normally have a big seasonal improvement Q2 versus 1Q because, in 1Q, with the Locks closed, you're really not shipping pellets. So, the biggest factor there is the normal seasonal change in our mining.

And that will be a net raw materials bar you're looking at there on page 13 in the presentation. The benefit of selling pellets, as the third-parties now is new to us compared to the past, that's actually shown up in that commercial bar because that really isn't an improvement in our raw materials business. That is a commercial venture we're in now.

So, the primary piece of that raw materials bar is the improvement in the mining operations that we would normally see year-over-year from our internal use of our pellets..

Okay. But – so, my question is really just on the commercial side, the $103 million.

How much of that is actually due to Keetac versus finished steel prices, et cetera?.

It's with – our mining operations are in this segment because the way our management structure will fall in the segment rules, that's – we consider that really commercially sensitive. We only have one competitor in that market, so we really don't want to tell them too much about what we're going on. I think you guys can appreciate that..

Okay. And then, just for again modeling purposes, moving forward, obviously, maintenance and outage wasn't a big driver either way this quarter.

How should we be thinking about maintenance and outage costs over the next six quarters?.

Well, I'll take you back to what I was telling Curt. Until we get a better feel for what projects we're actually going to complete in 2018, we're really not going to know that piece of the outage. So, I think it's too soon to get a 2018. I think you can see from the stuff we have also in the presentation there.

We expect there's going to be about $660 million in the back half of this year, $660 million versus $640 million in the first half, so pretty steady this year as far as how it's spread.

A little bit too soon to get into telling how much 2018 is going to be until we get – really get into developing the 2018 business plan in total and the asset revitalization details behind us..

Okay. Thanks very much..

And our next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead..

Yeah. Hey. Good morning, David and Dan..

Good morning..

Good morning..

So, I wanted to ask two questions. One is about just being clear on what's baked into the guidance because there was a very recent hot-rolled price hike and I wasn't sure if hot-rolled price hike – I wasn't sure if you would have baked that into your guidance already..

No. We use the CRU Index, so everybody is clear on what we're using. And the one we'll be using is the one from last Wednesday because that was the most recent one when we developed the numbers. So, I think hot-rolled was $612. And also, for the rest of our product mix, we'll be using the CRU numbers off of that same last Wednesday report..

It was $640 at the end of April..

Right, late April, $640, so now we're down to $612 in our calculations here..

Okay. I just wanted to be crystal clear there. Thank you very much. And then, if we could just talk – I know you said that you'd be able to respond quickly in any Section 232 results. But I didn't understand what you're talking about with Fairfield making slabs. I thought it was supposed to be making ramps.

So, I guess if they're not following that, maybe you could clarify as to what you're thinking about with Fairfield. Is that the change or is that something that's in line? And also, what kind of response would you be thinking, if you convert to Flat-Rolled, you wouldn't be – or slabs, you wouldn't be able to make rounds.

But, assumedly, Section 232 could benefit OCTG pretty nicely as well. So, just want to learn a bit more about your Fairfield plans perhaps against any Granite City plans and your vision there..

So, there's a lot in there, Timna. I'm not sure where you're reading that information. I'll just say that it's about our ability to be responsive given the 232. Of course, a lot depends on how broad and comprehensive this is and we – that 232. We would expect there to be meaningful adjustment to the imports. We'd expect it to be sufficient duration.

We expect it to be comprehensive. And, of course, we have to wait and see how that all plays out. But we would turn on Granite City, a blast furnace, maybe two blast furnaces and be as responsive as we could in maybe 10 weeks or so, depending upon how fast we could get the people on-board.

But as far as this discussion about EAF and the slab caster, I'd say this about the EAF. This is something that's in our future. I would say it's not a question of if, but when.

And at the appropriate time when our customers need the volumes and the Tubular business is EBITDA positive and we see that coming at a run rate basis very soon, we will be moving forward with an EAF. In fact, at the board meeting just this week, we had a detailed, in-depth discussion about the Tubular business and the EAF, specifically.

So, we're waiting for an improved business results. We're waiting to make sure that we can have the kind of flexible structure in our modeling. And then, we'll be good to go with – moving ahead with the EAF. But you have to wait and see on that because we want to see some numbers in the black for the Tubular business first..

And, Timna, this is Dan. Yeah. In the Q&A doc, we put that sentence in about the potential for slabs because....

Right..

As we've resized our Tubular operations and formally shut down some capacity, we just want to highlight the fact that when we – if we get to this process of running EAF, then we actually will have some available capability to do slabs if we need them.

The original plans would have that EAF feeding around caster consume most of its output just for Tubular. But now....

Okay..

Seamless capacity in Tubular we'd have some flexed capacity when we get there..

Okay. Great. Thank you. That makes sense. Thanks a lot..

And we'll go to the line of Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Hi. Good morning..

Good morning, Phil..

The question was just on the mining operations again.

Just curious, given the fact that there is probably some catch-up and you noted closure in the Locks in the first quarter and some new business wins, should we expect the second quarter rate of mining sales to persist into the back half or accelerate? I mean, how should we think about that?.

Yeah. Sure, Phil. There are two moving parts here. The big seasonal change that's normal in 2Q, that doesn't repeat itself. You're kind of at that level now, so you shouldn't see a big variance from our internal purposes in 3Q. As far as the external sales, they're probably going to be reasonably consistent through the year.

So, I said you'll continue to see a benefit from pellet sales, but probably not a big quarter-over-quarter differential from mining. We won't expect it this time..

Okay. That's helpful. And the 75% to 80% utilization rate you're running at now on your existing footprint or what's capable and running, is that sort of the limitation right now? Because I saw that you had said that you plan on getting another 1 million tons potentially of group capacity out of the assets over the next three years.

But are we limited based on the asset revitalization to that 75% to 80%? Where can we go?.

We can probably use a little bit. As Dave pointed out, the blast furnaces are running better, so we can do a little bit better.

But right now, also, since we opened the welded pipe mill down in Texas, we're going to supply some extra band to those, so our commercial shipments probably don't change much, but we're going to get a little better utilization that will help support getting bands to our Tubular operations..

Clearly, our blast furnaces are running much better just based upon the challenges we had at Great Lakes Works, so we have plenty of melt moving ahead. So we should have a little bit of upside, as Dan mentioned. But I think the 10 million tons moving to 11 million tons, that's going to take a bit for us to get there with the revitalization of assets.

It won't be overnight..

That's helpful. I just had a question for clarity, kind of, based off of the question that Timna asked on the Fairfield EAF. So, that sounds like something that is in the definitive plans here for the intermediate term. So, you – I just wanted to clarify.

So, you are or are not planning on doing a rounds caster there?.

It's not a question of if. It's always been a question of when. And again, some of the things we look for is we have accountable units. The Tubular business is fully accountable for their numbers. When they deliver profitable numbers, they will be ready to move forward with the EAF. We have to make sure that they have a flexible structure.

It wasn't too long ago that we saw rig counts at a low level. We believe, with the rig count increase and the density of pipe that we're able to produce, that this business is much, much healthier and in a much better position certainly in the near and intermediate term.

And we look forward to starting that EAF up at the appropriate time, and you'll hear about it when we're ready to go..

And, Phil, the rounds caster is already there. We – but that's from the past. We've had that down there for quite a while..

Well, I just meant in terms of that being something that you'd like to do in terms of casting rounds?.

Yes, yes, sir. Yes, we would like to turn on the EAF. That's definitely in – as part of our strategy, absolutely..

All right. Thanks very much for the color, guys..

And we'll go to the line of Alex Hacking with Citi. Please go ahead. Alex Hacking, your line is open..

Hi. Thank you. Thanks. Good morning, David and Dan. Thanks for the questions. So, just coming back around to the maintenance expense. It's targeted at $1.3 billion this year and $950 million last year.

I guess, my question is, what do you see as a normalized level per ton? Is it closer to where it was last year? Or post asset revitalization, should we expect it to stay closer to the current levels? Thanks..

Well, there's a lot of moving parts here because, remember, last year was impacted by not having all of the facilities running, which would make it lower than you would expect. So, there is that component of it. I said, when we're done with asset revitalization, we will have a much more efficient maintenance spend.

But I don't think we can really, at this point, quantify what we think 2020 is going to be. That's a little bit too far out. But like I said, at the end of the day, when your assets are better and you have better preventive, predictive reliabilities at our maintenance, you should expect maintenance spending to be below historical.

But at this point, I'm not sure which year to point to as historical because of all the changes we have had in the footprint..

And our next question will come from Gordon Johnson with Axiom Capital Management. Please go ahead..

Hey. Good morning, guys..

Hi, Gordon..

Good morning..

I guess, just starting on the Section 232, it seems like some comments came out from Donald Trump last night – President Trump, and he seemed to go the exact opposite direction, I think, a lot of people were expecting.

If we look at the seasonality of HRC prices over the past 11 years, typically, in the back half they're quite weak, down 1.1% on average versus being 1.6% in the first half. And if we look at what happened last year, right around this time, HRC prices traded off.

So, do you guys see or do you think that there has been some support for HRC prices as a result of the Section 232? And do you think that, given this delay, which seems to be counter consensus that we could start to see some of your customers buy more imported steel?.

Well, Gordon, the timing what they are going to use is so I think vague at this point. I mean, at some point, will the import guys get more involved and I don't think we have any better insight into that than anybody else..

I don't know that we want to comment on price in any case. But, Gordon, we do believe a remedy is coming. The administration needs to be thoughtful. There's a lot of other issues rattling around right now that they're dealing with. And I think being thoughtful about this is really important, but we do believe they're going to go broad and go deep.

Whether or not any of that is built into the current price, I don't know. But I know, from our perspective, particularly, when you think about the OCTG business, the Korean OCTG is a prime example of the unfair foreign trade. And I think this President, this administration understands that very well. At U.S.

Steel, we've been forced to idle 50% of our Tubular mills, abandoned about 40% of our OCTG products and reduced our workforce by more than 2/3. As we said earlier, the Granite City blast furnaces, they feed our Tubular business. And so, the Tubular business pretty much dried up over the last year.

And in spite of no Section 232, this business is returning to profitability and run rate positive on an EBITDA basis before the end of this year, and we saw a nice jump even in the month of June. So, whether Section 232 is in the numbers or not in the numbers, I don't know. But we're working really hard no matter what happens with Section 232.

We're going to be fighting each and every day at our mills to make them stronger and better. And we're investing in our people and investing in our assets to do that. I know that doesn't help you a lot, but I think it's anybody's guess, what's going to happen to prices..

Okay. That's helpful. And then, with respect to your cost in your Flat-Rolled division, impressive print there this quarter. Can you give any guidance how we should expect that to trend going forward? Should we expect it to continue trending lower? Was there – or was there something special this quarter? Thanks for the questions, guys..

Well, just to be really clear here, we're – Gordon, we've talked a lot about this. It's about execution. It's about operational excellence. And we're putting the blinders on our leaders here. It's really important that people spend time on the shop floor. I got to get out there more. I got to be out there every month. And we have leaders in this building.

When I see him in the building, I ask him if this is an in-house vacation day because what they ought to be doing is be at the plants. That's where the action is. And I firmly believe, when you put focus on the people that are doing the real work, the people in our operations, that's when we succeed.

If we're sitting around here in Steel Towers, that's not where the work gets done. If we're in Washington DC, the work is not getting done there. Where the work gets done is with our employees. We got outstanding people on the shop floor. I can tell them by names. We got great operators at our facilities. And now, we have tools.

We're just prototyping the tool at Great Lakes Works. That lets our operators understand immediately when they get a little bit off track. It's exciting stuff work, and that's what gives us confidence in the revitalization of assets because that cascades from the top of the organization these targets to full accountability on the shop floor.

And we have to do more here. And with each step, each success, we feel more bold and more confident. But we're still in the early stages. And with a good first step in the quarter, we have to repeat that.

We repeat that when we get our leaders on the shop floor, engaging with our people, helping them be successful and giving them the money to spend to fix the assets. And when we do that, we do well. So, I expect the third quarter to be as good as the second quarter, the fourth quarter to repeat the first quarter. We need to run our assets well.

That's the expectation. And we – and when we don't, there are consequences. There is consequences in our stock prices, and there's consequences to our leaders..

And we'll go to the line of Novid Rassouli with Cowen and Company. Please go ahead..

Good morning, guys. So, just to stick with cost .Can you guys break down the roughly $100 per ton delta quarter-over-quarter in the U.S. flat-rolled cost per ton just into buckets for us? It would be helpful to understand the moving parts driving the sequential swing..

I think the biggest piece is definitely the mining – the improvement in mining operations that's flowing through there by far. I mean, that was – it's a big number. The chart we have on page 13 in the deck is kind of where we're getting into that.

But that – and operating efficiency I mean – I think operating efficiency that Dave is talking about is hard to measure, it's hard to model. But the fact is, it's not just how many tons were produced. It's how well you produce them.

And I think we saw the benefit of that in 2Q is you run better, your fuel usage gets better, your yields get better, your reject rates go down. So, those are big impact on cost, but that's not a really good way to model and quantify those.

And what we are going through the asset realization is we're trying to get more consistency across operations, which will kind of minimize the quarter-on-quarter fluctuation and that type of thing because we know it's so hard to model. The best thing we can do is try and make it a much smaller number..

What we'd like to be able to do with you folks is we need to get you into these war rooms, our Carnegie Way war rooms and the excitement that happens. We're accelerating in this space. We have more focus. We have, I think, stronger emphasis on the operations right now.

And when you see our workers, our USW teammates present the improvements that they're making, it makes you feel great about U.S. Steel, great about U.S. manufacturing, great about the future for the U.S. We got to get you in the war rooms. You got to feel the intensity by which our team is performing..

And then, on the Tubular side, you guys have thought that you could achieve kind of EBITDA break in – breakeven by yearend. I was just curious, if your accounts plateau near the current level.

Is this still an achievable target?.

Hi. Thank you. Yeah. If you look at our outlook, that would assume things stay where they are. So, based on that, that would show that we would – we should be doing – we should be turning positive in the second half, yes, at current conditions..

Thanks, guys..

And we'll move to the line of John Tumazos. And I apologize, I don't have John's company name. Please go ahead..

John Tumazos, John Tumazos Very Independent Research. Thank you, dear. Congratulations on the great execution this quarter. The derived....

Thanks, John..

Cost of sales at the EBIT level in the Flat-Rolled division improved $101 a ton in June from March, which is really good blocking and tackling. The price effect of $23 a ton was about $57 million and 93,000 tons more volume might have been a couple of $100 a ton and $20 million. The iron ore might have been $50 million.

So, I was guessing if there was $182 million improvement in productivity. Now, is there anything you could do to sort of explain that besides maintenance expense and the blast furnace issues greatly as you referred to three years ago when there was a couple of furnace glitches that was very apparent what the problems were.

And maybe, there is a customer relations or employee relations reason why you're not being specific? And I respect that..

Well, no, John. I think when you think about that calculated cost you're looking at, actually, in that scenario, all the proceeds from pellet sales are also moving that number down with the way you're breaking it down. So, that's another moving part that would start cutting into your gap. So, the biggest factors are the ones we called out.

It's seasonal improvement in mining. When you're looking at cost, when you're looking at them, actually, the bands – the proceeds from pellet sales will be in there. And those will be the major factors that are moving it. Productivity helps, but it's not nearly the magnitude of those things..

Anyway, congratulations. It was great..

Thanks, John..

And your next question comes from Michael Gambardella with JPMorgan. Please go ahead..

Yes. Good morning and congratulations on the quarter. Just a question, though, over in Europe. European costs went up quite a bit.

Is that largely due to higher met coal costs running through their system?.

No, Mike. That's part of the – that's related to the FIFO adjustments because, actually, our raw materials costs – sort of big materials we actually purchased in the quarter were down quarter-over-quarter. So, that big swing in cost is purely that FIFO inventory adjustment. The actual physical commodity prices, for us, went down..

Okay.

So, was not the price input going up in the quarter?.

No. It was the FIFO valuation adjustment..

Okay. And just one other question on Section 232. I mean, what is your recommended format for 232, if you were doing it? Would it be a quota system in conjunction with the existing tariffs we have? I mean, my view is that that would be the only way to really address the circumvention issue. Is that what you're hearing or is there some other formats....

This is Dave. What I'd do – you're asking me what I'd do? I do exclusion, given the big punch that they got. But the reality is it's going to be something that's got to be comprehensive, broad-based that will meaningfully adjust the imports of duration. I believe it should be a combination of quotas and tariffs.

But we got to have at least tariffs and it's got to be significant. People have to get this, sometimes, the free trader guys, of which I was one, back in the old days, before I really understood this. People worry about a trade war. We are in a trade war and have been in it for decades and now is the time we have to fix it.

So, you don't fix it with soft response. And I think this administration understands that. And at the appropriate time, they will take action. Meanwhile, we're focused on execution. We're focused on our operations and that's where we're going to make our money.

And at the appropriate time, when this happens, we'll take advantage of that as well and that will be a good thing for U.S. Steel, a good thing for U.S. manufacturing, a good thing for the U.S. But we need bold action on this and we are awaiting that to happen..

And our next question will come from Charles Bradford from Bradford Research. Please go ahead..

Good morning. I've got some questions about the seamless projects. You've talked about being able to supply rounds off of both Fairfield and Lorain. But, historically, you've been buying the rounds for Lorain from Republic Steel also within Lorain and they put in a new EAF four years ago.

The relationship you have with them, would that be terminated?.

Actually, Chuck, we haven't been buying rounds from those guys for quite a while. That operation just wasn't working for us. Historically, we've all supplied some of our rounds for Lorain from Fairfield. The only ones we go outside to buy are the large diameter, small diameter we can't make ourselves.

So, we did permanently shut down one of the seamless mills in Lorain. So, our future round demands were less than were historically. So, we haven't been buying from those guys. We need less than we needed historically. And the Fairfield rounds caster can cover most of our needs.

If we get into some of the really, really large diameter business, we probably have to go and find those because our caster molds don't get us there. But we should be reasonably self-sufficient when we get to this point of time where we can see liquid iron and liquid steel under that rounds caster..

Well, their EAF has been shut down for some time even though it's four years old.

Might not that be the cheaper way to go to get an electric furnace about the same size as you're planning on at Fairfield?.

It's much more suitable for our operations economically to have that rounds caster in Fairfield because that's our point of consumption of the majority of the rounds we need..

Okay. And the second point, in Mon Valley, you've got an 80-year-old hot strip mill. It's making PIW coils well below industry standard.

Does it make sense to put some more money in like you're planning rather than do something to really fix the problem of an 80-year-old hot strip mill?.

That strip mill has a very good customer base and is doing very well. So, it does serve a specific market. But it does have a strong stable customer base. So, at this point, we don't see that as a big headwind for us at all..

But it is one of the 13 assets that we're very focused on. This hot strip mill runs well and we're going to focus on it and keep it going. When you maintain the assets well and you don't wait for them to break and instead you invest on it as you go, we get the returns and we're seeing that..

Next question will come from Matthew Fields with Bank of America. Please go ahead..

Hi, David and Dan. Thanks for the increased detail on the asset revitalization plan this quarter. You broke it out in terms of timing of spending and areas of spending. I was wondering if you could just sort of mix the two and say which areas are you going to focus on first.

Is it iron making in slabs? Is it finishing in hot-rolling? Is it a mix of everything, sort of, just timing of when you're going to address what areas?.

Matthew, it should be – we're attacking all areas at the same time. If you take one part of the process down to do some work, it's probably a good time to do – work another part of the process that minimize overall downtime.

On slide 5 of the presentation we put out there, we're giving examples of the products – some of the things we worked on in the second quarter and some of the things that will come up soon. So, I think we'll continue to give you that kind of color.

In the appendix, there's a few more examples of where we're working currently and where we worked in the past quarter, where we're working in the coming quarter. So, I think that presentation will give you a lot of good color that should help you there..

Yeah. We have accountability by each of the commercial entities, accountability in North American Flat-Rolled. So, automotive solutions basically owns the facility for Great Lakes Works. Industrial service center and mining owns the Gary Works facility and consumer solutions owns Mon Valley. So, you could really work on all these things concurrently.

So, you can have work going on at a blast furnace at Great Lakes Works because that's a bottleneck for auto solution as well as at the same time you can be working on the Mon Valley hot strip mill or at Gary Works, the slab caster and that's – those 13 assets are outlined also in the slide deck.

But we can do these things concurrently, and that's under the leadership of each of the commercial entities within, what we call, the global process owner that owns the overall prioritization of and integration across the whole company under the new position created with Christie Breves as the Senior VP, who also has other manufacturing operations activities, including procurement and transportation and IT and so on.

So, it's – if you think of them as a global process owner focused on the standard work, while at the same time we have commercial entities making sure that they're working on the things that meet their customer needs..

So, blast furnaces may not be down sort of focused in the beginning of the program and maybe spread throughout sort of a product question there?.

We're very focused on this, but it's commercial specific and constrained asset specific. So, it depends on what needs and what like the – again what I mentioned earlier at the B2 Blast Furnace.

That was a key thing that needed to be fixed, and that was moved up into the queue, and we have lot of trouble with the melt in the first quarter and it got fixed. We changed some talents around – changed the focus and made the improvement. That's an example. The hot strip mill at Gary was another example that this was a constrained force.

It was put into queue to make the improvements based upon the customer base it was serving and moved ahead there. So, that's really the way this thing has been laid out. We focus on the assets that need the most help, the constrained assets, and make the improvements there as part of the prioritization..

Okay. Great. And then, one last question on a Section 232 perspective, I appreciate your thoughts so far. Last week, we heard sort of a new concept where the administration may sort of lighten up on the Section 232 consequences in exchange for some kind of deal on Chinese overcapacity curtailment.

Can you give us your thoughts on sort of...?.

I don't think we can speculate on this. I'll just say this, I believe – we believe and discussing with Wilbur Ross here recently with other steel executives, I think we all believe that there is going to be strong action taken. This administration understands what's at stake here. This is something that's critical to our defense.

This asset base, it needs to make sure that it isn't harmed by these imports. It has to be fixed. And I believe the administration will do the right thing in spite of the heavy lobby from the free traders that really don't think they're affected by this. But can we get back to this? You've got to have a strong U.S. steel manufacturing base.

You've got to have a strong U.S. steel for manufacturing for America. I think most people get that. And because of that, we believe the right decision will be made at the appropriate time..

And we'll move to the line of Lee McMillan with Clarkson. Please go ahead..

Good morning, guys. Congrats on the quarter..

Good morning..

And can you talk a little about CapEx plans for the second half, specifically? So far, I think you've spent about $120 million of your $625 million budget. So, I'm just wondering if where that spend might be targeting and if there are any implications for downtime..

Like I said, the downtime, we've accounted for that. And the fact that we still expect we're going to have 10 million tons of shipments out there for our customers. The one thing that kind of skews that number a little bit on the cash flow statement is our working capital team has done a phenomenal job on terms.

So, there's actually quite a bit of work done in the second quarter because we've been ramping up our pace. There's a lot of work that was done in the second quarter, but the bills don't need to be paid until the third quarter. So, you'll see that line jump significantly. It will give you a better color to see that we're on track..

Along that same point, we should highlight here the cash conversion cycle. We're very focused on that, and that's been an important reason why we can afford amp over the last couple year. We've been able to manage working capital very well.

So, I don't people to think that we don't have the cash for the revitalization of assets because we do and you also saw that we had liquidity at an all-time best since it's $3.3 billion liquidity going back to 2001 with the separation from Marathon..

Okay. Really helpful. Thank you. The other question. Inside Coal was reporting yesterday that Clairton has been ramping up from maybe 80% utilization to full. Can you give any update on what's going on there or where any extra coke might be going if you're selling it to third-parties or what? Thanks..

Sure, Lee. Yeah, this was probably in fact actually discussed -blast furnaces are running better, so we actually are getting more production out from them, so we need more coke for ourselves.

And for the most part, that will support the increased bands going to Tubular now than now to say have the welded pipe move back up and running, we need to make more bands for them. So, we'd be working – the furnaces are running better, so we can make those tons. We need the coke, so that's really the connection there..

And our next question come from Sean Wondrack with Deutsche Bank. Please go ahead..

Yeah. Good morning..

Good morning, Sean..

Just a quick question. When you look at your Flat-Rolled segment, when you're doing a lot of asset revitalization, you can see that your capacity utilization is improving. It's at about 77%.

How far do you think – with some of these programs you're going to be enacting, how much higher do you think we can get that? And do you think there's a sensitivity associated with that, like, every 10 percentage points is, I don't know, $500 million? Or how should we think about absorption as we see that improve over time?.

Yeah. Sean, this is Dan. How much those tons add to the bottom line really depends on kind of the market conditions and the spread between price and the raw materials and things like that. But as far as the volumes, we said we expect that we can get, once we're done, another 1 million tons out of these.

That would put them back to the levels we've seen in the past, the – a mid-80s type utilization rate..

Okay. Great. That's helpful.

And how long do you think that will take – when should we start seeing the improvement there? Will that come on a quarterly basis? Or do you think it will take like a year before we start to see that move?.

No. It should be – there shouldn't be any big step changes out there. I'm not sure what the pace would be now. It certainly should gain some momentum the farther we go. But I don't expect we're going to see some big step change in any one quarter.

But I would say that the rate of improvement should continue to increase over the next two years – two to three years..

And is there a way to give a metric that all other things equal right now, 5 percentage points would equate to so much EBITDA improvement?.

I haven't done that calculation, so I don't want to get off top of my head. That's not good for anybody..

Okay. Fair enough. I'll follow up with you..

Sure..

Thanks..

And we'll go to our last question. It will come from the line of Karl Blunden with Goldman Sachs. Please go ahead..

Hi. Good morning, guys. Thanks for taking the questions. Just a quick one here and relating to your balance sheet to both Section 232 and your operational initiatives. As you think about potentially refinancing your bonds, you have some that are callable – or might become callable in six months or so.

Is that related at all to your thoughts on Section 232 and wanting to wait until people truly see the margin impact from the operational initiatives? Or what's your strategy on the balance sheet right now?.

I don't think the Section 232 has much to do with how we're going to refinance our balance sheet. We always keep a close watch on the bonds, and we will be opportunistic. When things are ready to go, we can pull the trigger and make the appropriate decisions for the balance sheet.

We're ready to go right now, if we needed to go and we'll just wait for the appropriate time..

That's helpful. And just a final one.

Just on some new capacity coming into the market, potentially areas such as Arkansas, how is that impacting your business? Is it at all and is that something that you're concerned about for pricing going forward?.

Yeah. I think we're always concerned about the competition. But in this case, it's probably less focused on us and more focused on other competitors. But we respect the competition and do our best to manage our business well. But in this case, we don't see as much impact in this space as we think it's focused more on the mini mills..

Yes. Thanks very much for the time..

And thank you. We'll turn the call back over to Dan Lesnak..

All right. Thank you. Dave.

Can we get some final comments from you?.

Yeah, sure, Dan. Thanks. It's very clear, the reason we're doing the revitalization of our assets. We need to improve our asset base. Now – and to be clear though, they're not broken but we can do better. We need to have better quality, better delivery, better cost structure and, of course, continued focus on safety.

We need to continuously improve in all of these areas. And as you can see from the last quarter, in spite of the fact that we're very focused on revitalizing our assets and we're spending an enormous amount of our people's time and talent in that effort, we can run our facilities well when we stay very, very focused.

Revitalization of assets is going to improve our margins, and it will improve our operational stability. It will reduce the volatility in our operations and therefore enable us to have better EBITDA margins and better performance for our customers, delivering better results to our stockholders.

It's a great honor to be leading this historic steelmaker. Thank you to our employees for a strong quarter. Our success is driven by their dedication and commitment to our customers, and thank you for joining us today and for your continued interest in U.S. Steel..

And, ladies and gentlemen, this conference will be available for replay after 10:30 this morning and running through Thursday, August 10. You can access the AT&T Executive Playback Service by dialing 1320-365-3844 and entering the access code 426382. That number is, again, 1320-365-3844 with the access code 426382.

This does conclude our conference for the day. Thanks for using AT&T Executive Teleconference Service. You may now disconnect..