David B. Burritt - United States Steel Corp. Kevin P. Bradley - United States Steel Corp. Dan Lesnak - United States Steel Corp..

Novid Rassouli - Cowen & Co. LLC Curt Woodworth - Credit Suisse Seth Rosenfeld - Jefferies International Ltd. Gordon Johnson - Axiom Capital Management, Inc. Timna Beth Tanners - Bank of America/Merrill Lynch Brett Levy - R. Seelaus & Company, Inc. Jorge M. Beristain - Deutsche Bank Securities, Inc. Michael F.

Gambardella - JPMorgan Securities LLC Piyush Sood - Morgan Stanley & Co. LLC Matthew W. Fields - Bank of America Philip N. Gibbs - KeyBanc Capital Markets, Inc. Chuck A. Bradford - Bradford Research, Inc. John C. Tumazos - John Tumazos Very Independent Research LLC Andrew Cosgrove - Bloomberg Intelligence.

Good morning, everyone, and welcome to United States Steel Corporation's Third Quarter 2017 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded. Now on the call this morning will be U.S.

Steel President and CEO, Dave Burritt; Executive Vice President and CFO, Kevin Bradley; and Dan Lesnak, General Manager of Investor Relations. After close of business yesterday, the company posted its earnings release, earnings presentation and updated question-and-answer document under the Investors section of its website.

Today's conference call contains forward-looking statements and future results may differ materially from statements or projections made on today's call.

The forward-looking statements and risk factors that could affect those statements are referenced at the end of the company's earnings release, in the earnings presentation and in the Q&A document and are included in U.S.

Steel's most recent annual report on Form 10-K and updated on their quarterly reports on Form10-Q in accordance with the Safe Harbor Provisions. I would now like to turn the conference over to our host U.S. President and CEO, Dave Burritt. Please go ahead, sir..

Good morning. Last quarter, I announced that Kevin Bradley was joining our team as Executive Vice President and CFO.

The experience and fresh perspective that Kevin brings to the team are valuable resources for the successful execution of our strategy to revitalize our assets, develop our talent and create innovative product solutions to remain a strong business partner for our customers. Kevin, welcome to the team. You're off to a great start..

Thanks, Dave. I'm real happy to be part of the team and very proud to be part of this company..

Speaking of our talent, I'd like to thank our employees for their dedication and commitment to achieving our goals. We're asking a lot from them and they are delivering every day under what are sometimes a very challenging conditions and they are doing it with a strong commitment to our core value of safety.

I've spent a lot of time with our employees at our facilities, and I'm always energized and motivated by their commitment and enthusiasm for our customers.

I am seeing firsthand how potential opportunities are being converted into sustainable improvements in our business, such as blast furnace projects at Great Lakes Works that improve operational control and reliability, steel shop projects at Mon Valley Works that reduce downtime or work on our hot strip mills and finishing lines that improve quality, our employees really are making a difference every day.

Some recent events have shown the true character of our employees. When Hurricane Harvey struck Houston, many of our employees in that area were severely impacted, some losing their homes. Immediately, our employees from around the entire corporation were reaching out to help those impacted by the storm.

This type of camaraderie and true caring for our co-workers really does show what being part of U.S. Steel is all about, and I'm very proud to say that I am part of this team. Our thoughts and concerns are with all of those that have been impacted by the natural disasters across the United States.

It's our employees, our teammates that we make the difference for our customers and our stockholders, we count on their commitment to the important work, the hard work, everyday with us. Safety remains our top priority and we are never satisfied with our safety performance unless every person that enters our facilities is safe and secure every day.

Moving on to our results and operations, our third quarter results were modestly better than we expected with stable operating performance at each of our segments, and our Tubular segment producing positive EBITDA in the quarter.

Our results for the first nine months of 2017 improved over the first nine months of 2016 with all three of our segments improving compared with 2016. Our cash and total liquidity position improved during the quarter and we completed a debt refinancing transaction that extended the average maturity of our debt and reduced our annual interest expense.

Our liquidity is $3.5 billion and our net debt at $1.2 billion, the best since 2001 and 2007, respectively, with no significant debt maturities over the next few years.

We've worked very hard to create a stronger cash and liquidity position so we can make the investments to revitalize our assets over the next few years, enabling our critical assets to perform at superior quality and reliability levels for our customers and invest in new technology like Gen 3 steel.

Two relatively stable quarters is a good start for us. But we cannot be satisfied with just two quarters. We still have a lot of work to do to meet our objective of achieving operational excellence, and we remain focused on safety, quality, delivery and cost.

We believe that executing well in these areas is the foundation for long-term success and value creation. We are committed to delivering consistent reliable earnings longer term with our focus on delivering operational improvements by 2020.

Again, we remain focused on our operations and are well-positioned to continue to move forward on revitalizing our assets and investing for customer solutions. We are seeing operating improvements in the assets in which we are investing. We've added talent where necessary.

And our structured and disciplined project management process has gotten stronger. This increases our confidence that we will achieve the 2020 improvement targets we have disclosed. We've made good progress on our asset revitalization program this year and have plans to accelerate our pace next year, so we can get consistent reliable earnings.

We're not only focused on operations. We are also continuing to develop the next generation of steel products for our customers. Our Generation 3 steels provide superior formability and high strength properties, while using a low-alloyed approach for robust weldability.

To expand our capabilities in Generation 3 steels, we announced in late September that a new continuous galvanizing line will be constructed at our PRO-TEC Coating Company joint venture, which will allow PRO-TEC to produce Generation 3 steels with a hot-dip zinc coating.

This line will be the first of its kind and utilizes proprietary technology capable of producing the high-quality cutting-edge advanced high-strength steels that will meet our automotive customers' needs and solve some of their more pressing challenges.

Our Generation 3 steels continue to reinforce why steel will remain the lowest cost, strongest, safest, and most environmentally efficient material of choice. It is our job to create value for all of our stakeholders. We're revitalizing our existing assets, developing our people, increasing our value-added product mix at U.S.

Steel Europe, strengthening our position in advanced high-strength steel for Flat-Rolled customers, and developing new premium connections for our tubular customers. While our primary focus right now is very much on our facilities, talent and steel innovations, we are always looking for opportunities to optimize our portfolio of businesses.

We are taking a hard look at all of our products and markets we serve in each of our segments to determine how we can more fully capitalize on our product capabilities and market positions.

We have made many difficult decisions over the last few years related to underperforming and non-core assets and we must always be open to exploring opportunities that can strengthen and grow our market position, improve our long-term earnings power and create value for our stockholders. As I say, we can and must do better. We're just getting started.

We have a lot more work to do. Dan, let's go to questions..

Thanks, Dave.

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

Thank you. First question is from the line of Novid Rassouli of Cowen & Company. Please go ahead..

Good morning, guys. Thanks for taking my questions. If we could start with guidance, I just want to see, given the volatility that we've seen in U.S. HRC prices, if you guys could give us your assumptions to arrive at your 2017 guidance that would be very helpful..

That's based on the CRU, the last CRU we had, before we have to prepare everything for our quarter-end disclosures. So, that's based on last Wednesday's CRU, hot-rolled was $578. So that's what's embedded in our calculation..

Got it.

And for European pricing?.

That would be using Europe for data from the same period..

Okay. And then moving on to Flat-Rolled costs, we've seen two relatively stable quarters. I was just curious how we should think about costs moving into 2018? Was wondering, if the seasonality of lower pellet shipments in the first quarter of 2018 could potentially drive higher costs? Any insight there would be very helpful..

Well, this is Dave. Maybe I'll let Dan provide more of the details. But we typically don't talk about 2018, but you know the pattern, which we – the quarters run, so you can expect a light quarter as it relates to pellets as we had last year, and you would expect that to continue. We are doing – intense focus on operations and on cost control.

So we're doing our best to deliver on our numbers, but we're really not going to give you much guidance related to 2018..

Yeah. Novid, this is Dan. So, we'll see a little bit of – start to see a little decline in the mining component in 4Q, just a little, which is why you'll see our 4Q numbers are down for Flat-Rolled. But first Q, we do have a large seasonal impact.

And now, that we are -want to point out is, now that we are also a third-party seller of pellets, that seasonal impact is probably be little bit stronger 1Q versus 4Q than it has in the past, a little bit more of a change quarter-to-quarter..

Okay.

But you guys are thinking that costs can potentially move lower on the annual basis based on all the programs that you guys have for 2018, just directionally?.

I mean, there's a lot of moving parts there. Until we get our business plan done, it's hard to come up with a total cost picture.

Certainly, the work we're doing to create more efficiency in our operations will help us, but we really need to see what the total program for next year will be as far as what all we're going to accomplish and how we're going to get there..

But getting back to Dan's part on this, I refer everybody to question number eight, I think we do a nice job of laying out the seasonality of the iron ore shipments. I think it's important for people to understand that..

Got it. Thanks for taking my questions, guys..

All right. Thanks, Novid..

Next question is from the line of Curt Woodworth, Credit Suisse. Please go ahead..

Hey. Good morning, Dave, everyone..

Good morning, Curt..

Hi..

I just had a question with regards to the maintenance and outage costs. You talked about a $375 million on increase this year, and I assume that wouldn't include the opportunity cost of lost volume from that, which could be another $100 million to $150 million.

So when we think about going into 2018, you talked about accelerating revitalization spend, but at the same time you're going to harvest all the efforts that you made this year.

So, can you comment on how you think maintenance and outage costs could look next year? Do you think that even though you're accelerating revitalization, can we assume issues like 1Q don't repeat, therefore you should be able to get more volume leverage out of the asset base? Thank you..

Well, you know – Curt, this is Dave. We're not really going to be commenting too much on 2018. We are putting the plan together for next year. But something to remember in all of this is that as we move forward, if we can find an opportunity to more quickly harvest some of this value, we'll do that.

But no one should think that this is some type of linear relationship in terms of our 2020 targets, where you can just plot a point from today in terms of the volume improvement, this million extra in volume, we talk about as part of the goals going to 2020.

So, I think we have to make sure that people understand that we're not going to automatically have these capacity increases as we move into next year.

And the other thing we're going to take very seriously is if we can continue to deliver here on the short term and gain more confidence in revitalization of assets, we may accelerate and be able to move more quickly and spend money so that we can drive the value toward 2020, because we are really all about this 2020 goal, the 15% to 20% return, and that's where we want to be focused.

So, we may do some things here in the shorter term to make sure that that number is delivered. I mean, after all, who wouldn't want the 15% to 20% return, and that's where we have to be focused and not be concerned about short-term volatility. But we really can't tell you for, at this point, what 2018 number's going to be, Curt.

That's something that we'll roll out at the end of January..

Okay.

And then just on Tubular, can you provide some thoughts on the EAF completion at Fairfield and your thoughts on that?.

Yeah. Sure. I think you've heard me say this before. We believe it's not a question of if, but when. Now, we haven't been able to demonstrate that we're EBIDTA positive, but it's very much at low levels. We need to figure out how to manage this business in a more nimble way, and that means we have to figure out how to run our cost structure more nimbly.

And if we can figure that out, we'll be turning that thing on sooner rather than later, but we have to know how to ride these waves. We're trying to get rid of all this big peaks and big valleys and create greater stability and more predictable earnings.

That's a heavy lift for our business, and we want to make sure that the Tubular business, not just the North American Flat-Rolled business and not just the USSK business has more stable earnings longer term.

So certainly, the Electric Arc Furnace is going to be in our future and when we're confident that we have strong EBITDA returns, we will have an announcement. And then, in the next, I guess, 30 months or so, we'd have that up and running and performing well. But again, it's a matter of timing.

We have to have confidence that we have sustainable EBITDA and a flexible cost structure, and then we'll have an announcement to turn that back on.

Did that help?.

Okay. I'll go to our next question, sir. Next question, Seth Rosenfeld, Jefferies. Please go ahead..

Good morning. Thanks for taking my questions. I want to touch on a couple of points regarding the timing of the CapEx spend associated with the asset revitalization plan. First, I noticed that you trimmed the fiscal – the full year 2017 target by $50 million.

Can you explain why and if there's perhaps any difficulty in ramping these CapEx projects? Second, given....

Yeah. I don't think there's really any difficulty in ramping of the CapEx projects. I think you know how seriously we take cash, and so the CapEx number is on a cash basis. And certainly, we have the payables in the queue, but we're managing the terms of those commitments very tightly.

And so, it's actually a good news story that we're able to get some things done here, spending less cash rather than more cash. So, I think we're pretty much on track with where we think we should be..

And Seth, this is Dan. None of that reduction came on the asset revitalization program. Our guidance for the asset revitalization spending is still where it was. Across some other projects we may have decided in some other areas whether we need to move things around or a lot of times it's a matter of getting projects done under budget, which helps us.

But we haven't changed our assessment of the spend for the asset revitalization this year..

Okay. Thank you. And just a follow-up on the expedition, I know you won't give any formal guidance for 2018, but should we expect on the CapEx side for 2018 a similar choppy pattern of investment for the course of the year? Obviously, year-to-date spend has been quite low. So, you're targeting a very big pickup in CapEx in Q4.

Should we expect that seasonally into 2018?.

I don't know that we can see the flow at this point. Like Dave said, some of it's just terms, lot of work's been done already. The bills will get paid in 4Q. So, that's why it's not shown on the cash flow statement right away. But I'd say, it's too soon to guess on what the overall pattern of CapEx will be quarter-by-quarter next year..

Yeah. I know everybody is eager for 2018, and let me tell you, we're eager for 2020. So, that's where we have to be focused. We're going to deliver here on getting this asset revitalization in place, what we call accelerated manufacturing performance coupled with our reliability centered maintenance in a more robust way.

And when we do those things right, we're going to deliver on 2020. So, that's the prize, 2020. And so, as we move forward with a robust plan for 2018, we'll give you more information on CapEx..

Thank you very much..

Next, we have Gordon Johnson, Axiom Capital. Please go ahead..

Hey, guys. Thanks for taking the question..

Good morning, Gordon..

Hi, Gordon..

Good morning. Just looking at import prices, for the first time in a while, we've noticed that U.S. prices are nearly at parity with a lot of the global import prices.

So, just wanted to get your thoughts on, if you think even though the 232 hasn't actually been passed, if you guys think the effect of the 232 is already in prices? And then I have a follow-up..

I guess, Gordon, I'd say, one of things – the biggest impact probably on import prices is the cases from the Flat-Rolled, the cases from two years ago that took some of the really bad players out of the market. So, I think seeing those higher import offers is a reflection of those trade cases more than anything else. How close U.S.

pricing got to import pricing, that's unusual, I think. So – no, I think, that's supportive of what's going on in the recent price announcements..

Yeah. I'm not so sure how much is built into the 232, I think that's anybody's guess. But, Gordon, I think we're still fairly optimistic that 232 will have a meaningful impact on the continued unfair trade practices that are harming domestic steel. I mean it's not again a question of if, but when.

We count on the government to do their job in this space and we're going to be patient and let them do it. And again, we're confident that we'll see something happen and when it does that'll be a good thing for the steel companies in America and a good thing for the United States of America..

Thanks. That's helpful. And then just a follow-up. If I could get your thoughts on the Vietnam decision, and also separately, we've heard some comments recently just in the field that there may be some inventory building in the oil patch, some excess inventory building in the oil patch. If you guys can comment on that. Thank you..

Gordon, on the oil patch, I would say, I haven't heard our guys mention that. That would actually be pretty unusual because typically what we see is, particularly for the people based in Texas, for tax reasons, to minimize their tax bills, they try and minimize their inventories by year-end. So, I haven't heard that from our guys.

But like I said, that would be an unusual pattern for that business..

Okay. Please re-queue, sir. Okay, sir, your line is open. Go ahead, Gordon..

Yeah. Sorry. And then just your thoughts on the Vietnam circumvention case..

You know what, I think on the Vietnam circumvention case, the preliminary decision's just been delayed indefinitely and we really don't have anything more to report on that..

All right. Next, we have Timna Tanners of Bank of America. Please go ahead..

Yeah. Hey, good morning guys..

Good morning..

Hello..

I want to ask two questions. One, regarding your take on current market conditions and the other about your asset repair program. So, really, your comment on the lead time, still four-and-a-half weeks, not awful, but not great. One of the other CEOs in the space talked about market conditions in the spot market starting to improve.

So I wondered if you could comment on that. And then also if you could give us any insights into the quality or the discussions with your auto customers given it's that time of year, and if you're concerned about passing through higher costs, like met coal and alloys? Thanks..

Well, I'll handle the first one, Timna. We don't talk about the prices and the dealings with our customers. That's between us and our customers. So, we won't share any information about that. We like to keep that confidential, and we think it's appropriate to do so. That was your first question.

What was your second one?.

The market conditions..

The market conditions, we're not going to comment on the market conditions as we get....

Lead times.

Lead times and if you could comment on any recent improvements such as was commented on by other companies, yeah?.

I think for our lead times, our lead times are, like I said, they're up about four-and-a-half weeks for hot-rolled, few weeks longer for cold-rolled and galv. I think, for us, it's a little bit different because we are running on a restricted footprint, because of the work we're doing. So, we only have a certain amount of tons to fill.

So, I think maybe how we fill our books may be a little bit different than other people. So, that may be causing us to be a little different than the market, in general..

That's fair. Okay. Thanks. And I wasn't trying to probe too much on your customers, but just if you're expecting to be able to pass through higher costs, but if you want to comment on that, that's great; otherwise, I understand.

And then with your asset repair program, I noticed there was a comment about an additional 1 million slabs that could be generated from your existing assets. And I was assuming that that means finishing eventually into final product, so wanted to understand that a little better.

And also noticed that investments did not include Granite City, so I just wanted an update on that as well, please..

Just to be clear, this is a revitalization program, it's not like our assets are in terrible shape. We're bringing them up to superior levels. I think we talked about this a lot. The improvements that we've made at the blast furnace most notably in Great Lakes, the B2, the D4 and these are running at all-time record levels.

And the B2, for example, is 65 years old. So, it's not like we're repairing them, we're bringing them to the best-ever condition. So, we prefer, Timna, the asset revitalization rather than repair, because it clearly is going to give us some competitive advantage and deliver this 15% to 20%.

Dan?.

Yeah. And Timna, on incremental volume, I think we believe that these facilities will be able to produce a million tons or so more slabs. I guess we said slabs, now certainly we have finishing capacity, so how those tons get in the market the market will determine that. So, there could be slabs sales, there could be finished product sales.

We're going to look for where the best margins are, but we have, like we said, the capability to produce an extra 1 million ton starts with slabs and then, like I said, the market will determine what product that turns into. And then, I'm sorry, what....

It's multi-part question, Granite City..

Yeah. There is work at Granite City, certainly not as big as a couple of the other plants right now, but Granite City is part of the program. All the domestic steelmaking operations are part of the program..

All right. Thanks..

And next question is from the line of Brett Levy, Seelaus. Please go ahead..

Hey, guys. As you look to 2020, just I want to talk a little bit about the automotive market, it seems like the aluminum rollers, the Constellium, Aleris and Novelis, seem to be aiming a lot at CapEx at exposed automotive. You've got many mills developing more HBI for cleaner feed potentially to aim at automotive as well.

And as you guys look at it, and as you guys talk to your customers, I mean I know you're not going to mention which platforms, I mean obviously Chevy liked to drop a lot of rocks in their trucks, in commercials, which suggests they are not going to aluminum any time soon.

But can you talk a little bit about what you're hearing from your automotive customers as you look out to what their platforms will look like in 2018, 2019 and 2020, and sort of how strong your position is for your kind of steel that will go into these cars and trucks?.

Dan, why don't you take that, and then I'll follow up..

Yeah. Hey, Brett. I think what we're hearing from our customers is they want us to move forward faster on our development of Gen 3s. That's important to them. So, I think our focus is really moving into that market, because we understand there's going to be a lot of competition trying to make their way into automotive. It's an attractive business.

Our strategy is to move towards the highest end of the market we can, because we feel we have the strongest position there..

And are they saying we'll be there for you in 2020, if you do what you need to do in Gen 3?.

Yeah, absolutely. And in fact, we're working very closely with a number of customers who are helping us deliver what they need. Remember that our Generation 3 is a little bit different than others in that others are primarily focused on the press-hardened steel and ours can use the existing tooling and dies.

So, it ends up saving time and money for our customers and they're excited by that possibility. And that's what this PRO-TEC JV is all about.

We currently have pre-production orders off our Continuous Annealing Line for our weldable 980 Gen 3 with the 24% elongation with some of the OEMs, as well as we are currently finalizing our qualifications with the other OEMs. So, we feel very good where we are.

Obviously, this is going to take a couple of years to get in place, but we do think we have something pretty special here, but we have to deliver and we have to execute it and we've just announced that. And so, we're excited about the possibilities as we get to 2020..

Thanks very much, guys..

The next question is from the line of Jorge Beristain, Deutsche Bank. Please go ahead..

Good morning, Jorge..

Hey. Good morning, gentlemen. A few follow-up questions.

Can you quantify what the volume impact from Gary Works Number 6 blast furnace outage is or will be in 4Q?.

Not specifically, that's why we gave overall volume guidance for the year, because we know we're going to take so many different outages. Any one furnace, any one strip mill can influence at any time. That's why we went to giving a full year volume number to kind of take the guesswork out of that..

Okay.

On the recent Kobe Steel measurement scandal, is there going to be any potential negative impact to your PRO-TEC JV because of that or is it just a completely isolated product line?.

Well, as far as this impact is, we don't see any impact, as you recall, we're the – U.S. Steel is the substrate that's provided to PRO-TEC. So, that's all U.S. Steel. So, there should be no implication related to the Kobe Steel incident..

Okay. And then maybe just a technical follow-up on your tax rate.

Can you just explain why taxes paid were technically zero? And just give us an idea of how many more years you foresee having tax loss carry-forwards?.

One of the biggest thing that affects that tax rate is, we have a very big depletion discrete item that just shows up on our tax footnote, that really keeps us from having a – that really affects our overall rate, that's a good reduction to our rate. If you look at our tax footnote, you'll see up in there, what is the after tax amount of our NOLs.

The better we do, the quicker it runs off, but we certainly expect that we're still covered for next year, most likely..

Okay. Great. And so, maybe just one last question on the Trump Administration's NAFTA regional content push of 85%.

Do you see yourself as a beneficiary of that higher content rule?.

Well, we're monitoring the formal, the renegotiation process. We certainly have a cross-border trade with both Canada and Mexico, primarily in automotive through NAFTA, and North American Trade is not our highest trade priority. Our focus is more on the unfair trade from overseas, the dumping of steel into our market, that kind of thing.

Steel that's subsidized by foreign governments are undercutting the American market. And we'll continue to watch the NAFTA process and we'll engage with the Administration as appropriate. I really don't have more than that..

And our next question is from the line of Michael Gambardella, JPMorgan. Please go ahead..

Yes. Good morning and congratulations on the last quarter, and the last two quarters despite the declining price, that's quite an accomplishment..

Yeah. Well, we have a lot of work to do. We're just getting started..

Right. The question just going back to Section 232, Commerce Secretary Ross had said in late April, I think, that he would have the recommendations to the President by the end of June, and here we are with nothing yet.

What's your opinion? Why the big delay?.

Well, I think there's a lot going on in the Administration, no doubt. And what we've heard them say, and we believe them, is that they want to study this thoroughly and they want to make the right decision. And we've said before, we're confident they will.

This is something that has been egregious and, certainly, the Commerce Secretary understands that. And anybody that's close to this issue fully understands it. That's why we're optimistic that there's going to be strong action. But we certainly want them to think it through and do the right thing. We don't want an anemic response.

We want an appropriate response. And when people have the opportunity to study things thoroughly, we're confident that they'll come across with the right and meaningful response. So, it's a very busy time for this Administration with a lot of things going on and they have to sort through those.

But we know, I think, it's January 14, something has to be brought to the President, and he will be deciding by April. And we eagerly wait for an appropriate response, which we think we'll get..

Okay. Thanks, and keep up the good work..

Thanks, Mike..

Next question is from the line of Piyush Sood, Morgan Stanley. Please go ahead..

Hi. Dave, Kevin, and Dan. Thanks for taking the questions.

First around – just wondering if you've concluded your met coal negotiations for next year? Any thoughts how prices would change?.

No, we're still negotiating, and I said we're pretty consistent, we'll give you guys an update in January. But the same thing with our steel contracts, while we're negotiating with our customers, we really don't like to speculate publicly on where we're going..

Again, we'll provide you some updates in 2018 in January. I know this is a bit of an awkward time, when you're trying to close out the year and get into next year, but we're going to stay with our process and talk about 2018 in 2018..

Sure.

And the second one, in the sequential bridges for EBITDA, 2Q to 3Q, could we go through the other items, and if – especially if some of that is kind of sustainable either increase or decrease?.

On Flat-Rolled, the biggest change in other is, we had a one-time item of $45 million in the second quarter we said would not be recurring. So, that's the biggest change you see in the sequential Flat-Rolled, other category. In Europe, the biggest change is, we've had some FIFO inventory valuations along the way. And they were pluses and minuses.

They've netted themselves up pretty well. So, that's just going different way – not big a number, but going different ways in second, third quarter created that kind of difference. That was the biggest piece. Also, for Europe, there was some favorable foreign exchange implications for us there. Tubular, it's really a collection of small items.

There's nothing really of any significance to call out on Tubular..

That's helpful. And last one for me, and it's more high level, but just comparing hot stamping versus cold stamping technologies.

Could you talk a little bit about which one you're focusing on more right now and which one you'll probably be focusing on maybe two to five years? And if your approach is, at this point, a little different versus where the other steel industry guys are headed?.

Yeah, we're focused on the normal process that we have today.

So, it's the normal quick stamping approach, which saves time for our customers; whereas the press-hardened steel is more of a forging type approach where the other types of advanced high strength steel you have to heat it up to like 90 degrees, and then it gets squished into the part number.

Of course, that takes extra seconds to do that, and when there's 16 million vehicles a year, you can imagine how costly it is to go with the press-hardened steel approach versus a normal type stamping approach. Stamping is fast. Press-hardened steel is slower. And we have the really good processes for the weldability, the formability with our Gen 3.

So, that's the basic difference..

And the biggest thing is, it will be lower retooling cost to our customers who adopt our grades. That's why we're pursuing this, because we think the net benefit to the customer between getting the grades they need and not having to do massive retooling at our operations is a good thing for them..

And next, we have Matthew Fields of Bank of America. Please go ahead..

Hey guys. I wanted to ask about Tubular pricing. You had a nice jump in pricing in the third quarter.

Do you think you can hold that into fourth quarter given your comments about people running down inventory in the oil patch?.

For the most part, our Tubular pricing is usually about a quarter out. That's kind of the nature of that business. So, I would say, we don't expect any unusual headwinds for Tubular pricing in 4Q, no..

Okay. And then on the balance sheet, just sort of a couple of questions. You sort of talked earlier on the call about the move eventually towards more stable earnings, more predictable earnings.

Given the cyclicality in the business, do you still think you have the right level of sort of dollar amount of debt at sort of just under $3 billion or do you think that there might be a lower level going forward that would make you more comfortable or do you think it could be higher if you eventually stable out – stabilize out the earnings?.

Matthew, it's Kevin. Thanks for the question. I've looked at a lot of the work that's been done on the balance sheet over the last couple of years, it's actually pretty impressive. It is strengthening. If you look at the debt levels have come down a little bit in the last year, but net debt obviously at pretty impressive levels.

So, you saw the refinancing we did earlier this year on $750 million, we got some better pricing and just about doubled the tenure on that debt, pushed out all near-term maturities, so some good work there.

I think we look at it and say, the working capital progress that's been made has been exceptional, but there's still opportunities; on a percentage basis, there's still opportunities to improve on working capital. We think there's big opportunities as we improve the financial profile and the stability of that profile to also get better efficiency.

We think we could be looking at the ability to refinance more of the debt next year into a much better rate environment. So, we're optimistic. As Dave acknowledged, there has been a lot of good work done by this team before I got here, and we'll look to improve it over time..

And a follow-up, if I may, on the comment about refinancing. Your secured bonds, that's the highest coupon you have, is callable in July in 2018.

Is there a chance you may address that one early or are we waiting until July?.

We're keeping a close eye on it. We don't think that really has a long-term place in our capital structure. So, we plan to address it. And as a team, we'll pick the right time to go in and take that out and get to higher ground from a capital structure standpoint. Thank you..

Our next question is Phil Gibbs, KeyBanc Capital. Please go ahead..

Hi. Good morning..

Good morning, Phil..

Good morning..

Dave, is a target for 10 million tons of shipments in U.S.

Flat-Rolled still intact within your guidance?.

Yes..

Okay. Very simple. Appreciate it.

On the Gen 3 coating line, do you think this is going to be sold out day one with platform-specific wins given customer demand pull or is it going to take a little bit of time?.

We're pretty excited about this. Obviously, it's hard to commit that we'll be that far along, but we feel pretty good about our Gen 3 and this JV that we have in place. So, we're excited about the possibility.

So, we're working really hard to fill it up and it's going to take a while, obviously, to get the facility constructed, but we'll have to see how it goes. But we're cautiously optimistic that it will do very, very well..

Okay. And then my last question is kind of more of a housekeeping or accounting question, just so I make sure what's in the numbers here.

So, the CapEx got trimmed a little bit right now, but has there been a change in the projection for the full year benefit from the accounting reclassification of that $275 million?.

No, that's still where we're at, Phil..

Okay. Appreciate it. Thanks very much..

All right..

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

Good morning..

Good morning, Charles..

Good morning..

Can you talk a bit about your purchases of steel specifically the blooms for your seamless and whether your supplier, which I understand is Nucor, is pricing the product relative to the price of Tubular or do you have some other kind of pricing system?.

Yeah. Chuck, I mean for our rounds for our Tubular business, we don't get into who we're dealing with. We're dealing with people to do sell commercially, but at their negotiated prices, they're not indexed or anything like that. It is negotiations as we go..

Okay. Can you also talk about the tax situation? If the federal tax rate goes to 20%, as might be announced tomorrow, what would that have eventually on your deferred tax situation? Would you have to write down your deferred? I guess it's some future benefit..

Chuck, that's probably too technical, and we'd have to be – why don't you shoot me an email. I guess I can get our tax people to look into that, but off the top of my head, that's a little bit too deep for me, I think..

It's probably too early even to – this tax position is so complicated, like so many other areas of the business, we're going to continually evaluate it. We think overall tax reform is a good thing. Simpler is definitely better. This will help revitalize our economy. It will be good for the economy and, therefore, good for us.

But as far as the overall tax implication, we have a very low effective tax rate right now. We have a lot of NOLs. So again, we're focused on the operations and focused on the Gen 3, and that's where we need to put our time. But certainly a tax reform would be a good thing for us, but it's probably more around the edges than a big impact..

Thank you..

And our next question is from the line of John Tumazos from John Tumazos. Please go ahead..

Thank you very much.

As the Tubular business has rebounded, has the mix changed? You idled I noticed the (41:31) in the north, are premium connections or other product lines more important now?.

Yeah, John, and that's certainly our focus. We did get our welder facility back on line, but most of our capacity is seamless. You know that the heat-treated seamless product is the best product out there for us. Premium connections are important for us. We are taking that heat-treating line, was in Lorain.

We're going to move it to one of the other facilities, where it makes more sense for us. So, maintaining and having strong heat treat capacity is important for us. That's why we're going to get that line back up and running at one of the other facilities..

Yeah. I think everybody understands it, and as Dan said, it's really important to us here as our customers that – they're drilling longer laterals, they're increasing the number of frac stages and drill in the more demanding environment.

And you recall, before we developed our own suite of premium connections, we were unable to participate in this value-added segment of the OCTG market. So, it's going to be increasingly more important to us. Again, we get to the stable EBITDA, we'll be able to invest in more premium connections.

But first, we've got to get the operations ready and making some more money..

If I can ask a second question. Now that business is good, a couple of good quarters, Europe, Tubulars, U.S. Flat-Rolled are all humming nice.

Do you think you would revisit attempting to sell Košice or the Tubular division now that business is good, trends are up, or do you think you're just doing good and you don't need the money?.

Well, just first off, I don't think we're doing so well. We can do a lot better than this. We're just getting started here. We have to approach this very humbly. This is a kind of industry that can knock the wind out of you. So, we've got to be very focused on the day to day, while at the same time having the 2020 in sight.

But we've said this before, everything's for sale all the time. If we can extract value for our stockholders, we'll work with whoever it is to create value. We're in this for our stockholders. And the longer-term stockholders are the ones we care about, and that's what we have to do.

We have to get off this short-term focus here of continually worrying about the short-term earnings and get more to consistent, predictable earnings, so we can deliver this important value for 2020. That's what we have to do. And while we can say a couple of good quarters, we can do better than this.

And there's a lot of things that we can improve upon and we intend to do so.

But as far as the assets, the portfolio management, we've made some hard decisions, whether it'd be in Canada or even more recently it was not as hard a decision, but the sale of a non-core asset at Tilden, we're going to continue to do this thing, and if there's value for our stockholders, that's the name of the game, and that's what we have to get more focused on; predictable reliable earnings and consistent beating of the drum, safety quality, delivery costs, revitalizing the assets, Gen 3 steel, and getting this 2020 number.

So there's a lot of work to do. I don't want you thinking that we're in good shape here because there's more we have to do..

And next is Andrew Cosgrove, Bloomberg Intelligence. Please go ahead..

Hey, thanks for taking my call. I'm not sure if you've covered this because I had to hop off for a second. But I was curious about the European iron ore costs, how they kind of flow through. And I understand that you guys mainly buy pellets, right, from Russia and Ukraine.

So, just trying to get an idea, maybe if there is a lag mechanism there or just a little bit more clarity?.

Yeah. Sure, Andrew. This is Dan..

Hey, Dan..

Yeah, we buy our pellets over there. It is mostly pellets and it's quarterly pricing that we negotiate. It's not indexed, it's not – but it's negotiated. But it is quarterly, so you'll generally see about a one quarter lag on when it flows through our cost side.

I think what helps us in Europe is, our steel product pricing is also kind of shorter term than it is here. So, you tend to see a decent match up of steel price changes and raw material price changes flowing through, it's why we see more stable margins there..

Okay. Great. And then maybe on – again, sorry, if you covered this already, but any color around order books. I mean I know one of your peers had mentioned something about Flat-Rolled order book kind of picking up more recently on their call.

I'm just curious, if you guys have any color with respect to that?.

I'd say it's a little bit different for us because we are running on a limited steel supply in general, because of what we're doing with our assets, 10 million tons. So, it's not like we're trying to go fill up capacity. We have the orders to match.

Just to service our good strong customer order, our contract customer base, that ties up most of our tons. So we don't have to go out and chase tons at this point..

Okay. And then one last one.

OCTG, I mean, I know that the rig count is kind of rolling over a little bit, but you have a big backlog of DUCs, and just kind of curious, if the supply and demand dynamics are obviously shifting more towards making sure that we focus on completions relative to just at looking at rig count?.

I'd say what we're seeing there that market has flattened out. That's why I think, if you look at our outlook, I think that would imply we're thinking things could be pretty stable for the next few quarters probably. So, I'd say that it seems like it's kind of stable right now.

But in this environment, how long that remains – how long that lasts, that remains to be seen..

Sure. Thanks a lot. Appreciate it..

Thank you. And the last question is from the line of Seth Rosenfeld, Jefferies. Please go ahead..

Thank you. A few follow-up questions on the European business, please. You obviously reported quite strong margin improvement Q-over-Q and your guidance seems to imply for even more expansion into the fourth quarter. I noticed in Q3, you flagged I think a $45 million tailwind from inventory revaluation and FX.

Can you help us understand the scale of those two contributions and would you expect that to continue into Q4? And then the second implied from your full year guidance maybe $25 per ton incremental margin increase in Q4, is that just metal spreads or is there something else improving your operations in the fourth quarter?.

I think for Europe, I think we would expect to see higher volumes and higher prices right now. This is our expectation. You know that the FX is probably favorable next quarter again, basically what we've seen. The inventory reval, that tends to maybe balance itself out towards the end of the year.

So, that probably isn't a big quarter-over-quarter change. It's more price and volume in Europe driving that 4Q number..

That's great. Thank you very much..

All right. Thanks. Dave, some final comments..

Thank you for your interest in U.S. Steel. We're working hard every day to earn the confidence of our long-term investors. We are focused on delivering long-term results without being distracted by short-term market volatility.

We believe our intense focus on operations and improving safety, quality, delivery and cost will result in more reliable and consistent results and create value for all of our stakeholders, our stockholders, our customers, our employees and the communities where we operate.

We are building the kind of results that should give our longer-term investors more confidence in our 2020 asset revitalization commitments as we deliver more cost-effective and reliable solutions for our customers. Thank you. It's time to get back to work..

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