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

Seth Rosenfeld - Jefferies International Ltd. David Francis Gagliano - BMO Capital Markets (United States) Curt Woodworth - Credit Suisse Securities (USA) LLC Piyush Sood - Morgan Stanley & Co. LLC Timna Beth Tanners - Bank of America Merrill Lynch Matthew W. Fields - Bank of America Merrill Lynch Matthew Korn - Goldman Sachs & Co. LLC Chris D.

Olin - Longbow Research LLC Michael F. Gambardella - JPMorgan Securities LLC Chris Terry - Deutsche Bank Securities, Inc. Philip N. Gibbs - KeyBanc Capital Markets, Inc. Andreas Bokkenheuser - UBS Securities LLC Alexander Hacking - Citigroup Global Markets, Inc. John C. Tumazos - John Tumazos Very Independent Research LLC Charles A.

Bradford - Bradford Research, Inc. Karl Blunden - Goldman Sachs & Co. LLC David Lipschitz - Macquarie Capital (USA), Inc..

Good morning, everyone, and welcome to United States Steel Corporation's Second Quarter 2018 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. Now, after close of business yesterday, the company posted its earnings release, earnings presentation, and updated question-and-answer document onto the Investors section of its website.

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

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

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

execution, capabilities, and quality and delivery. First, execution, we effectively managed both our challenge at Great Lakes Works and our opportunity at Granite City. As we disclosed during our first quarter call, we began the second quarter with an unplanned operating issue at the steelmaking operations at Great Lakes Works.

We were able to minimize the impact of the outage at the steel shop by getting the vessel back in service quickly and efficiently. And in Granite City, the focus and execution demonstrated by the team was remarkable.

As a result of their hard work, we restarted B blast furnace and steelmaking operations without any safety incidents and ahead of schedule. This allowed us to respond to our spot customers' needs sooner than expected and provided an opportunity for us to rebalance our footprint to better support our strong order book.

This is the type of execution that is required to win, and we are winning. Next, increasing our capabilities. Our customer-driven, value-focused business model has been extremely successful in identifying value-adding commercial opportunities for our products.

When we work closely with our customers to understand and solve their strategic issues, we win together. I've said it before but it's worth repeating, we are the market leader in Generation 3 advanced high strength steel.

The investment we are making at our PRO-TEC joint venture is on track and we are confident that our proprietary GEN3 product will meet the demanding needs of our customers. Last, improved quality and reliability. Our asset revitalization efforts have been focused on the facilities that are vital to achieving long-term success with our customers.

We are seeing the benefits from improved quality at our highest value-added Flat-Rolled facilities and improved reliability at our 13 priority assets. And, now, we'll turn the call over to Kevin Bradley to cover our second quarter results and our third quarter and full-year guidance.

Kevin?.

Thanks, Dave, and good morning, everyone. With continued positive momentum into the second quarter, we reported adjusted EBITDA of $451 million, which exceeded our expectations. This brings our first-half adjusted EBITDA to $706 million, a 50% improvement over the first half of last year.

All three of our reportable segments had improved earnings compared to the first half of last year. Revenues in the quarter of $3.6 billion increased 15% on a year-over-year basis, reflecting our ability to capture benefits in today's strong market. We are seeing favorable trends in the markets we serve.

End market demand has been strong in all three segments, benefiting from the increased prices and shipments in 2018. We are also seeing benefits from our asset revitalization efforts through the expanded capabilities as we are now participating in steel applications that we could not previously serve.

On the operational side, I want to briefly highlight a few second quarter events in our Flat-Rolled segment. First, as Dave mentioned, we were able to minimize the adverse impacts of the unplanned outage at Great Lakes.

Second, we also completed a planned maintenance outage at the Gary Works Number 8 blast furnace in mid-June both ahead of schedule and under budget.

These two positive outcomes, along with the expedited restart of B blast furnace and steelmaking at Granite City, enabled us to exceed shipping plans in the second half of June and take full advantage of increased contract and spot market customer demand. Our European operations continue to be our most reliable and consistent performer.

Europe also contributed to a strong finish to the second quarter. Now shifting to guidance, our focus on execution is beginning to be reflected in our results.

Based on our confidence in this continued execution, coupled with the positive market backdrop, we are raising our full year adjusted EBITDA guidance to a range of $1.85 billion to $1.9 billion. For the third quarter, we are currently expecting adjusted EBITDA of $525 million.

Our normal seasonal pattern at the enterprise level would have third quarter EBITDA higher than fourth quarter. We are not anticipating that to be the case this year. There are two primary drivers behind this shift.

First, as we communicated in our Q1 earnings materials, we had a significant planned blast furnace outage at Great Lakes Works in the third quarter. This 52-day outage is part of our asset revitalization program and actually kicked off today.

This investment is targeting reduced operating cost, as well as improved productivity and reliability of the furnace.

This major outage, along with other asset revitalization projects scheduled for the third quarter, will result in an increased maintenance and outage cost in our Flat-Rolled segment as compared to the second quarter of approximately $50 million.

The other primary driver for expecting a stronger fourth quarter versus third quarter is that the fourth quarter will be the first time in 2018 where we expect to have our full portfolio of U.S. blast furnaces available.

We are anticipating the restart of the second blast furnace at Granite City in October and do not have any planned blast furnace outages in the fourth quarter across the North American Flat-Rolled segment. Looking at the back half of the year, we are now expecting adjusted EBITDA margins in the back half in the mid-teens.

Digging further into the third quarter, our third quarter guidance assumes lower sequential EBITDA in our European segment. This reflects the lower seasonal pattern in the European market. We take advantage of the lower demand each year to perform necessary maintenance outages to minimize customer impacts.

These seasonal planned actions will drive an increase in outage costs of approximately $20 million. We also expect an unfavorable commercial impact of approximately $20 million related to lower volumes and changes in product mix versus the second quarter.

The financial performance of our Tubular segment has been negatively impacted by increased substrate costs. We expect pricing increases to begin to flow through in the third quarter driving positive adjusted EBITDA for Q3.

Before I turn it back to Dave, I just want to remind everyone that the work we have done on the balance sheet and the capital structure has put us in a position of strength. Our cash and liquidity provide us the ability to execute on our inflight initiatives as we focus on opportunities to drive sustainable, profitable growth for the business.

We still have a lot of work to do, but I'm encouraged by our progress and become more confident in our ability to execute our strategy each passing quarter. With that, I'll turn it back to Dave..

hot-rolled, cold-rolled, corrosion-resistant, tin mill products, tubular and slabs. Let me pause just a second here. Did everyone hear that? We are open for business and ready and willing and able to make and ship hot-rolled, cold-rolled, corrosion-resistant, tin mill products, tubular, and slabs.

Contrary to the false information spread by those who import slabs quoted in the media, we have offered and remain willing and able to sell significant volumes of merchant slabs in the U.S. and at market prices. Second, the investments we are making in our business are working. The business is stronger.

Our balance sheet is flexible, and we are committed to growing the business in a way that returns value to our stockholders. We believe value creation is maximized when we invest to achieve sustainable and profitable long-term growth.

The foundation is in place, and we believe that the improvements we are targeting through our asset revitalization efforts combined with additional growth-oriented investments will establish a pattern of stronger and more consistent cash generation across the cycle.

We still have a lot of work to do, but we are encouraged by our progress and become more confident in our ability to execute our strategy each passing quarter. Dan, let's move to Q&A..

Thanks, Dave.

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

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

Good morning. Thanks for taking my questions today. I'd just like to better understand the outlook for volumes and mix in your U.S. Flat-Rolled business given the ramp of Granite City.

A couple of quick questions, I guess, Granite City, can you confirm the contribution to volumes in Q2 and how we should expect the ramp-up of both furnaces in the coming months? Should it be an immediate or more gradual ramp that we should be forecasting? And then going forward into 2019 perhaps, how should we consider the product mix and also the contract mix for U.S.

Flat-Rolled business shifting as Granite City hits full utilization? Thank you..

There's a lot in there. Let me just first say that we're probably not going to be talking a whole lot about what's going on with 2019. It's a little bit premature for us to give a lot of details on that. But I'll pass it to Dan if he could help provide some color..

Yeah. Sure, Seth. So we got about 30,000 tons in June by hitting the ground running faster than we expected. So yeah, we said before we expected about 100,000 a month. We should be at that run rate starting July. So it's a good progress there, a good performance there. The A blast furnace, hoping to bring that on October 1; around October 1.

About a 75,000 a month contribution from that furnace. So certainly in this year, more of that – that one will give us a little more spot exposure than we had. A lot of those new tons will wind up being spot. Certainly, our contract customers will take as much as they need. Like Dave said, a little bit too early for 2019.

How much becomes spot versus contract next year is really going to determine what our customers, in particular our important contract customers want from us..

Thank you.

And on the product suite side, you have obviously been quite clear on the call earlier that you are willing to sell slabs to third parties, but based on just your internal optimization or your internal downstream capacity, bringing online Granite City, recognizing that the downstream was already running at Granite City historically, how should we expect your product mix? Thank you..

I think, as Dave pointed out, we do have capacity to sell slabs. We've been a commercial seller of slabs all along, but we do – with all our blast furnaces running, we have more capacity than we had before. To the extent that we have more slab demand, we'll fill it..

Great. Thank you very much..

The next question is from the line of David Gagliano, BMO Capital Markets. Please go ahead..

Hi. Great. Thanks for taking my question. I just have a quick question on the contract versus spot mix given the time of year. Can you just remind us again, you've got 31% of your Flat-Rolled volumes under firm-based contracts, 41% of your European mines under firm contracts.

How much of those volumes actually roll off at the end of 2018, both in the U.S.

and Europe?.

Sure, Dave. And, actually, when you look at our distribution, the ones that we labeled cost based, those are also firm contracts. They very rarely would adjust. They're not very sensitive to the cost buckets they're tied to, so about 40% of our Flat-Rolled volumes are annual fixed price contracts. About three-quarters of those are January 1 restarts.

Most all the rest of them are in April. Europe, the Europe contracts tend to be more six-month contracts, not full year, and they would generally be January, July..

Okay. That's helpful. That's it for me. Thanks..

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

Hey. Good morning, Dave, everyone..

Good morning, Curt..

Hi..

Dave, given your comments, your bullish views on sort of sustainable free cash generation of the company, bullish view on the market, when you look at or think about capital return options for the company, you've already pre-funded the majority of your revitalization spend.

And based on the guide for 4Q, you'd be at an exit rate of EBITDA of close to $2.5 billion, $2.6 billion, and that's before you reprice 40% of your contract book.

So can you comment on free cash flow usage going forward? Do you plan on implementing a share buyback program? Have you discussed that with the board? Because I think you do not have an authorization in place today, if I'm correct..

Thanks for that question, Curt, and I think it's pretty clear to everybody we've earned the right to grow and we've spent many years here working on the balance sheet and putting the balance sheet in a pretty good state. And I'll have Kevin Bradley respond to what's going on there.

But I think you can look at our first priority now is to pursue profitable growth. We have some opportunities here, and if we can move faster on revitalization, if we can make the right investments in order to improve the company faster for the long-term benefit of our stockholders, we will do it.

We have looked at other priorities, and certainly keeping the pension fund essentially well-funded, which it is now, we don't really see much contributions in that for the foreseeable future. So it does give us an opportunity to pursue other avenues. But I want to be abundantly clear, it's about profitable growth.

And certainly, repurchase programs or dividend increases would be lower priorities.

We want this BB-type credit rating, and we think when we invest in these assets and we improve the capability of these assets, sometimes we amaze and delight the team here, who's been around for a very long time when they put these things in place and perform an all-time record best.

And so if we can move faster, if we can do better, we want to be a strong competitor not just with integrated mills, but we want to be able to compete with the mini mills as well. And that's really what we have to do.

We have to figure out a way that we can ride this cycle well from peak to trough and everywhere in between where we're throwing off cash.

Kevin?.

Yeah. Dave said it right. I don't want anybody to be confused. Dave and his management team are all about driving long-term shareholder value. We've done a lot of good work on the balance sheet. We've put ourselves in a good position. It's a generational shift in maturities. We've shrunk the debt. We've made it more efficient.

We feel really good about the position we've put the company in and now pivot to investments in growth and create real, sustainable, long-term value for our shareholders. We want to be an equity-friendly, capital allocation company but in terms of direct return of capital, we think that's not the time right now.

Right now, we're about revitalization, we're not even halfway through, and looking for other ways to accelerate value creation through smart investment for our shareholders..

And our preference there, of course, is with organic growth, and you see what we're doing with revitalization of assets, where we're going to get the extra tons, when we complete this program. And of course, Granite City, that gives us extra tonnage as well and with PRO-TEC, the advanced high strength steel.

That also is an opportunity for some upside. So clearly, we're focused on those areas of the business, the high end of the business that creates the most value for our stockholders and we're making progress. It's purposeful, it's deliberate, and step by step, we're getting it done..

Okay. Understood. And then I guess just to that point on revitalization ROI and capacity creep in the business at Granite City. You're at a run rate first half of this year of close to, I think, 10.6 million tons of shipment volumes. Granite City will get you another, call it, 2.2 million, maybe more.

So do you think into 2019 that you could be at a shipment rate of 13 million plus? And you're two years in revitalization, so I assume you would be harvesting some capacity benefits from that by next year..

Well, we're halfway through the second year of our asset revitalization program and we are already seeing the benefits, but we're not going to spend again a lot of time talking about 2019. I know, Dan, you want something to add there..

Yeah. And remember, Curt, the incremental benefit increase from Granite City would only be about 1.5 million tons assuming the markets are still there because we're going to ship this year at a certain level.

I think when you look at the pattern on the asset revitalization, clearly, to hit our four-year target, we're going to be spending more next year than we did this year. So we're probably going to take some additional outage time at the assets. So there's going to be some give backs there.

So, I'd say, yeah, as Granite City stays a full run rate to next year, that's going to add 2.1 million tons. We were expecting 10 million tons from Gary, Great Lakes, and Mon Valley this year.

Whether that stays at 10 or creeps a little bit, we'll have to wait and see what happens when we get our outage plans all lined up for next year for the asset revitalization projects..

Okay. Thanks a lot..

And next, we have the line of Piyush Sood, Morgan Stanley. Please go ahead..

Hey, guys. Good morning. A few questions from me. First one, there was an article in a reputable trade rag yesterday talking about weaker OCTG prices versus a month ago. Some grades down maybe $50 per ton; import prices, in some instances, down more than that.

Could you comment on why pricing is falling despite (00:21:35) tariffs and quotas? Is demand weaker than anticipated?.

Piyush, this is Dan. We haven't seen that in our order book. So I don't know where their sources are, but we have not seen that in our order book at this time..

Let's say if it were to sort of permeate through the industry, what kind of lags are we looking at in terms of when would those weaker prices possibly flow through your order books?.

Generally for us, we have a lot of one-quarter lag on most of our Tubular business..

But I think to reiterate again, we're not seeing that impact in our order book right now..

Yeah. From my opening remarks, we're actually seeing in Q3 some of the pricing actions we took earlier starting to flow through and so turning us EBITDA-positive in Tubular in Q3 in the back half..

All right. That's helpful. And next question, it seems like in 2Q, you had moved about 22,000 tons from Europe to the Flat-Rolled segment. We saw that last year in the first half and then we haven't seen in the last three quarters.

Just wondering what's changed and that you again had to start these imports and also, if you're paying duties on these and if that will continue..

Well, I think, Piyush, periodically we've brought some slabs over from Europe to help balance here, particularly with all the work we're doing on the assets here. So it was a small volume but that's all that was. Certainly, if we're moving steel across borders and there are tariffs in place, we're going to be paying them..

All right. And last one from me, this is on pensions. Your fund ratio is now above 90%, maybe closer to 95%.

Any possibility you could shift the whole burden of your pensions to an insurance company by topping it off with some additional onetime funding?.

Yeah. Appreciate you bringing that up. We're pretty excited about the improvement we've made in our funded coverage. We're looking at all options related to that to make sure we're further de-risking the company.

So, nothing on that today, but I can promise you we spend a lot of time as a management team looking at optionality to further de-risk the company in that area..

Yeah. I think if we look back five years, Kevin, what? $2.7 billion....

$2.5 billion in unfunded back in 2013..

...and we're seeing the line of sight to 100% here. So we feel really strongly about the way the – good about the way the pension has been managed..

Thank you. Next question is from the line of Timna Tanners, Bank of America. Please go ahead..

Yeah, hey. Good morning, guys..

Good morning..

Good morning..

Wanted to ask a couple of things. In terms of the upcoming labor discussions, I didn't hear you touch on that. I'm sorry if I missed it.

Anything you can remind us about regarding the timing of that or tell us regarding color of how that's progressing?.

Sure. Yeah. September 1 is when the contract becomes due, and we're actually having some excellent discussions. We had a sound-off meeting here with the U. S. Steel workers. It was pretty much as expected. I think we have a pretty good meeting of the minds of the kind of things that we need to look at.

And frankly, I'm pleased with where we are at this point. We've got of course some more work to do. I feel pretty comfortable that we're going to be able to work through this without much disruption. I think that was one of the key learnings. We're both committed to helping this company succeed.

And I think everybody knows that we're completely aligned with USW when it comes to safety. We work very closely together and they've been great advocates as it gives to trade. And they can rally the membership very effectively and the relationship that we have there is important to our company.

So we're encouraged by where we are and we're looking forward to completing the negotiations this year..

Okay. That's helpful. Thanks for that. And then, I really was hoping we could drill down on slide 19 to understand what's at stake into 2019.

And I fully appreciate you've said you don't want to talk about 2019 but just to think about, again, the percentages of your business that are up for renewal for contracts and – so just if you could remind us, the timing of discussion of those contracts, is that usually October-November? And then is it – you said it was 75% of your annual contracts on Flat-Rolled, I think, restart January 1 and the rest during April.

But then on Tubular and on Europe, it looks like you have a decent amount of what might be annual. So just wondering if you could go through in a little bit more color about what's coming up for renewal in the next several quarters..

Yeah. Sure, Timna. This is Dan. On Tubular, they really aren't annual as far as pricing. There were volume new arrangements but not pricing. Pricing tends to be quarterly. Like I said, the ones in Europe that are fixed tend to be no more than six months.

So I said, yeah, on the Flat-Rolled side, I said about three-quarters of the fixed in cost based reset January 1, the most of the rest in April. On the quarterly monthly adjustables, those also have negotiated restarts to go with those. So, like I said (00:26:50), there's a fair amount that we'll reprice.

I think the questions also mean what's the cost curve going to do next year and that'll determine kind of how our spot and monthlies play out more than anything else..

Okay.

But October-November timeframe, is that when we should be expecting the bulk of those Flat-Rolled discussions then? Is that fair?.

Usually our conversation will start the end of fourth quarter and depending on what's going on and how things are going and how stable the markets are will probably dictate how soon we get them done..

Okay. Great. Thank you..

Okay. Next we have Matthew Fields, Bank of America Merrill Lynch. Please go ahead..

Hey, everyone. Appreciate your earlier comments to Curt's question on free cash flow priorities and the focus on that BB credit rating. I saw that you purchased some of the 2020s in the quarter and in the third quarter. I know you mentioned paying these down in cash.

Is it your intention to sort of pick at these along the way out to 2020 rather than waiting until maturity to pay them out in cash?.

Hey, Matt. Thanks for the question. It's Kevin. Yeah. That's our highest cost debt. It's 7.375%. It goes current next April anyway. So we try to be proactive on these kind of things, so we did go in and took out about $30 million in June, and we're up to about $75 million through the end of July in reductions on those bonds.

So we've got about $357 million left. Again, they go current in April, so we're paying a little bit of a premium to get out our highest cost debt. We think it was prudent. And that's basically our strategy. So....

Okay. And then, I think one of the hardest things for us to model this out is this sort of interaction between Flat-Rolled and Tubular.

With your comments about Tubular growing profitable next quarter and the rising OCTG prices, can you give us a little bit of help on how kind of Flat-Rolled and Tubular are expected to interact and how maybe will there be some extra pull-through of tons from Flat-Rolled and how the spread kind of is expected to increase or decrease, stay the same?.

Sure, Matt. This is Dan. So, for our Tubular business, right now, for the seamless part of the business, which is the bigger piece of the business, they're sourcing their rounds from third-party sources. But on the welded part of the business, they do source from the Flat-Rolled segment. We're doing that at market pricing, adjusted monthly.

The volumes really won't move a whole lot. Our welder operations have been running pretty stable along with rig counts.

So, for our Tubular in the back half, it's more of a price upside than a volume upside because the facilities that really service the onshore markets have been ramping up with those rig counts that have been pretty high for a while now. So I'd say it's more of a price flow-through benefit coming from Tubular.

But as I said, on the welded pipe, those tons do come from Flat-Rolled at market prices..

Yeah. There's margin compression that we've been seeing and we should see that alleviated as we get in the back half and we should be positive. But we'll be challenged to be able to hit the outlook that was provided previously..

Yeah. And just to add to that, so when we originally came out in January with our outlook, we had talked about Europe at about $400 million and Tubular at about $50 million. Tubular for the full year, we expect to be positive, but probably a little bit light of the $50 million, but offset by being a little bit strong on the $400 million in Europe.

So kind of a push between the two segments..

Okay. That's helpful. And then, one last sort of bigger-picture question, if I may.

Without jeopardizing the great progress you've made on the balance sheet, how do you kind of further intend to separate yourself from your peers, whether that's integrated or mini mills? Obviously, asset revitalization seems like your highest priority in terms of our IRR investments.

But are there other product lines, other capabilities, other materials that you think U. S.

Steel should be in the business of going forward?.

Yeah. Well, I think, for us, a differentiator is this Generation 3 steel; this construction of our new Generation 3 continuous galvanizing line at PRO-TEC. As I said earlier, it's on track and we are the leader there. And in this space, we do very well.

Recently, we won the Altair Enlightened (sic) [Enlighten] Award for Enabling Technology for automotive at the Management Briefing Seminar presented by the Center of (sic) [for] Automotive Research. So that's just one example of the kind of things we're doing.

So this advanced high strength steel strategy, this is a great focus for us that's at the high end, and I think we got this right and we need to push hard on this. And if we can move faster, we certainly will. But this is where the money is to be made, and so we want to continue to have that leadership moving forward..

And next we have the line of Matthew Korn, Goldman Sachs. Please go ahead..

Hey. Good morning, everybody. So lots of repair work scheduled for Great Lakes in the upcoming quarter, which you've been warning us about.

Could you quantify at all the improvements expected as you lay out the projects there on slide 11? For instance, at the facility, where are costs, reliability, quality measures now relative to your goal, and what would you project in terms of either additional throughput or lower costs as a result?.

Hey, Matt. This is Dan. Hey. That project is all part of that total asset revitalization scorecard we're talking about. That's where ultimately we'll get additional tons as we complete more of the projects through the entire system. So this is just one part of that entire system improvement we're going to get through asset revitalization.

We're really not talking about discrete numbers for any one project. What really matters is how much better the entire system gets..

All right, Dan, got it. Let me ask this.

Overall thinking about 2019, what should maintenance and outage expense look like next year relative to these last couple of years? And is there anything on the schedule there that we should be sure and account for?.

Hi, Matt. And, Matt, I'd say mostly it's too soon to tell. Certainly, when you look at our asset revitalization pieces, the expense piece of that probably stays pretty flat. But in total, that's a pretty small percent of our total normal maintenance.

And so I think we really don't have that kind of planning done yet for what all the normal maintenance will be which makes up the bulk of the expense. The only thing I would note is that certainly Granite City hot still may be running for an entire year. We'll have maintenance costs there that we didn't have this year.

But too soon to really get our hands on that number for what's actually going to wind up on the schedule..

Just additionally, Matt, 2019 would be the peak year right now for revitalization on the capital side. That's pretty clear news. (00:33:46).

All right. Appreciate it, guys..

And next we have the line of Chris Olin, Longbow Research. Please go ahead..

Hi. Good morning..

Good morning, Chris..

Just want to do a quick follow-up question on contracts. I know it's a little bit early, but I'm curious if you are starting to hear from your customers maybe on the automotive side or anybody else that they would like to limit the terms on those contracts, maybe moving to 3 to 6 months instead of 12 months.

Has anything changed there?.

Chris, I would just say we really don't go into that kind of detail. We like to respect our relationship with our customers. And also, a lot of that's very much competitively sensitive. So I think we're going to pass on the answer to that one..

Okay. Fair enough. And then, how about a question on Tubular? Just looking at the import dynamics within this OCTG market, I'm under the assumption that South Korea producers have already bumped up against their import quotas they were agreed upon within that trade deal.

Hearing that some of this excess material that has landed was diverted into some of these warehouses and it can't be touched in 2018, I'm trying to understand what that means going forward.

How should I think about that material that's been put away? Once that gets for lease in 2019, does that disrupt the marketplace or anything you can help me with?.

Chris, I don't know that we think there's a direct impact to us. But as I said, we're running our facilities pretty much as hard as we can. We think we have enough demand from our customers to stay there for the most part. So I'm not sure what happens next year. Certainly, there's going to be a quota on them next year unless the agreement changes.

But when it shows up, it shows up. Inventory fluctuations in that market aren't unusual. But we'll have to see what happens, but we're pretty comfortable that our facilities are running that – like I said, we don't see a lot of volume upside for us at this point. We're running pretty well..

There was no impact when South Korea hit that quota?.

I said, for us, we were running pretty full already. So we didn't really have the room to take on more volume. But we did see some price benefit. Yeah. Prices are – that's why we expect prices to perform better in the back half through the fourth quarter..

Okay. Thanks, Dan..

Okay. Next, we have the line of Michael Gambardella, JPMorgan. Please go ahead..

Yes. Good morning..

Good morning, Mike..

Just have a – regarding your new guidance, the new guidance that you put out last night implies a fourth quarter EBITDA annualized run rate of nearly $2.6 billion, including some of the start-up costs that you still have coming from Granite City in the fourth quarter and also obviously assuming that you don't have the repricing of the contract (00:36:43), which doesn't happen till largely the first quarter.

So is the $2.6 billion annualized EBITDA run rate in the fourth quarter, which is only a couple months away, and the stock kind of stuck in mud here since April in the $35, $36 range, obviously, there's a lot of uncertainty surrounding trade and the Trump administration's view on trade that's holding the stock back.

The market's assuming a lot of uncertainty; kind of assume almost a worst case scenario.

What's your view on how you think the trade situation will end up and how that will free up some of your value creation in the form of higher stock price?.

Well, thanks for that question. And we had an incredibly exciting visit from the president and actually his daughter was there as well and I can tell you the commitment that he has to steel is unprecedented. And the notion that this guy would blink I think is just not going to happen.

He knows that this kind of unfairness should've been taken care of long ago. He's got this. He's with us and we're going to do everything we can to support him because this is not just good for U. S. Steel. This is great for the United States of America.

You've got to be able to make steel if you want to have a strong country and you want to have a strong manufacturing presence. So my view is that he will continue to be supportive. He gave every indication of that.

We had other discussions with the commerce secretary and other advisers in the organization and the administration is fully committed and we expect him to be so for the foreseeable future.

This trade situation requires a lot of courage and we have courageous leadership now that's addressing it now rather than kicking the can down the road as it's happened so many years and years and years. And here we are. We're finally seeing it take hold and I expect it to continue. We don't expect the president to blink..

Okay. Thanks very much..

And next we have the line of Chris Terry, Deutsche Bank. Please go ahead..

Morning, guys. Just wanted to get a bit more detail on the 4Q implied guidance, it's about a $120 million step-up I guess at the midpoint. Just stepping through the moving parts there, the outages, the Granite City, and then the EU that you've spoken about, I think $15 million for outages shouldn't be there in 4Q versus 3Q.

Furnace A starts and then I think it's about $40 million from the EU contribution.

So you get close to that $120 million, so I assume on the pricing, you're close to flat on that or can you comment at all on what you've put into your guidance for the full year from a pricing perspective?.

We do have a fair amount of work going on in the first quarter in Europe, so I think the step-up you're referring to is probably not going to be the case in Europe in Q4. I know there's at least one significant blast furnace outage in Europe. That's planned right now, has been planned for the full year.

But, yeah, your math is accurate on the Great Lakes Work impact, as I explained in my opening remarks. Yeah, again, Timna went through it, right? Extrapolating out from Q4, that's not something we're recommending. You know we've got Q1 impacts, seasonal impacts from the mining business, et cetera.

We don't know where pricing is necessarily going to be, although I fully agree with Dave's comments on the administration support being continued.

So we're not going to really talk about where we expect next year to be, but the Q3, Q4 cadence is really driven by having really all the North American Flat-Rolled furnaces on in the fourth quarter and the big outage in Great Lakes Works in Q3..

Yeah. Thank you..

And next we have the line of Phil Gibbs, KeyBanc Capital. Please go ahead..

Thanks. Good morning..

Good morning, Phil..

Hey, Dave. I just wanted some thoughts on the Fairfield EAF.

Should we expect to hear any more about that because it seems like it could be a key pillar in driving down the cost structure in Tubular on the seamless side?.

Yeah. That's a great question. And I think we've said it before, it's not a question of if, but when. But we've also have a number of stage gates, and one of the stage gates is we want to see this positive EBITDA and make sure that we're confident that it's positive for the foreseeable future.

And the other thing we want to get through this labor agreement with a separate labor agreement for the Tubular business. They're very different businesses and we need alignment.

We need to make sure that the folks working at Tubular are aligned with the business and its performance, just like we need to have the North American Flat-Rolled aligned with this business. You can't have kind of one big agreement that everybody goes to because it dilutes the performance of one organization over another.

And I think we need to make progress on that in order to turn on the electric arc furnace. But you know we have about $150 million left to spend, 20, 24 months to complete it and we're ready to go as soon as we get through the stage gate..

Thanks, Dave. And in terms of – just a segue, you talked about alignment. I thought I saw last night in your bridge, Q1 versus Q2, you had a step-up in cost in the Tubular division related to increased maybe incentive comp.

And how is that if that business hasn't really changed in terms of its profit stream, in terms of actually being in a money losing situation? I would think that that would actually be on the other direction, not stepping up..

Phil, I think that's the point Dave was making. Right now, all the U.S. operations are covered under one agreement. So for our U.S. employees right now, it's all one big calculation. There's no differentiation from the segments. And as you noted, the segments have very different results right now but it is one calculation for the entire U.S.

population for us right now..

This is the alignment issue and we need non-represented and represented to have the same metrics. We need to pull on rope together and we have situations where management will get a reward and the represented workforce won't get any and vice versa. And we need to just fix that. And so, that's what we're working on through this labor agreement.

There's a lot of benefits when everybody's pulling on the rope together. And when we do that, like we're doing on safety, like we're doing on trade, that means there isn't anything we can't accomplish together..

And next question is from the line of Andreas Bokkenheuser, UBS. Please go ahead..

Thank you very much and good morning. Thank you for taking my question.

Quick question on the European market, obviously, you had a lot of EBITDA growth in the European market in Q2 and then you're talking about a bit of planned outages in Q3, but how do you look at the market going into the second half of the year in view of the new EU safeguard measures in response to Section 232? Do you think this is going to be an opportunity for you to basically generate higher prices in Europe in second half or do you basically think that all these trade war elements between the U.S.

and the EU ends up being a problem for volumes at this point in time? That's the first question.

And I guess secondly, there's also been some talk that the White House might actually end up dropping tariffs with EU if they settle on a good trade agreement and how would you view that? Would you view it as a key positive or potential challenge in terms of prices? Thank you very much..

Well, there's a whole lot in there, so let me take a shot at it here. When you think about the EU safeguard in the trade cases, the preliminary measures are going to be applied in a form of a global quota that is per product, not per country.

This has been questioned by several of the member states, which supported country quotas in line with our position for definitive measures. The commission reacted that it will evaluate these comments for the definitive phase and the imposition of provisional measures is expected here very, very soon.

So I think as far as the impact on our operations there, we pretty much said that we expect the outlook to be better than what we said earlier in the year, as Kevin just illuminated. But the reality is we just don't do that much between the EU and the U.S.A. so it's not a big impact because USSK sells within the EU, within the V4..

Yeah, I think that's – I completely agree. The way we look at it is the EU caring about free trade and caring about their market is probably good for everybody just like it is here. So we see that as a positive for our European business to the extent that they're conscious of making sure free trade is what's incentivized..

And I think that our president has it right. We've got to get everybody to the table thinking about this stuff. And if you just sit passively on the sidelines and don't do anything, you don't resolve anything.

So he has a habit of putting his finger in the most important priorities that this country should be working on, and sometimes it can be a bit disruptive. But we're getting people to the table, people are talking about it, and certainly we'll get to a more fair trade environment as a result of his leadership.

I don't think there's any doubt about that. And in this case, as we said earlier, the European thing is not going to be as big a deal for us there as the trade implications here that he's going through with 232 in the United States.

But all said, it's a plus for the globe what the President is doing to get everybody to the trading table, especially the bad actors who have been unfairly trading forever..

And one thing I would just say in relation to the – our queue is still pretty long. We're running out of time, so we're going to try picking up the pace a little bit. So I hope you guys understand that I might move for you – move you through a little bit faster so we can get everybody a chance to talk today..

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

Yeah. Good morning. I'll be quick. The first question just on Granite City, the revitalization work that's required there, was that done while it was closed, or is that something that will have to be done subsequently? Thank you..

No, I'll just say, on Granite City, those facilities were newer assets. They were in better shape; not as much revitalization, and we really didn't have a lot of money allocated to the Granite City asset business; maybe $10 million or something like that.

But that doesn't mean we won't invest further in these assets if we can bring them along faster and better and figure out a way to grow the assets..

Okay. Thanks. And then, on Tubular, you mentioned that 3Q is going to be better given some of the catch-up in lags between OCTG and substrate. Would you expect that trend to continue into 4Q, that 4Q would be better than 3Q, or at stable pricing? Thanks..

Yes, better..

Yeah, we expect that trend to be upwards through both quarters..

Thank you very much..

And next we have John Tumazos. Please go ahead..

Thank you very much.

What do you expect the operating rate will be in the fourth quarter with Granite City up? And do you still keep any capacity on the books for Fairfield?.

John, no, the Fairfield blast furnace has actually been physically destroyed. It's been dismantled. I think Granite City will (00:49:12) fit into our overall order book.

I said based on our anticipated shipments we're talking about, that would imply that our system will probably in a good – assuming the customers are there and demand doesn't change, it'd be system-wide close to 80%..

Thank you..

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

Good morning. A couple of questions.

First of all, with the revitalization program, what will that do to your capacity in 2021 when it's completed, and what about the number of employees?.

Yeah. Chuck. This is Dan. So our expectations are that when we look at Gary, Great Lakes, Mon Valley, the primary focus right now, that we'll be able to ship an incremental million tons more out of those facilities than we have now. It really doesn't change the head count.

It's just production efficiency that drives that and less downtime, more reliability, more consistent performance..

But does that affect the stated capacity or just the operating rate?.

Just the operating rate. The capacity, we're not adding new capacity. We just expect to be able to utilize our existing capacity at a higher rate..

Okay. Second question. In Japan, there's been a report that you hired a ship from NYK to move 120,000 tons of iron ore from Québec to Ōita. Where did that iron ore come from? It seems a little far for that to be....

(00:50:44) that information come from?.

And, Chuck, I would just say, we've been clear that we are a commercial seller of iron ore and we do have international business. So, I mean, we've talked about it. We do – we have international contracts. We sell iron ore out of Minnesota into the seaborne market right now..

Boy, a $32 freight rate, that's pretty expensive..

We're making....

Thank you. Good..

Next question is from the line of Karl Blunden, Goldman Sachs. Please go ahead..

Hey. Good morning, guys. Just a quick one on the balance sheet here. You spoke about a desire to get to BB rating. You've been chipping away at those 2022s, as you discussed earlier.

Is that, along with an immunization of the pension fund, that you think that's enough to get to a BB rating, or based on your agency conversations, do you also need to show further progress on reducing costs of the business?.

So thanks for the question. Technically, we're there already in terms of the performance of the business, right? It's really making sure that we're comfortable, that we're meeting those criteria on a through-cycle basis.

So we're spending a lot of time thinking about how do we make sure that as things cycle, and they will cycle, that we are maintaining that level. So there's work to do there in terms of variabilizing our cost structure.

And then, that's why we're probably going to go slightly beyond in current market BB rating-type credit metrics so that we can sustain it on a through-cycle basis..

Got you.

And then, on the longer-term organic investments, as you assume steel price or a spread, how do you go about that calculation when you're looking at your hurdle rates, just given the volatility we've seen recently?.

I would say, Karl, anytime we're evaluating projects, we're focused on cash, something's worth what the cash generates. We're looking at DCF-type values. We make our assessment on where we expect market spreads to be. That's just part of our job. But certainly, we are – looking at hurdle rates won't be on our cost of capital. We're here to create value..

Got you. And then, just the hurdle rates that you're baking in, are those consistent return – current spreads, or....

Definitely higher than our cost of capital, but that's going to vary by how strategic a project is and how discretionary it is..

And then the spread rates, are those kind of consistent with current levels, or down a bit?.

We have to make an assessment on where we expect the market to be in the future, because that's when those investments are going to generate their returns..

Okay. Thanks very much..

Next, we have the line of David Lipschitz, Macquarie. Please go ahead..

Hey, good morning. Just a quick question in terms of – with your stock price here and things like that, there was rumors a while back of you selling Europe or things like that.

What are your thoughts on either selling the Tubular or the European assets?.

I think we've always said all of our assets are for sale at any time at the right price to create stockholder value, but I can tell you this that the assets that we have right now, we're happy with them and they're performing very well. In particular, USSE Europe is a fantastic asset. It's reliable. It's consistent quality delivery.

It's the best asset I would say for sure in Eastern Europe and continues to outperform. So we're – and through the cycles, it makes money, so that's an absolutely great asset. And the Tubular business, it's coming back.

We've already talked about – it's getting hit a bit with the substrate cost now but we should try to see that delta improve and we've seen this business be a heck of a lot better in the past and we expect those days to come back, especially when you see the rig counts improving. I think the rig counts are over 1,000 now, pushing towards 1,100.

So it's getting back to better investment times. So both those assets are good assets and we're running the assets and unless somebody comes with a compelling offer, we're going to continue to do that and make those assets perform..

Thanks..

Now at this time, we have no further questions in queue..

Dave, do you want to have a closing remarks for us here?.

our stockholders, our customers, our employees, and the communities where we operate. We are building the kind of results that should give investors more confidence in our ability to create value by delivering cost-effective and reliable solutions for our customers.

We're pleased with our progress so far, and we won't take our eyes off the 2020 prize for our employees, our customers, and our stockholders. Thank you. It's time for us to get back to work..

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