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Edited Transcript of AKS earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 AK Steel Holding Corp Earnings Call

WEST CHESTER Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of AK Steel Holding Corp earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Otto Mitterholzer

AK Steel Holding Corporation - General Manager of IR & Assistant Treasurer

* Jaime Vasquez

AK Steel Holding Corporation - VP of Finance & CFO

* Kirk W. Reich

AK Steel Holding Corporation - President & COO

* Roger K. Newport

AK Steel Holding Corporation - CEO & Director

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Conference Call Participants

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* Alexander Nicholas Hacking

Citigroup Inc, Research Division - Director

* Christopher David Olin

Longbow Research LLC - Analyst

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* Curtis Rogers Woodworth

Crédit Suisse AG, Research Division - Director & Senior Analyst

* David Francis Gagliano

BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst

* Martin John Englert

Jefferies LLC, Research Division - Equity Analyst

* Matthew James Korn

Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst

* Nicholas Jarmoszuk

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Tyler Lange Kenyon

Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to AK Steel's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I will turn the conference call over to Doug Mitterholzer, General Manager of Investor Relations and Assistant Treasurer. Please go ahead, sir.

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Douglas Otto Mitterholzer, AK Steel Holding Corporation - General Manager of IR & Assistant Treasurer [2]

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Thank you, Shannon, and good morning, everyone. I also would like to welcome you to AK Steel's conference call to review our second quarter 2019 financial and operating results.

With us today are Roger Newport, our Chief Executive Officer; Kirk Reich, President and Chief Operating Officer; and Jaime Vasquez, our Vice President, Finance, and Chief Financial Officer. In a moment, Roger will offer his comments on our business and overall market conditions. Following Roger's remarks, Kirk will provide an update on our progress on some of the projects and initiatives underway at AK Steel.

Following Kirk's remarks, Jaime will review our second quarter 2019 financial results. And together, we'll field your questions.

Please note that during today's call, we will refer to presentation materials that were posted on AK Steel's website last evening. If you've connected to this call via the webcast, you should see those slides on your screen.

For those who have dialed in, the presentation slides are available at our website, aksteel.com, under the Investors tab, where you can then click on Investor Presentations. We would encourage you to refer to that information during this call; however, it will also remain posted on our website subsequent to the call.

As noted on Slide 3, our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to the items such as future shipments, product mix, prices, costs, operating profit, EBITDA or liquidity. Please note that our actual results may differ materially from what is contained in the forward-looking statements provided during this call.

Information concerning factors that could cause such material differences and results is contained in our earnings release issued last evening. Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events.

To the extent that we refer to material information that includes non-GAAP financial measures, the reconciliation information required by reg G is available on the company's website at www.aksteel.com.

With that, here is Roger with his comments. Roger?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [3]

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Thank you, Doug. Good morning, and thanks for joining us on our call. I am pleased with the strength of our second quarter results, which reflects the collective efforts of our entire AK Steel team in executing on our strategy.

For the second quarter, we generated net income of $66.8 million or $0.21 per share and adjusted EBITDA of $151.5 million. These results demonstrate that we are continuing to deliver on our commitment to enhance the long-term value of our company. In just a few minutes, Jaime will provide further details and highlights of our second quarter financial results.

Moving to Slide 5. Throughout all that we do, the safety of our employees is our highest priority and the core foundation of operating our business. Our 9,500 employees are to be commended for their vigilance in adopting safe work practices and for making AK Steel a leader in the industry in overall safety performance.

And speaking of our employees, we were also pleased to have successfully negotiated 3 new union labor agreements with our Butler, Zanesville and Mountain State Carbon locations. These new contracts position us well for the future.

We're also very proud of our sustainability initiatives that benefit the environment and the communities in which we live and work. As highlighted on Slide 6, we continue to increase our recycling of water and waste products while simultaneously reducing our generation of hazardous waste and increasing our use of renewable energy. In fact, we were excited to be featured recently on John Holden's national TV program, EARTH, which highlighted our environmental sustainability efforts.

Our new product and process innovation initiatives are also creating positive sustainability impacts. Many of these efforts are done in collaboration with our customers as we collectively look to reduce greenhouse gas emissions and increase energy efficiency.

We have exciting innovation initiatives throughout our portfolio of steel solutions. For example, our advanced carbon steel and stamping solutions enable our customers to reduce vehicle weight and improve fuel efficiency. Our stainless steel and tubing solutions are employed in the advanced exhaust systems for hotter-burning engines that improve overall vehicle emissions. And our electrical steel solutions improve the efficiency of both electrical transformers used in our nation's power grid system and in electric motors used in a wide variety of industrial applications.

In short, our innovative solutions are helping our customers to drive progress to a more sustainable future. Our customers are recognizing us for the tremendous value that we provide. During the second quarter, General Motors named AK Steel a GM Supplier of the Year, and Ford Motor Company recognized us with their Smart Brand Pillar award for delivering smart, innovative steel solutions.

We are delighted to receive these awards and are pleased that they recognized the strong, collaborative relationships that we have created with these important customers.

Turning to Slide 7. We are making great strides in our ongoing efforts to: one, enhance our operating assets to improve our competitive cost position; two, further strengthen our balance sheet; and three, de-risk the financial market exposures within our pension plan.

While we have made substantial progress over the last few years, we are not done. In fact, we have numerous initiatives underway as we work to increase shareholder value for the long term.

Our efforts on the research and innovation front continue to progress very well. At the forefront is our family of ultra-high-strength steels, which includes NEXMET 1000 and NEXMET 1200. Our customers are very excited about these new products and their interest continues to grow given the unique combination of high strength and high formability that these steels offer. In fact, we've recently secured NEXMET product on an upcoming major vehicle platform and several additional applications are currently under consideration.

In a moment, Kirk will provide additional details regarding our product innovations along with recent advancements at our downstream operations at AK Tube and Precision Partners.

Moving to Slide 8. We continue to make progress on the closure of our Ashland Works facility by the end of this year. Effort -- efforts remain well on track to transition products from our Ashland coating line to our other facilities with excess capacity. When completed, we expect to realize at least $40 million of annual run rate savings as a result of this footprint optimization.

Turning to Slide 9. I would like to discuss what we are seeing in the markets that we serve. Overall demand from our core automotive market remained strong during the second quarter. We presently expect 2019 North American vehicle production of approximately 16.8 million units. While this would represent a slight reduction as compared to 2018, it remains very strong by historical standards.

Likewise, we continue to see stability in residential and commercial construction. New housing starts for 2018 were approximately 1.26 million units, and we currently anticipate comparable levels in 2019.

Inventory to steel distributors remained well balanced with seasonally adjusted levels estimated at 2.1 months for carbon products and 2.8 months for stainless products. We believe the recent reduction in carbon steel inventories will help position the market for a rebound in both steel demand and steel spot market pricing as we enter the second half of 2019.

The USMCA agreement should also bode well for steel demand once it is approved by Congress. The new auto content requirements in agreement are good for the domestic steel industry and for manufacturing as a whole in the United States. The new requirements will [incenetize] greater use of domestically produced steel by stipulating that a certain percentage of the vehicle's content originate in the North American region.

And from the standpoint of enforcement, our administration is working to put mechanisms in place to swiftly address any surge in steel imports from either Canada or Mexico into the United States. In short, demand for our products and overall market conditions remain fundamentally solid, and the evolving trade actions are expected to help ensure a more level playing field going forward.

Moving to Slide 10. We remain focused on our -- executing our strategy to commercialize our innovative products and services, transform our operations to significantly improve our competitive cost position and drive future growth, both in our current businesses and into new markets and downstream businesses.

Now I would like to turn the call over to Kirk to comment on our innovation, capital investments and downstream businesses. Kirk?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [4]

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Thanks, Roger. I'd like to touch on a few items, beginning with an update on our downstream operations.

Beginning on Slide 12. AK Tube remains on track to improve on last year's record-setting performance as well as expand their order book of tubing made from advanced high-strength steels for automotive applications.

At Precision Partners, they also remain on track for the higher EBITDA we are expecting this year. As seen on Slide 13, the construction of their new facility, which will ramp up production next year, is progressing on schedule and on budget. As we have commented before, this puts us in fairly exclusive territory with the production of single-piece, hot-stamped door rings and large subassemblies, and is the next major step forward in the exciting progress of their growing business.

This investment is expected to add more than $50 million of annual revenue and drive our downstream business earnings growth.

From an operations perspective, I'm happy to report another quarter of solid performance throughout the company. Looking ahead, we're making final preparations for our planned Dearborn Works blast furnace and steel shop maintenance outage coming up in October. This is a major investment in the Dearborn Works hot-end, and many of the projects will improve those operation's efficiency as well as reducing costs. Examples include our investment in a hydraulic ladle turret lift and improved BOF Lance cooling water system combined with a new boiler hood system and downcomer as well as new caster drive controls and a new compartment in our -- for our electrostatic precipitator. Taken together, these improvements are expected to lower our costs in the steel shop by approximately $10 per ton.

Turning to Slide 14. On the research and innovation front, we now have been awarded a total of 4 U.S. Department of Energy grants over the past couple of years. These awards are a testament to our innovative capabilities and the strong partnerships we have with several national labs.

As an update on our first DOE award, it was a 3-year project to improve the efficiencies of non-oriented electrical steel by 30%. The original intent was for applications and industrial motors, but we are pursuing a parallel path using the technology for electric vehicle motor applications as well.

Simply put, this means the steel in the motor has lower energy loss due to heat such that more of the input energy can be converted to mechanical energy for the drive system. This means that you can use less electricity or battery power to accomplish the same task.

I'm happy to report that we remain on track to accomplish these results. Last year was focused on developing the product in the research lab. This year, we're making the new product in our production facilities and are refining those practices. Year 3 will be turning this steel over to a motor manufacturer who will produce more efficient motors from this new grade of steel. As you would expect, a 30% improvement in efficiency of these motors will be a real game changer.

Turning to Slide 15. As we've talked in the past, we are truly uniquely positioned as a full-spectrum solutions provider to the automotive industry. When you combine our high-quality carbon, stainless and electrical steel production, our unique product mix with niche differentiation, our leading research and innovation group, our world-class sales and customer support team and our downstream capabilities in tubing, tool and dye, hot- and cold-stamp components and major assembly capability, there is no one else like us. We truly can and do bring solutions which make a difference for our customers. It's a big reason why we are winning supplier awards from OEMs as well as being awarded new business.

As Roger mentioned, while automotive production is down slightly, we still expect the year to be a good one overall for the industry. Moreover, unlike typical years, we expect to ship more tons to the automotive industry in the second half of the year versus the first. Normally, that isn't the case due to July and Christmas shutdowns, but as we reported in the past, we continue to gain share and some of that volume is ramping up in the second half of the year.

With that, I will now turn the call over to Jaime. Jaime?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [5]

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Thank you, Kirk. As Roger mentioned, the second quarter highlighted benefits of our strategy to focus on value-added products and fixed base price contracts. This was evident in our average flat-rolled selling price of $1,102 per ton for the second quarter, as shown on Slide 17, which was about flat with a year ago and down about 1% from the first quarter.

The stability in the average selling price, despite the large decline in carbon hot-rolled coil spot prices, is due to our focus on fixed base price contracts and less emphasis on the volatile carbon commodity spot market.

Our adjusted EBITDA on the second quarter of $151.5 million was slightly ahead of the second quarter a year ago and down about 6% from the first quarter. The second quarter included $25 million of outage expense compared to $12 million in the first quarter. The recent second quarter also included mark-to-market iron ore derivative gains of around $35 million compared to $2 million in the second quarter a year ago and $22 million in the first quarter of this year.

About $20 million of the second quarter gains relate to iron ore derivative contracts that settle in 2020 with the balance of the gains offsetting expected higher-cost iron ore purchases during the remainder of 2019.

Also included in the second quarter of 2019 were realized derivative gains of almost $9 million that settled, but did not flow through the income statement, as those gains have been recognized in prior quarters.

Turning to Slide 18. We highlight the changes and reported second quarter adjusted EBITDA from the previous quarter.

Pricing, volume and mix had a $5 million negative impact in the second quarter compared to the first quarter. The decrease mostly reflected the impact of the decline in carbon hot-rolled coil spot prices on our steel index-based contracts as well as reduced surcharge revenue. Raw material and energy costs were a positive $21 million, mostly reflecting lower carbon scrap costs and the positive impact of our hedging program on iron ore costs.

Operations was a $16 million negative impact to adjusted EBITDA compared to the first quarter, due mostly to the planned major outages at our Middletown and Rockport Works.

The other category was a $9 million negative impact on sequential change in adjusted EBITDA, mostly due to the first quarter sale of high-voltage assets at our Dearborn Works that we discussed last quarter.

Overall, we generated solid free cash flow that allowed us to reduce borrowings by $95 million during the quarter.

Turning to Slide 19. Let me conclude my remarks by providing you with an update to our annual guidance. In April, we indicated that our expected adjusted EBITDA would be in the range of $505 million to $525 million. Our guidance was based on a carbon hot-rolled coil spot market price at that time of about $690 per ton. In addition, we indicated that our guidance could change by $5 million to $7 million on an annualized basis for every $10 change in the carbon hot-rolled coil spot market price. Based on the July hot-rolled coil price of about $555 per ton, our fiscal year 2019 guidance range for adjusted EBITDA is $470 million to $490 million, which essentially aligns with the expected impact on adjusted EBITDA from the change in carbon hot-rolled coil spot market price. But also note that our guidance includes the year-to-date mark-to-market gains on iron ore derivatives. As I mentioned, a little bit less than half of these gains will be offset by expected higher-cost iron ore for the balance of 2019, which is also included in our guidance.

The other annual guidance items are highlighted on Page 20.

I will now turn the call back to Shannon, who will assist us in taking your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) David Gagliano of BMO Capital Markets.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [2]

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So I have a question about Slide 22 and Slide 23. After, obviously, adjust your pricing optically, as you just said, it appears full year guidance is unchanged. But on Slide 23, you've lowered your full year shipment volumes from 5.9, I think, to a midpoint of 5.5 and 0.5 million ton. So my question is, is it the case that the volumes you are removing are 0 EBITDA volumes at 5.55 hot-rolled? Or is it that the inclusion of the $35 million noncash mark-to-market gain in Q2 in the full year guidance basically offset the loss EBITDA from those lower shipment targets?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [3]

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Let me just correct on the shipment volumes. The flat-rolled volumes guidance in the first quarter should have been about 5.7 million. The 5.9 million ton sounds like the total flat-rolled -- total tons shipments. So we are actually going from about 5.7 million tons to the guidance of 5.5 million to 5.6 million. And the 200 -- roughly 200,000 ton delta there would represent the distribution -- what we sell into the spot market and to the distributing converter market just based on current CRU.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [4]

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Yes. So those are our Butler carbon melt tons that are flywheel tons that we bring in to the market or out of the market depending on the price. So to your point, David, if the price is not high enough, then we simply don't make those tons and they would not have contributed at those lower numbers. So that's how we view that. So that's the flywheel that we always use and we talk about. And when it's -- when it makes sense and it's advantageous, we do it. When it doesn't, we remove those.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [5]

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So our guidance assume we're not moving as many tons in the spot market, but there is opportunity if the spot market improves in the second half as we have seen some signals out there from different firms about what they're seeing in the marketplace, so that could -- we could move more tons into the spot market should the market support it. And I think your -- second part of your question was commenting on the mark-to-market, and I would comment there that mark-to-market gains or losses, as you correctly noted and we pointed out, as we had mark-to-market gains in 1Q and 2Q, most of those are related to 2019. So what will happen there, it will just offset the higher costs that we incur in the second half. So it's just a timing issue for the most part. There are some of the gains that are related to 2020, but most of it is related to 2019. So when you look at it for the full year, it's kind of a zero-sum gain for the gains that are related to 2019.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [6]

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Okay. Just follow-up, clarify one thing, you mentioned your prior guidance was 5.7 million tons for flat-rolled, but I'm looking at 1Q slide deck that says flat-rolled shipments of 5.9 million tons. This slide deck says flat-rolled shipments of 5.5 million to 5.6 million tons. So I guess I'm confused where the 5.7 came from.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [7]

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Yes. David, I think that's -- there is probably a typo on that slide, that 5.9 represents total tons. And the flat-rolled shipments at that time was about 5.7 million tons.

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Operator [8]

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Our next question comes from Chris Terry of Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [9]

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A few questions for me. The first one just to do with the shipments in your guidance of 5.5 to 5.6. I'm just wondering if you could give a little bit of color on 3Q versus 4Q with automotive changeover and holiday schedules. And also, I think, your comments earlier suggested second half orders would be better than first half, so just interested in why that number came down from the 5.7 for the full year?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [10]

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Yes. The number came down on the full year, mostly due to the spot market pricing. It really is what's centered to the spot market and the distributing converter market. CRU -- since we put out our numbers, it looks like CRUs moved up another $30 to $40 a ton, so that could change our volumes positively as we go forward if CRU keeps on moving up.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [11]

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Yes. And as I commented, you're right, we're going to be up in the second half versus the first half. Fourth quarter is actually going to be up a bit versus the third quarter as well, and those are incremental gains that we've been making on new products that are launching and we've talked about that before. We are on the right platforms over the right amount of time and we have been sourced appropriately on those, and many of those are ramping up here in the second half, and so that's a bit unusual. Normally, the second half, because you have July shutdowns in there, you have December or Christmas shutdowns in there as well. Normally, it's off by maybe as much as 10%, first half versus second half. And we're actually seeing it up a little bit first half to second half. So that gives you an indication of how much new business we've garnered.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [12]

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And then just one other one on Slide 9 where you've given an update on the end markets. Just wondering if you can comment on -- your 2020 order outlook is 16.6 million units. Just wondering whether you can comment at all on how you see this [stand] out for the fixed price negotiations into 2020 given the weaker steel prices at the moment and the decline that you're expecting to 2020?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [13]

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Sure. Yes. We have not begun any of those negotiations at this point. Obviously, some of those fall off here in the fourth quarter, some at the end of the year, and some the first quarter of next year. But it's not just a CRU discussion. Certainly, CRU is a piece of that discussion, but market competition, raw material pricing, our product offerings, the limited number of suppliers that supply some of the things we do like press-hardened steels, exposed general -- exposed GI, exposed GA. Those types of products are in a different class, and those will all be part of the discussion, as will be our quality and customer service and new product development. So those are the kind of things that are drive -- that will drive our discussion and that will be part of what we talk about when we get into the negotiations with folks. And the reason, I guess, why we are not seeing the impact in our shipments, as you've noted, some have forecasted a bit lower from an overall auto. We really haven't been impacted by that because we're on trucks, CUVs and SUVs, which is what we've stated a number times in the past. We have intentionally gotten awarded business on the right kind of platforms and really minimized our exposure to passenger cars. And so that has benefited us in these kind of markets.

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Operator [14]

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Our next question comes from Matthew Korn of Goldman Sachs.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [15]

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It sounds as though you are making gains with your branded AHSS. Could you help us properly scope out that part of the business? How much does it represent among your value-added shipments today? How much these steels contribute to EBITDA today? And how do you bracket out your own expectations of how much that should contribute in '20, '21, as long as it's progressing, as it seems like it is?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [16]

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Yes. So it's a difficult question. And you're -- we are going to get into definitions of what's advanced high-strength steels and what's ultra-advanced high-strength steels or generation 3, which is what we're calling our NEXMET series of products. So as Roger touched on those, literally, we just got assigned the first parts on that for full production going onto a major SUV platform that ramps up next year. And so we're excited about that. That's kind of our first -- the first domino to fall, if you will. We have a lot of other folks looking at that material expecting to source it on different vehicles, and so that will ramp up. But as of today, the true NEXMET return, if you will, we have no EBITDA being generated as a result of that.

Let's say, this is a long-term proposition. As we have stated in the past, this is like planting an orchard, right? So you're planting the orchard. For a long time, you don't harvest crops from that. And at some point it starts to bear fruit. It's going to start to bear fruit next year and then it bears for a long time thereafter, and we expect that, that continues to ramp up. So to tell you exactly where it is in 2021 or 2022 or 2023, that depends on how quickly folks adapt that in each of their new platforms. Well, we expect that to ramp up fairly significantly. At the same time, advanced high-strength steels, which are dual-phase 980s, 1180s, 780s, and our press-hardened steels, which is a hot-stamped alternative to some of these third-generation products, are ramping up pretty significantly. And we've seen pretty significant gains every year year-on-year, and we expect those to continue. So it's a difficult question to answer, but it's a longer-term proposition and the point is we've kind of finally made the breakthrough and are getting those sourced on the right kind of vehicles going forward.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [17]

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And I'd also comment, these products are going to be beneficial as we move forward too, both in our stamping business and our tubing business as they develop applications for using these new steels. So it's not just on the flat-rolled side, but it's also when we hot stamp the NEXMET products or cold stamping -- or cold stamp NEXMET products or hot stamp other products along with our AK Tube facility, who is making progress on utilizing these steels and applications. So as Kirk said, it's the beginning of opportunity for growth here and we're very excited, and our customers are very excited to be utilizing these steels. And it's like we've done in product innovation for the last century is, coming up with those new grades and then it takes time to work with our customers, and we have a team that works with them very closely to find applications to use these steels. And we feel we're well-positioned because we have, not just on the flat-rolled side but also from the stamping side and the tubing side, to go in with comprehensive solutions for our customers.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [18]

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Let me then switch to something maybe a little bit more near-term. Kirk, you may have mentioned this before, but could you refresh us on the Dearborn investment? What exactly it's going to allow you to do? What's the expected commercial benefit? And then do you feel any impetus now to invest more in the upstream to kind of keep up with all the investments we're seeing across the rest of the industry? What's your opportunities there relative to what you see investing in the downstream?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [19]

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Yes. So it's a good question. What we're doing in Dearborn is a whole lot of thing and I referenced several of them, but it's a lot of our work at our blast furnace. A re-line of that blast furnace, kind of a gun lining, to give us more life and ability to go there. Some of the periphery equipment is being reworked and upgraded at the steel shop. It's the downcomer and kind of all the off-gas system as well as the environmental pieces there as well that will be upgraded. The casting machine gets new drives and new ladle turret lift. A lot of equipment that probably doesn't mean a whole hell of a lot to you, but what it means to the shop is the overall throughput will be increased, the efficiency with which we can run that facility will be improved, and kind of all those things combined give us about $10 per ton improvement in the cost from that shop. And so that's a pretty significant chunk when you think about the investment we're making there to get a return of $10 per ton. And so, as we look at it going forward, I don't feel the need to be out there announcing billion-dollar deals in order to remain competent or competitive or sound sexy. We don't need to do that. What we're doing is things like we idled the Ashland Works coating line that we talked about earlier, that's $40 million, on our carbon tons, which are almost 4.5 million tons, that's about $8 a ton. We just talked about $10 a ton we're saving in our Dearborn melt costs. We're likely going to be announcing some upgrades to our Middletown hot mill that's going to shave a certain number of dollars per ton.

When we got to Dearborn, we're going to -- they were going to invest in a cowl line, that was going to be about $300 million. We didn't do that. We invested about $3 million in an upgrade that we're making to the galv line. Anyway, we now have cowl product.

Those are the kind of things that we're going to continue to invest in, in order to enhance our profitability and lower our costs, and we think we can do those things and not spend $1.5 billion and instead spend money in smaller pieces and kind of more strategically so that we're not just expanding, we're actually improving our book of business and reducing our overall costs. And so that's our impetus, that's what we're putting our efforts towards, in addition to looking at downstream opportunities and expanding those. Our Precision Partners' application that the new facility is going to continue to increase their book of business and we expect that to continue. And so we're going to expand downstream by running our current operations at even a higher EBITDA level. But at the same time, we're going to take care of the steel-making assets, but do it in a way that doesn't require billions of dollars of investment.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [20]

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And I'd comment on our coating line. A total of about $35 million that we invested in that line, as Kirk mentioned, avoiding the cowl line, but also we didn't have to build a new coating line. We're able to make the NEXMET 1000 and 1200 products on that line, which really positions us well for the $35 million investment solid return. And that's really what we're focused on is very targeted investments that give us a return for the long term.

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Operator [21]

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Our next question comes from Chris Olin of Longbow Research.

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Christopher David Olin, Longbow Research LLC - Analyst [22]

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I'm just curious if you are currently seeing any positive impacts from shipping greater amounts of stainless slabs today? Or do you expect to -- I know one of your competitors has been looking to source slabs for one of their joint ventures.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [23]

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We're not selling stainless slabs today.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [24]

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Yes. I would comment, in the stainless market, we were not a big player in the commodity chrome nickel business. Years ago, we made a decision to only be a spot player in that because of the volatility that occurs, especially with the alloys, mainly nickel, and that it was very tough to turn and generate returns as others, I believe, have also made decisions on how they are approaching that market. But right now, there is plenty of capacity out there for stainless here domestically, and we're very focused on generating return in selling steel where it makes sense. But, again, we're not a big player. We're more focused in the high-end chrome nickel products along with the 400 series chrome products.

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Christopher David Olin, Longbow Research LLC - Analyst [25]

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Okay. And then I just had a quick question on electrical steel. Weather seems to have been a problem here in North America. Wondering if that's impacted volumes or your visibility? And then maybe talk a little bit about how the dynamics have changed since we've lifted the import tariff against Canada?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [26]

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Yes. From a demand standpoint, the electrical steel business has been good. As you pointed out, there have been some weather-related issues that have driven some of that. But between weather and normal replacement schedules, we've seen very good solid demand and our volumes are as expected, if not a little bit higher at this point. And really I have seen no issues from that perspective. Certainly, it's a very ultra-competitive market right now. We've got a lot of imports coming in, pushing for, trying to bring their steel in. If they can't bring it in directly, then bring it in through either Canada or Mexico and import cores or cutup pieces that they call laminations and kind of getting around the import tariffs, if you will. And we've seen that competition for sure and are feeling the effects of that, but we've been able to push back and keep our book of customers. And, again, the demand has been good and our business remains fairly strong in that area.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [27]

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And I'd comment. We're continuing to work with the administration and the Department of Commerce to address the electrical steel, what I'll call loopholes where others are figuring out how to beat the intent of the 232 actions and the trade actions that are out there. We believe there may even be an opportunity when you look at what's been set up for monitoring system under the USMCA to address surges and circumventions. So we believe that there's opportunities, whether it's made in a USA, NAFTA mill, other approaches, but we're working and continue to work as -- with the Department of Commerce and others to address it to ensure it is a fair and level playing field in regards to electrical steel.

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Operator [28]

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Our next question comes from Nick Jarmoszuk with Stifel.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [29]

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Question for you on the 2019 converts. Is the plan there to still use the ABL? Or if the share price returns to a high enough level, would you consider refinancing with another convert?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [30]

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Yes. If the share price moves up, we might consider that. I'd say at these levels, there's probably a high likelihood that we would park that under the ABL.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [31]

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Okay. And then with the '21 notes, given where credit spreads are currently versus the nearing maturity, how do you balance the urgency of getting it done versus seeing where credit spreads go for unsecured refinancing?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [32]

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Yes. You're right. The spreads have been volatile over the last probably -- over the last 1.5 months, but we're actively assessing the markets. We want to kind of mitigate the refinancing risks. We'll continue to assess the markets and act when appropriate.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [33]

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And then last one on the iron ore hedges. Can you give us the hedge book by quarter regarding volumes and price to the extent that you have it available?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [34]

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Yes. That's something we probably would not disclose. It'll be a little bit challenging to do that. But I just want to clarify on the mark-to-market. I think Roger explained it well. A large portion of those mark-to-market gains that we have received already, I know people like to back it out of the EBITDA, but we will have higher costing iron ore in the second half of the year. So on a full-year basis, it will be neutral. But just like this past quarter where we had about $9 million of settlements, that did not flow through the P&L. In fairness, if you back out the $35 million, you should add back $9 million, and those settlements will probably, if iron ore prices don't change, those settlements that don't pass through the P&L in the third and fourth quarter will probably be larger.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [35]

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Now in terms of the iron ore hedging strategy, do you hedge 100% of the exposure with -- that you have within the Cliff's contract?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [36]

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Yes. Well, we look at our IODEX portion holistically and we kind of run 2 different books. We look at our total exposure as, say, with the automotive contracts, since we start locking in volumes, we will make sure we hedge appropriately to protect those margins under the automotive contracts. And then on, what I would call, anticipatory business, maybe business that runs through our infrastructure and machinery market or the distributor and converter market, we'll do anticipatory hedging. So even like as we get into 2020, where probably more than half of our exposure is hedged for 2020.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [37]

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So should we think about you generally hedging 12 months out? Is that the right way to think about it?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [38]

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Yes. We'll hedge anywhere from 12 to 24 months out. It's a pretty systematic program, obviously, as we go further out, we're hedging a little bit less. And as those near months come in, we're hedging a little bit more. But it's, I would say, very systematic. We try to take thinking out of it so that we're not guessing on a price, but operate within bands.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [39]

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So it's correct that we have hedges in '19, '20 and a little bit even in 2021.

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Operator [40]

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And our next question comes from Phil Gibbs of KeyBanc Capital Markets.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [41]

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Was there any tariff cost alleviation in the quarter? Because I know you ship a decent bit to Canada and Mexico, and the USMCA, as part of that agreement, I think, sunsetted those retaliatory tariffs in the middle of May. So just trying to understand if you benefited a little bit in the back half of the quarter? And what do you expect moving forward?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [42]

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No, we have not. Actually, we've accrued for those. It's a very small amount of money. For most of the stuff we ship to Canada or Mexico, we are not the importer of record, only a very little portion of that business. And where that's impacted us, we actually have accrued that, but we haven't seen that money physically come back yet. We've applied for the duty drawback and all of that kind of stuff that will come back to us, but it's a very small amount of money and it has not had much impact at all.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [43]

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Okay. And not to beat a dead horse on the iron ore piece because I know there's been a lot of questions already asked on it, but the way to think about it, Jaime, really is that if you have had about, call it, nearly $60 million of these non-cash mark-to-market gains in the first half, you've got $20 million related to roughly 2020 contract hedges, that you've got $40 million of gains that haven't settled yet, but you're going to see about $40 million of absolute pressure on your iron ore costs in the second half if everything stays the way it is right now?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [44]

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Yes, that's fair. We would see the higher-cost iron ore in the second half of the year. That's why I think it's important as people make adjustments for the mark-to-market that it's appropriate to add back the settlements that don't pass through the P&L.

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Operator [45]

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Our next question comes from Alex Hacking of Citi.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [46]

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Any change to the guidance on downstream EBITDA? I think that was previously at $70 million, $80 million this year? And any update on where you expect downstream EBITDA to be next year given the investments that you're making at Precision Partners?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [47]

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The guidance range still holds. They should be somewhere between $70 million and $80 million of EBITDA. Both companies are performing spot on. In terms of next year, it all depends on builds, but we would expect that number to be higher because we'll get a little bit of a benefit from the new facility that's going to be probably mid to third quarter commercialization, but we would expect improvements in EBITDA.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [48]

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Just to clarify, when you say mid to third quarter, mid to third quarter next year, right?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [49]

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Right, 2020.

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Operator [50]

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Our next question comes from Curt Woodworth of Crédit Suisse.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [51]

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So just if you look at your implied second half guidance, it's a run rate of about $330 million to $340 million. And if we kind of gross-up the sensitivity for about where the spot market is today, say $600, I'm getting like, call it, a $360 million annual run rate in the back half of this year for EBITDA with the higher auto shipments, but then you also talked about, you know, effectively like a negative iron ore delta from booking the paper gains earlier this year and then you've got outage costs. So I guess my question is, I'm just trying to figure out, kind of like, what a more normalized run rate of EBITDA for the company would be, like would you say that, is there any way you can kind of quantify what more normalized outage expense would be relative to the back half of the year? Or how normalized for some of the iron ore headwinds that prospectively are kind of back-end loaded, relative to that guide?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [52]

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I think -- I mean, I would probably just default to our full-year guidance. Obviously, it's going to be back at around CRU and how that adjusts for automotive contract pricing for next year. But on a current average for CRU, I think our guidance is probably reflective of outage expense is a little bit less than last year in total. Our outage expense on a normalized basis is roughly around $50 million to $60 million. So we probably are slightly ahead of that this year. I think to just kind of look at a normalized run rate of EBITDA, I think our annual guidance is probably pretty reflective of that.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [53]

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Okay. And then can you comment on capital spending going forward? You mentioned maybe some upgrades at the Middletown hot mill. I mean, do you feel like, you kind of threw around the billion number, but do you see any sizable sort of capital spending needs that would be in the $50 million to $200 million range going forward? Or can you kind of quantify what you're planning to do at Middletown?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [54]

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Yes, that -- that -- it depends on what your definition of sizable is. Yes, we have some investments that will be bigger than $50 million going forward. There's no doubt about it. It will be spread over a period of time. We don't have any major investments at this point that we will be planning on making, and we would attempt to kind of keep it within our normal capital budget constraints that we've had.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [55]

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Yes. I think on kind of a run rate CapEx, we're probably going to be in that $170 million range. This year, it's a little bit more. We're still comfortable with the $170 million to $190 million guidance. But it's a little bit more because of the new facilities that we're putting up at Precision Partners.

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Operator [56]

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Our next question comes from Tyler Kenyon of Cowen.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [57]

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So -- hate to ask another question on iron ore, but just to be clear, should we assume your full year EBITDA guidance is based on the persistence of iron ore prices at levels where you've marked the derivatives to market? Or is there another underlying assumption made there within the guidance?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [58]

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It would be the former. It's basically where iron ore is today. I mean, if iron ore continues to move up we'll probably have more mark-to-market gains. Conversely, if it moves down, we're going to have to mark those to market and you will show mark-to-market losses. But the underlying assumption is today's pricing.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [59]

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And the offset will be in what we actually paid for the iron ore. So it's just, whether it goes up or down, we'll see the opposite of it in the price we actually paid for the iron ore at that time.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [60]

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And then just one more, just on maintenance and outage expense. Jaime, I think you mentioned there was $12 million of maintenance and outage expense in the first quarter, and then $25 million in the second quarter. So bringing the first half total to somewhere around $37 million, $38 million? But the 10-Q that you filed last night suggested that you've only incurred about $29 million to date, so that would imply first quarter maintenance and outage around $3 million, $4 million in the first quarter of '19, so I'm just trying to bridge that difference there?

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Douglas Otto Mitterholzer, AK Steel Holding Corporation - General Manager of IR & Assistant Treasurer [61]

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This is Doug Mitterholzer. So we have pulled forward some work that was scheduled in the fourth quarter at Dearborn. And so that was in the technical sense in the queue, it's unplanned, but it was part of our overall plan for the year. So there's a little bit of a mismatch there. So we're still on track for that $70 million to $80 million for the year.

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Operator [62]

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Our final question comes from Martin Englert of Jefferies.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [63]

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With your upcoming fourth quarter maintenance, coupled with the increasing second half volumes, can you discuss the implications for working capital in the coming quarters? And I guess, how would you define a modest working capital release that you expect for the year?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [64]

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Yes. I think we will probably be slightly higher than where we showed at the end of the second quarter. You'll see a natural buildup in the third quarter, mostly due to kind of a receivable buildup. But then through receivable liquidation and inventory liquidation in the fourth quarter, we should end up with kind of a working capital source that's a little bit higher than where we are at the end of the second quarter.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [65]

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Yes. Since we planned for our upcoming outage on the hot end outage, we're building slab inventory currently so that'll be part of it. That's a -- use of cash as we go into that outage and then quickly we'll go down levering that outage.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [66]

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Okay. And then also if you could just provide some color on the quarter there. There was a $4.5 million nonoperating gain in the P&L. What was that associated with?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [67]

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Yes. That was an asset that we had at our Mountain State Carbon facility that was sold.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [68]

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Okay. Any other detail on what the asset was?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [69]

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It's basically right of way usage. I don't want to go any further than that.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [70]

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Okay. And then, within your guide, are there any other asset sales factored into the back half of the year? So we'd seen, I think, a couple year-to-date in 1Q and 2Q?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [71]

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No, there's nothing planned.

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Operator [72]

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This concludes our question and answer session. I would now ask Mr. Newport for his closing comments.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [73]

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Thank you for joining us today. We appreciate your questions and your comments, and we appreciate your continued interests in AK Steel. We look forward to updating you on our progress in October.

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Operator [74]

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Ladies and gentlemen, this concludes our conference call for today. Thank you for participating, and you may disconnect at this time.