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Edited Transcript of AKS earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 AK Steel Holding Corp Earnings Call

WEST CHESTER Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of AK Steel Holding Corp earnings conference call or presentation Thursday, October 31, 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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* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* David Francis Gagliano

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

* Hunter Davis Alley

Goldman Sachs Group Inc., Research Division - Associate

* Karl Blunden

Goldman Sachs Group Inc., Research Division - Senior Analyst

* Martin John Englert

Jefferies LLC, Research Division - Equity Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Sean-M Wondrack

Deutsche Bank AG, Research Division - VP & Senior Credit Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the AK Steel's Third 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 third quarter 2019 financial and operating results.

With us today are Roger Newport, Chief Executive Officer; Kirk Reich, President and Chief Operating Officer; and Jaime Vasquez, our Vice President of 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 third quarter results. And together, we will field your questions.

Please note that during today's call, we will refer to presentation materials which were posted on AK Steel's website yesterday afternoon. If you've connected to this call via the webcast, you should see those slides on your screen. For those of you 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'd encourage you to refer to that information during this call. However, it will 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 items such as future shipments, product mix, prices, costs, operating profit, EBITDA or liquidity. Please note 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 in results is contained in our earnings release issued yesterday after the market closed. 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 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, once again, at www.aksteel.com.

With that, here's 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. Despite facing some headwinds, our company performed well overall during the third quarter. We generated net income of $2.8 million or $0.01 per share and adjusted EBITDA of $86.9 million. It should be noted that these results include a negative mark-to-market charge of $15.3 million or $0.05 per share, and most of this relates to hedges for 2020. These results demonstrate the effectiveness of our strategy when navigating through periods of challenging spot market conditions. In just a few moments, Jaime will provide further details and highlights of our third quarter 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. We had numerous plants deliver outstanding results for our key safety categories, including 2 of our facilities working the entire quarter without a single occupational injury. Our 9,500 employees are to be commended for their vigilance in adopting safe work practices and for making AK Steel an industry leader in overall safety performance.

From an environmental standpoint, as highlighted on Slide 6, we are making great progress in our ongoing efforts to further increase our recycling rates, reduce the generation of hazardous waste and increase our use of renewable energy. We have made significant investments of over $20 million in the last several months in pollution control equipment and technology at our facility in Dearborn, Michigan. This was just one part of a much larger planned investment to further enhance the long-term sustainability and environmental performance of our Dearborn operations.

And I'd like to take a moment to comment on our Dearborn facility since we acquired it about 5 years ago. We are delivering on a vastly improved environmental record. We are making major investments in an important pollution control device and related equipment. We are continuing to engage in the community initiatives, and we are providing high-paying jobs to our employees and hundreds of local contractors every day. In other words, we are doing what we said we would do, and we look forward to continuing to operate in an environmentally responsible manner at Dearborn Works, which bears the rich history of being the original Henry Ford steelmaking facility.

Just as we continue to enhance the sustainability of our manufacturing operations, the steel products that we manufacture are also having a positive impact on the global environment. For example, the fuel efficiency of vehicles is being improved through the tremendous properties afforded by our family of advanced high-strength steels. Vehicle emissions are being reduced through technology made possible by our high alloy stainless steels. And the efficiency of our nation's electrical distribution system is continually being improved as our grain-oriented electrical steels are playing an absolutely vital role.

Our innovative steel products are providing our customers with a sustainable, cost-effective solution, especially when compared to competing metals such as aluminum. In short, our innovative steel solutions are helping our customers, our society and our world usher in a more sustainable future.

Turning to Slide 7. We continue to pursue actions to enhance our operating assets to improve our competitive cost position, further strengthen our balance sheet and reduce our pension plan's exposure to the financial market volatility. Highlights in the third quarter include the construction of a new facility at Precision Partners, completion of a significant hot-end outage at our Dearborn Works here in October and the successful planned transition of numerous customer items from our Ashland Works coating line to our other lower-cost coating facilities. These actions and investments are in keeping with our 3-pronged strategy to improve our competitive cost position, commercialize our innovative new steel products and grow our downstream operations.

Moving to Slide 8. We are on track to complete the closure of our Ashland Works facility by the end of this year. As previously communicated, we expect to realize at least $40 million of annual run rate savings as a result of this footprint optimization, of which we have realized some of the benefits already. I would like to thank our Ashland Works team for their tremendous dedication to our company and for all that they have done to make this transition a smooth one. Many of our Ashland employees have already accepted positions at other AK Steel locations, and I am hopeful that even more will do so going forward.

Turning to Slide 9. I would like to discuss what we are seeing in the markets that we serve. Overall demand for our core automotive market remained fairly strong during the third quarter, although it was negatively impacted by the 40-days labor strike at General Motors. We presently expect 2019 North American vehicle production of approximately 16.6 million units. While this would represent a slight reduction compared to the prior year, it remains a very strong year by historical standards. Similar overall production levels are forecasted for calendar year 2020.

Likewise, we continue to see stability in the residential and commercial construction. New housing starts for 2019 are projected at 1.26 million units, and we currently anticipate comparable levels in 2020, along with improving construction spending. Seasonally adjusted inventories at steel distributors are currently estimated at roughly 2 months for carbon products and 2.8 months for stainless products. These levels have declined modestly throughout the year, and some degree of restocking is expected to take place here in the fourth quarter. Both refilling of the General Motor supply chain and the recent round of steel price increases that were announced should also further support improved market conditions over the course of the coming weeks and months.

On the trade front, we continue to urge Congress to pass the USMCA, which will incentivize a higher level of consumption of North American-made steel. From the standpoint of enforcement, we support the efforts of the administration to establish the needed mechanisms to swiftly address any surge in steel imports from Canada or Mexico as a result of their exemption from the 232 tariffs. Along these lines, we are currently working with multiple agencies to address what we believe is circumvention activity by numerous foreign electrical steel producers. These companies are now routing their products through Canada and Mexico, performing minor modification to the steel and then shipping this material into the United States without having to pay a tariff. Such loopholes must be closed in order to ensure a level playing field.

Addressing global steel overcapacity is also fundamental to our fight for fair steel trade and the preservation of manufacturing jobs in the United States. This requires a vigilant focus on China, who continues to make steel without regard for either supply-and-demand balance or environmental stewardship. The steel industry in the United States faces some of the most stringent environmental rules in all of the world, and companies like AK Steel are committed to meeting them each and every day. But unfortunately, the steel industry in China does not have to adhere to the same stringent rules.

We were pleased to see the statement issued last week by the collective steel industries for more than a dozen nations across the globe, calling for their governments to address the trade distortions that have encouraged global overcapacity. We trust that this is just the first step of many, and we encourage these countries and our government to work together to develop a definitive time line to deliver tangible results.

Moving to Slide 10. Our overarching strategy remains clear. We will commercialize our innovative products and services, transform our operations to significantly improve our competitive position and drive further growth, both in current businesses and in new markets and downstream businesses. We have made great strides over the past few years in executing this strategy. We have grown our downstream businesses and increased our automotive market position among the major OEMs. We have improved our cost position, lowered our debt levels and substantially derisked our balance sheet. And we have returned to our long-established roots of product and process innovation.

In summary, we are doing what we said we would do, and we're focused on the long term to deliver value to our shareholders.

I would now like to turn the call over to Kirk to comment further on innovation, along with our 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 Precision Partners.

Slide 12 shows the new Precision Partners' state-of-the-art stamping facility, which is progressing well and remains on schedule and on budget. The equipment installation is well underway, and we are very excited about this new facility and the value it will bring to our customers and our shareholders in the future.

As we have noted before, this investment puts us into fairly exclusive territory with the capability to produce single-piece, hot-stamped door rings and large subassemblies. This positions us well to more strategically align with our customers going forward.

In addition, Precision Partners remains on track to deliver the higher EBITDA performance that we were targeting for this year with even further EBITDA growth anticipated in 2020. From an operational perspective, I'm happy to report another quarter of solid performance throughout the company, including the execution of a very successful planned maintenance outage at our Dearborn Works blast furnace and steel shop.

Slide 13 shows some of the extensive work that was done. The outage was performed safely. We completed all of the planned work and have been running well since restarting the facility. This major investment will improve both the efficiency and environmental sustainability of the operations and will result in a reduction of our manufacturing cost at Dearborn Works by at least $10 a ton or over $25 million annually.

In addition to highlighting our investments in our equipment, I wanted to make a few comments regarding artificial intelligence and big data. Although these topics often make headlines and appear to be all the rage with some of our competitors, we at AK Steel have traditionally not provided much public commentary on the subject. This may lead to the incorrect belief that we have not yet embraced such technology. In reality, however, we've been utilizing AI for many years now in our operations to provide adaptive learning and to continually improve the quality and consistency of our products.

We've also been making good progress improving our systems, allowing us to centralize the massive amounts of data that we have from the shop floor processing records and then analyzing this aggregated big data to drive process improvements. And through a recent grant from the U.S. Department of Energy, we will soon be taking the adaptive learning science on hot-mill modeling to the next level.

We are steelmakers. That is what we are great at, and we do it in a way that results in innovative solutions from raw materials all the way through to finished steel components. We combine data and process innovation throughout our company to deliver unparalleled value and great steel products and engineered solutions to our customers.

Turning now to some market updates. We have begun the annual cycle of contract negotiations with some of our major automotive customers. We are only in the very early stages of this process, and thus, it's a bit premature for us to offer much color at this time. I would remind you, however, that at -- that while directionally, our auto contract prices typically move in tandem with the spot market pricing, the magnitude of the moves are generally far more muted than the overall market, which provides more stable pricing over time.

Regarding the recent strike at General Motors, it did have a modest negative impact on our third quarter shipments, and an even larger impact will be felt in the fourth quarter. Although it remains to be seen how much lost production GM will make up over the coming weeks and months, we do anticipate a reduction in shipments of both our carbon and stainless steel products as a result of this unforeseen labor disruption.

Looking ahead to next year, we anticipate further market share gains in our primary market of automotive, as noted on Slide 14. Despite the consensus of forecast calling for a reduced vehicle production in 2020 versus 2019, we are planning to ship a greater volume of carbon automotive steel next year while also realizing further product mix development. Being a top-tier supplier to the automotive OEMs requires a great team of professionals, and we are uniquely qualified within North America to provide these diverse products and services.

As indicated on Slide 15, we used the ultra high-strength steels such as -- the use of ultra high-strength steels such as our ULTRALUME and NEXMET products is expected to increase rapidly. In 2020, we will grow our sales of both exposed galvanized products and ULTRALUME, our aluminum-coated, press-hardened steel for hot stamping. In addition, we will supply our first production orders of NEXMET third-generation, advanced high-strength steel for an upcoming new vehicle platform in 2020.

Turning to Slide 16. And speaking of our ULTRALUME press-hardened steel product, we are happy to announce -- we were happy to announce earlier this week that we have entered into a licensing agreement for this high-strength, high-formability steel that is hot-stamped into parts for lightweighting in the automotive industry. Under this agreement with ArcelorMittal, and aside from them, we will have the sole license to manufacture this product in the U.S., Canada and Mexico for the hot-stamping of parts.

Additionally, stampers will be permitted to process our material in accordance with the ArcelorMittal patents, which cover the hot-stamping process for this product. This agreement is part of the settlement of all of the pending patent infringement litigation between the 2 parties. We are pleased with this outcome and believe with the dispute now finally resolved, we will significantly expand the sales of our ULTRALUME material, which is an important growing automotive product.

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. The third quarter was essentially in line with our expectations despite having experienced more challenging market conditions than originally anticipated.

Turning to Slide '18. Our third quarter adjusted EBITDA of $86.9 million compared to $160.8 million in the third quarter a year ago and $151.5 million in the second quarter of this year. The recent third quarter included $15 million of unrealized mark-to-market losses from our iron ore derivatives compared to mark-to-market gains of $35 million in the second quarter. Also, in the recent third quarter, we had realized gains on derivatives of about $13.5 million that settled but did not flow through the income statement had those gains had been recognized in prior quarters.

The third quarter decline that we experienced in sales and earnings from the second quarter of 2019 and the third quarter a year ago primarily reflects the significant drop in carbon hot-rolled coil spot prices or HRC on our index-based contracts. To put that into context, the average spot HRC price in the third quarter of last year was $899 per ton compared to just $562 in the third quarter of this year. Also, the sharp drop in pricing of nearly $100 per ton that occurred during the month of June caused many customers to place orders at minimum levels in anticipation of further price declines. This negatively impacted our third quarter shipment volumes.

Turning to Slide 19, we highlight the changes in reported third quarter adjusted EBITDA from the previous quarter. Pricing, volume and mix had a $60 million negative impact in the third quarter compared to the second quarter. The decrease mostly reflected the decline in HRC prices on our steel index-based contracts as well as lower shipments. Raw materials and energy costs were a positive $13 million and mostly reflected lower carbon scrap and other alloy costs.

Operations was a $26 million positive impact to adjusted EBITDA compared to the second quarter due to lower outage costs, increased utilization of certain assets and reduced spending on supplies. Here, we also note some dramatic shift in our unrealized mark-to-market gains and losses related to iron ore derivatives. This was caused by a sharp movement in the IODEX, which went from nearly $110 per ton at the end of the second quarter to $93 per ton at the end of the third quarter. The other categories primarily comprised of several nonoperating items, including lower selling and administrative expenses.

Turning to Slide 20. Let me conclude my remarks by providing you with an update to our annual guidance. In July, we indicated that our expected adjusted EBITDA would be in the range of $470 million to $490 million, and our guidance was based on an HRC price at that time of approximately $555 per ton. We also provided guidance that for every $10 change in HRC pricing, our earnings could be impacted by $5 million to $7 million on an annual basis.

However, since July, the pricing for HRC has fallen more sharply than previously anticipated. This also caused many service center customers to order at minimum levels. And these volatile events, combined with the strike at General Motors, will most likely result in a deviation from our anticipated range of $5 million to $7 million for every $10 change in HRC pricing.

Accordingly, we now expect adjusted EBITDA for 2019 to be in the range of $450 million to $465 million. Our guidance excludes any fourth quarter mark-to-market changes in iron ore derivatives and any potential pension and other postretirement benefit quarter charges. In addition, it excludes the charge previously taken in the first quarter related to the closure of Ashland Works.

On Slide 21, we highlight the other annual guidance items, which included a change in expected shipments for fiscal year 2019.

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) Martin Englert of Jefferies.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [2]

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With the permanent closure of Ashland, you expect over $40 million in savings starting next year. Are there any potential offsets as you're transitioning the coating volumes across the other assets? And you mentioned earlier in the call that some of these savings have been realized this year. If you had to estimate how much of the $40 million do you think you're realizing now this year.

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

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Yes. The number for this year would be fairly small, I would say, Martin. But as far as the expenses for transitioning, if we saw any of those, it would have been this year as we kind of moved products, requalified at different coating lines and made that happen. So going forward, we have very little of that left to do, and it's more of now kind of having a more fully utilized set of assets from our coating lines that are at lower costs. So we should see the advantage going forward.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [4]

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Fair to say then the net savings year-on-year in 2020 would be around that $40 million that you've highlighted there, correct?

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

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Yes, fairly close to that, I would say.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [6]

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Okay. Got it. And if I could, one more, within autos, can you remind us again of your expected platform exposure for next year between cars versus truck, SUV? Also touch on the share gains, specifically what products are you gaining share within carbon next year.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [7]

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Sure. I can highlight some of those. So we're more than 75% of our businesses in trucks and SUVs and crossover vehicles, much the same as what the market segment would be. We're actually a little more heavily weighted in those areas. And next year, as we gain market share, I would say that will continue to increase.

I've seen some people ask the question, why are we so confident in 2020? It's because we're already awarded the business. And in some cases, there are platforms that started in 2019 midyear and are continuing next year and are going to ramp up into next year. And so we know we'll be on that book of business. We know those are good selling vehicles, and we'll get more advantage there. And then we're on some new platforms that begin next year. Almost extensively, there are -- very extensively, there are trucks, SUVs and some of those major vehicle platforms that are coming out that you would know of that are hot selling. So we're on the right platforms. We're on the right material, and we know that that's going to grow.

As I said in my remarks, we also know that we're growing on our ULTRALUME, the hot-stamped product. We're seeing more market increase in that product next year. And we expect with the resolution of the issues with ArcelorMittal that, that will grow going forward. And then our partnership with Precision Partners is certainly helping as well. They're seeing their book of business grow, and we're kind of being able to provide full-spectrum solution to our customers from that perspective.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [8]

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Okay. But not necessarily anything incremental on advanced high-strength steels there, so it sounds like maybe on the ULTRALUME front and some of the other...

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [9]

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ULTRALUME is advanced high-strength steel.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [10]

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Apologies.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [11]

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One of our -- it's our hot-stamped version of that. Our cold-stamped version would be NEXMET that's in the ultra high-strength category, and we're shipping our first production parts of that next year as well. And then some of our other products, the Dual Phase 780s and 980s and some of those things that are more advanced high-strength steels, we're continuing to make advancements in those areas as well. So it's really across the spectrum, but our product mix is improving, not just we're getting more volume.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [12]

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Okay. Any color on the mix improvement there year-on-year, basis points towards the richer mix?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [13]

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Say that one more time?

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [14]

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Any color on the percentage mix year-on-year for that mix improvement? Looking out into '20, based on what you can tell today, are you gaining a couple of hundred basis points of improved mix versus where you're at today?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [15]

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I'd say our market share is increasing, I don't know, maybe 5% from where we are now overall, and it's more heavily weighted towards those high-value products that we discussed. The product mix improvements that we've anticipated are coming, we anticipate will continue in that direction.

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Operator [16]

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Our next question comes from Karl Blunden of Goldman Sachs.

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Karl Blunden, Goldman Sachs Group Inc., Research Division - Senior Analyst [17]

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I was interested on the capital structure. How you think about timing and means of addressing some of the upcoming maturities? I know that the convertible is likely, that's -- you've kind of looked at the revolver for that. But for the 2021, it seems like the maturity is now approaching. You've outlined a pretty optimistic -- or a growth scenario in terms of market share. So do you wait for those gains to show before you look to address the '21s? And are you still thinking about the unsecured market as something that's feasible in the way you'd like to do that? And one of your peers has issued a convertible bond recently. So just interested in the range of options you have for addressing that.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [18]

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Yes. On the convertible, as you indicated, that's going to be refinanced under the revolving credit facility. We had increased the liquidity under that facility assuming that this may happen. On the 2021s, we do have some time. I mean it's an October maturity in 2021. So we have a little bit of time. We continue to assess the market conditions, as you know, they haven't been too receptive to steel companies. But as you indicated, we do have a variety of options that we could pursue. So we're just going to continue to evaluate the market. So we're not going to put the company at risk waiting to kind of the fourth quarter of doing things, but we'll get things done in I think plenty of time.

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Karl Blunden, Goldman Sachs Group Inc., Research Division - Senior Analyst [19]

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Okay. Just on the options, do those include equity-linked options and revolver draws other than just straight debt refinancing?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [20]

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Yes, I think we're going to look at the full menu of our refinancing options and then do what's the most cost-effective.

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Operator [21]

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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 [22]

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A couple of questions for me. If I could just start on the setup into next year. A lot of moving parts, so I guess, savings at Ashland, Dearborn, coal presumably down into next year. Just wondered if you could comment specifically on how you see the margins shaping up for 2020 versus the end of '19.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [23]

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Yes. Just from a margin perspective, and while I obviously give our guidance in January, but as you know, as Kirk alluded to automotive contract pricing is going to follow directionally with where spot market pricing is going. Obviously, not dollar-per-dollar, something much less. So that's going to put a little bit of downward pressure on margins. The offset to that is all the cost savings that we do have as well as raw material costs have come down. I think as you noted, coal has been down. We're essentially done with those contracts. So there will be decreases in coal costs, energy probably about the same. We don't want to get into too much detail as we still have a lot of negotiations going on, both from a supplier standpoint and with the automotive contracts.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [24]

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Okay. A couple of others for me. Just on Slide 16, when you talk about the ULTRALUME. I just wondered if you could put some numbers around that opportunity.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [25]

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Yes, I'd say ULTRALUME right now is probably in the range of 3% to 4% of our automotive carbon shipment tons, and we see that growing just as our piece of it in the next few years to 10%, maybe more. It depends on how quickly those products are adopted. And that would be our ULTRALUME, that's not speaking of our NEXMET. Our NEXMET, as I said, we're shipping our first tons of that on production vehicles next year in 2020. And then we anticipate that starts to ramp up as well. How quickly that ramps up, we'll have to see as the -- as things develop. But we know it's getting qualified and getting a whole lot of interest. And so we expect as new models roll over those -- the use of those steels will increase. And we expect to be a big player in those areas.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [26]

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And I'll also comment, we would see some benefits coming too on the AK Tube front as they have continued to find applications to utilize these new high-strength steels.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [27]

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And the last one for me. Just in terms of the price hike that was announced last week. Just wondered if you could comment on the behavior you've seen since that in the market. And then also just tying that into your overall EBITDA guidance. Obviously, you're quoting $510 per ton and we're below those levels today. I just wondered, should we be adjusting for the view around where steel prices are today? Or have you done that specifically in the guidance?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [28]

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Yes. I'd say we've done that in the guidance. We're -- we don't have that many more tons left to sell for this year. What we've seen in the market is a little bit of a bounce since then. The word is that scrap prices are going to be going up, and hopefully, we'll see some of that as we've hopefully reached the bottom and now started heading back up.

We're going to be -- we're going to continue to do what we've always done, which is be disciplined in those markets and not make dumb deals. We're going to pay attention to where the market's headed and we're going to participate where and when we should.

And you've seen the volume reductions that we've made in the forecast, and that's as a result of simply not doing some deals that don't make sense for us. So we'll continue to do that. And I think all that's booked into what you heard in the forecast today.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [29]

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And I'd comment, our focus is making sure we get a return. If we're not able to get a return, we don't move the tons. We do have flexibility in the carbon market with our Butler EAF that we can produce carbon. So that is what I would call is our flexibility to turn the switch on or off depending on what market conditions are and do we ultimately generate a return. When we idled Ashland years ago, we decreased our position in the spot market. And as we go forward, we do have some flexibility, and we'll serve that market as it makes sense.

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Operator [30]

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(Operator Instructions) Our next question comes from 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 [31]

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I just actually have a few follow-ups to the prior questions, actually. I ask it almost every quarter, but can you update us on specifically how much volume this year is priced under these annual contracts that are expected to reset at the end of the fourth quarter?

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

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The fixed-price contracts, it's typically about 70% of our overall volume. So you're talking probably close to roughly 3 million tons. And so those may be in some of the markets reset at the end of the year. But keep in mind, David, some of those are from an automotive standpoint, particularly we're divided between kind of into the third quarter, which I know has already happened, but we haven't settled those deals yet. So those will be retroactive to then. Others at the end of the year and then others at the end of the first quarter. And so some of those are staggered from that perspective as well.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [33]

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Okay. So as we think about 2020, at the end of the fourth quarter, it's not -- is it [$30 million] that we should be adjusting for contract resets? Or is it -- I mean what's the number that we should be adjusting for the contract reset at the end of the fourth quarter?

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

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So that's predominantly, I would say the heavyweight there is the automotive side. And we've always said a little bit more than half of our automotive tonnage resets January 1. And then it's roughly 25% April 1 renewals and then 25% on October 1 renewals.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [35]

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That's helpful. And then on the met coal side, can you remind us again the volume tied to the resets at the end of the year on the met side? And since those contracts are done at this point, what was the year-over-year reduction in the contracts this year?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [36]

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I'll answer one of those 2 and then avoid the other one. So 3 million tons thereabouts. And the price is down and we think we've got a really good price, but we're not going to talk about that separately. It'll be all part of the overall forecast that we'll give in January. But we've certainly done well there.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [37]

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Okay. And then just my last one. How much of the -- how much is actually being produced at Dearborn these days? This $10 per ton cost save, what's the total volume there?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [38]

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Little more than 2.5 million. That's [around] $10 [times that].

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Operator [39]

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Our next question comes from Matthew Fields of Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [40]

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I just wanted to ask about stainless and electrical this quarter. It looks like the volume in the quarter was your lowest kind of in the last decade despite imports being -- of stainless at least being down 10% to 20%. What's going on in that market? And is that kind of a way to look at things going forward?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [41]

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Yes, it's a good question. A couple of things in that. So maybe starting on the stainless piece. Imports are down, as you referenced. The majority of it -- we've done a couple of things. First of all, we don't supply into the commodity market when it doesn't make sense, and it doesn't make sense based on where the pricing is currently in the pure down and dirty commodity markets. And so we shrink our position there. That's some of what you're seeing in the third quarter. That really probably continues into the fourth quarter.

The other piece of stainless is we did start seeing some impact as a result of our automotive exhaust book of business. And so automotive exhaust has been impacted by a couple of things. Auto builds in general have been down a little bit. And while we're heavily weighted truck/SUV on our direct sales of carbon steel, our sales of stainless steel go into the overall market. And so any time less vehicles get produced, that impacts it a bit.

And then we started to see a little bit of the impact of the General Motors strike because a lot of that material goes into General Motors from that standpoint.

And so I'd say that's -- those are the pieces that make up the stainless business decrease in volume. I don't know that, that's where that remains long term. It depends on where the spot market goes for our 300 series. And certainly, with the General Motors strike resolved, we anticipate that business picking back up, obviously. So hopefully, that answers the question on the stainless side.

On the electrical side, it's a fairly complicated one. As you know, there's a lot of trade things going on. But as we've referenced several times, we have customers who have elected to take their business and move to Mexico and buy foreign steel and cut it into laminations and put it into cores and ship it into the United States and assemble transformers in the United States made of foreign steel. It's exactly what we warned of when the trade cases came and it's exactly what has happened.

It's not too dissimilar from -- if you go back in history a couple of years before, the EU put in minimum import pricing, the same thing has happened there. The vast majority of transformers, cores, laminations are now being produced in Turkey and in the UAE, and those are being imported into Europe in the same fashion because people want to avoid those, the tariff in our case, or the minimum import price in their case. And so we have seen a reduction in our business and our volume there.

I would say the domestic market itself, the demand is good. Some of our -- some of the transformer producers are seeing record-breaking years. And so it's not a demand issue. It's the circumvention of the tariff being done through Mexico that is bringing these -- the steel into our marketplace. And therefore they're not buying it from us. And so that's the volume reduction that you're seeing. And will it go -- will it continue going forward? Unfortunately, it appears to be the case. They continue to move some of their business away. And we think that's going to be tough sledding from that perspective.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [42]

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And as I indicated earlier, we're looking at trying to get support, whether it's under U.S. MCA or other trade actions, because this is basically just circumvention of the intent of the trade cases and also the 232 actions, and we're seeing the steel come in from multiple countries. So people have figured out how to beat our system. And as I indicated earlier, we've got to how to close the loopholes because everyone seems to find them.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [43]

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Okay, got it. And then just looking at 2020, sort of trying to get a handle on sort of EBITDA for that year. You've sort of ran through a variety of cost savings that you're going to do, $40 million from Ashland and $10 per ton at Dearborn. Can you just like run us through like a preview of an EBITDA bridge, what it should look like by the end of 2020, of all these different cost-savings programs that you were expecting to be benefiting 2020?

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

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Yes, I think it's probably premature to do that. Obviously, as you highlighted, we have the cost savings. There will be some offsets, but we're going to save that for January.

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Operator [45]

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Our next question comes from Matthew Korn of Goldman Sachs.

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Hunter Davis Alley, Goldman Sachs Group Inc., Research Division - Associate [46]

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This is Hunter Alley on for Matthew Korn. Is there any way you can provide us the margin for the downstream business? Or just kind of let us know how that business is performing relative to the broader steel mills business?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [47]

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Yes, the margins are better in that business and it's performing well. Our tubing business is a little pressured with some of the automotive pressure going down a bit. But Precision Partners has been -- I'd say both of those are doing very well. Precision Partners is going to be right on what we expected. And as I referenced in my comments, we see another pretty significant step-up next year as a result of continued growth in that business and some of the investments that we've made with our new facility will start paying dividends, very -- right towards the very end of the year. So that business is going very well for us.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [48]

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Yes. And we had previously indicated an EBITDA range for the downstream businesses of $70 million to $80 million, and they're certainly within that range.

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Hunter Davis Alley, Goldman Sachs Group Inc., Research Division - Associate [49]

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Got it. And then inventory destocking by the service centers continues to be an issue for nearly all of the steel mills. Are there any kind of catalysts that you all see in the near term that you think could lead to restocking?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [50]

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Yes. I think as we referenced earlier, the announced price increases in scrap that we expect to bump up probably starts to spur some of that activity on is how we would read it.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [51]

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And also the service center inventories remain low. The carbon service center inventories is around 2 months, and that's actually probably the lowest point of the year. So usually, when you see it getting down to that level, you would also see it spurring people. Basically, you're sitting on the sideline to see where the bottom is. And we think it's bounced off the bottom and heading back up on what we're seeing currently. Time obviously will tell, but that's what we're seeing as we look forward.

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Operator [52]

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Our final question comes from Sean Wondrack of Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [53]

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Just a couple for me. Obviously, over time, as you've been growing your sort of higher-value business and your stickier business, you've been shirking some of the lower-margin business. Should we expect that trend to continue sort of throughout 2020? Or do you think you've sort of backed away from some of that and we'll see some growth now secured?

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

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Yes. So I think we'll continue to do what we've been doing, which is participating in the markets that provide us the right return and the right margins. And so to your point, we're going to continue to reduce our footprint in the spot markets or the commodity spots where we don't see that being possible. And so the obvious place is what we've done with Ashland a few years ago, our continued flywheel piece with the Ashland carbon tons that we can or can't make, depending on where the market goes there. And so we're going to continue to do that.

From a stainless perspective, as I referenced earlier, the 300 series commodity business, when it's not good, we're not participating to that degree. And in electrical steel, there's a product called cold rolled nonoriented. The kind of the lower grades of that, we do the same thing. When the commodity market works, we participate; when it doesn't, we don't. And you're going to continue to see that.

Now we do grow in the places where it makes sense for us to. We referenced next year, we expect volume growth in the automotive space, and those are in higher-value automotive products and the better product mix shift. And I assure you, while we have gained market share, we are not doing it by buying the business. We're doing it by producing the right products and providing the right services and having the right innovative stuff going forward.

I don't think our track record has ever shown that we would go out and sell stuff for too low a price. That's not what we're -- our reputation is. That's not what our product deserves. And so we're not buying business. We are increasing market share because we're doing the right things despite the fact that volume overall in the automotive business, automotive builds are going down, we're seeing more of that share, and in the right products and on the right platforms.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - VP & Senior Credit Analyst [55]

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Right. That's great. I appreciate that. And then your specialty business is growing nicely, $70 million to $80 million, I think, of EBITDA this year, which is almost, call it, 15% of your EBITDA guidance. As we think about this over time, maybe over the next few years, how big do you think specialty can grow as a piece of the entire pie?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [56]

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And I'll comment on that. I think what you're meaning is our downstream businesses versus our specialty steels. And Jaime indicated, we've given guidance on it. It's continued to grow. We see growth going forward. We have our investment going on at Precision Partners for new hot stamping equipment capabilities there.

And when we laid out our strategy a few years ago, we said we want at least 30% of our EBITDA to be coming from our downstream businesses. So we see the opportunities in Precision Partners, we see opportunities in AK Tube, little small acquisitions that we've done that we bolt on to some of those to basically continue to grow that side of the business. So that's our goal. We laid it out. Been heading in that direction, and we've made great progress so far.

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Operator [57]

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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 [58]

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

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Operator [59]

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