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

Q1 2019 AK Steel Holding Corp Earnings Call

WEST CHESTER May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of AK Steel Holding Corp earnings conference call or presentation Tuesday, April 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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* Christopher David Olin

Longbow Research LLC - 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

* David Kevin Deterding

Wells Fargo Securities, LLC, Research Division - Director and Senior High-Yield Credit Analyst

* 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

* Philip Ross Gibbs

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

* Piyush Sood

Morgan Stanley, Research Division - Research Associate

* Timna Beth Tanners

BofA Merrill Lynch, Research Division - MD

* 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 First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I'll 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, Candice, and good morning, everyone. I also would like to welcome you to AK Steel's conference call to review our first 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, 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 exciting projects and initiatives underway at AK Steel. Following Kirk's remarks, Jaime will review our first quarter 2019 financial 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 this morning. If you have connected to this call via the webcast, you should see those slides on your screen. For those of you who've dialed in, the presentation slides are available on 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 the 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 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 in 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'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.

I am pleased with our first quarter results, which demonstrate another step forward in executing our strategy. While we reported net loss for the first quarter, this included the previously disclosed charge related to our decision to close our Ashland Works operations. Excluding the Ashland charge, we generated net income of $72.9 million or $0.23 per share for the quarter. Our adjusted EBITDA was $160.9 million for the first quarter excluding the Ashland charge of $77.4 million. These results demonstrate that our strategy is indeed working well and that we are delivering on our commitment to continually improve the performance of our company. In just a few moments, Jaime will provide further details and highlights of our first 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. Through the collective efforts of our 9,500 associates, AK Steel continues to be a leader in the industry in safety performance.

Turning to Slide 6. We are making great strides in our ongoing efforts to enhance our operating assets to strengthen our competitive cost position, enhance our balance sheet and derisk our pension exposure. All of these actions are positioning us well to continue to expand our steel product and processing capabilities for our customers.

More recently on the growth front, our steel research and innovation group is working in conjunction with our teams at AK Tube and Precision Partners to demonstrate the full breadth of our steel solutions we now offer to our customers. Key among these is our family of ultrahigh-strength steels, which includes NEXMET 1000 and NEXMET 1200. Our customers' interest in these new products is very high given the unique combination of high strength and high formability that these steels offer. In a moment, Kirk will provide additional details regarding recent advancements at our downstream operations.

Moving to Slide 7. Earlier this year, we announced the planned closure of our Ashland Works facility by the end of this year. This position stems from our overarching strategy to enhance our competitive cost position while simultaneously reducing our exposure to certain commoditized products that do not generate sufficient financial returns through the cycle. Efforts remain well on track to transition products from Ashland coating line to our other facilities with excess capacity. When all of this is complete, we expect to realize at least $40 million of annual run rate savings, as Jaime will discuss in greater detail in a moment.

Our management team is undertaking these actions and many others to improve the long-term shareholder value of our company. As shown on Slide 8, we have made great strides over the past few years to reduce risk in our business and build a stronger foundation for our company. That said, our management team, just like our other investors, gets very frustrated with how our stock trades. But I believe it is important to note that the basis of our strategy and the execution of that strategy has not changed. Over the last few years, we not only communicated our strategy, but more importantly, we have executed. Quite simply put, we are doing what we said we were going to do. The company is in the best position that it has been in over the last 10 years. We have a strong automotive position, growing downstream business, a favorable trend in our leverage metrics, essentially no financial covenants, very manageable debt maturities and more than ample liquidity.

I also believe that our results demonstrate that we are on the right path. This is clear from our 2018 financial performance and our first quarter 2019 earnings as well as by our annual earnings guidance for 2019. However, I do want to be clear to our investors: we are not done. We know that we have more work to do, and we remain intently focused on increasing shareholder value throughout the entire business cycle.

Turning to Slide 9. I would like to discuss what we are seeing in the markets that we serve. While down slightly from 2018, overall demand from our core automotive market remained strong during the first quarter. We presently expect 2019 North American light vehicle production of approximately 16.9 million units, which would represent a slight reduction compared to 2018 but still remains at a solid level on a historical basis. Likewise, we continue to see strength in residential and commercial construction. New housing starts for 2018 were approximately 1.26 million units, and slightly higher levels are anticipated in 2019. Inventories at steel distributors remain well balanced, with seasonally adjusted levels presently at 2.2 months for carbon products and 3 months for stainless products. In short, demand for our products remains solid overall, and market conditions remain favorable.

Now I would like to turn the call over to Kirk to provide an update on our capital investments, downstream business progress and the exciting developments on the new products front. Kirk?

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

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

Beginning on Slide 11 with Precision Partners. I'm excited about the commercial opportunities that are developing as well as the improved operating performance. Precision Partners is on track for the higher EBITDA that we were expecting this year. We are also seeing good progress on the construction of their new facility. As I referenced on the fourth quarter call, this capital expansion will allow us to produce a body-side outer subassembly consisting of a single-piece hot-stamped door ring for a major SUV program. In addition, this facility will also produce another single-piece hot-stamped door ring for a second major SUV platform. Construction remains ahead of schedule and on budget, with the ramp-up of production next year in line with our customers' needs.

As a reminder, taken together, these 2 awards represent approximately $50 million of annual stamping and assembly revenue in addition to revenue from an associated onetime large tooling job for those same components.

Meanwhile, as we show on Slide 12, our AK Tube operations continues to build on their record-setting performance of last year and are on track to have an even stronger year in 2019. They are continuing to secure new orders for tubing made from advanced high-strength steels. These tubing products are going into automotive applications to help our customers achieve their lightweighting objectives and lower their costs.

Turning to Slide 13. We have created a technical road show to showcase our broad portfolio of steel solutions. This includes our downstream companies' capabilities along with our combined portfolio of carbon, stainless and electrical steels for the most demanding applications. We are in the process of visiting several of our major customers to share our story of product and research excellence that we believe sets us apart as a full-spectrum steel services -- steel solutions provider. The response thus far has been overwhelmingly positive. And our customers' engineering, purchasing and leadership teams have been impressed and, in some cases, surprised by the vast number of ways our material finds its way into their products from direct sourcing as well as through Tier 1 and Tier 2 suppliers.

Turning to the opposite end of our business, the raw materials side. We also have some exciting developments shown on Slide 14. At our Mountain State Carbon coke plant, we have continued to increase production of foundry coke and are now utilizing approximately half of the current extra available capacity at that facility. Foundry coke is a larger-sized coke produced with different coal blend and coking time, which differentiates it from our standard furnace coke, which feeds our own blast furnaces. We are quickly gaining market share in the foundry coke market and are generating a nice return with a modest investment. This also helps reduce our overall coke costs, which means lower costs for our production of carbon steel. It has been a good success story and something the entire team at that facility has managed very well.

Also at our coal operations, AK Coal, we identified a cost-efficient way to access additional mining reserves at our existing mine. Through some innovative thinking, we are foregoing the large cost of opening a new mine entrance by simply ramping down inside the existing mine to be able to extract the coal from another seam. This will allow us to lower our coal costs. We plan to continue mining the same total volume of coal for now, but this project allows us to easily increase that production level in the future should we elect to do so.

Finally, just a couple of comments regarding the much discussed announcements of new domestic carbon steel capacity expected to enter the market over the next several years. While the high-level numbers may indeed sound staggering, a little analysis adds some much needed perspective.

First, nearly 1/3 of this "new" capacity isn't really new at all. It's old, restarted, previously idle facilities that we have competed with in the past when they were operating. Second, some of the announced capacity is planned to produce bar, rod, long products, tubular and plate products, none of which impacts our markets. And none of the newer restarted capacity is in the areas of stainless or high-end electrical steels, our other differentiated markets. Third, those announced facilities which are planned to produce flat rolled carbon products will primarily be aimed at construction and spot markets.

Regardless, we have important competitive advantages over this new supply. Those include our technical specialists, which serve the OEMs on a daily basis; our customer service team, which manages the delivery of just-in-time shipments; and our broad array of product offerings, many of which cannot be easily duplicated by this new capacity. This includes our exposed-quality galvanized and galvanneal products and our ultrahigh-strength steels for automotive.

Slide 15 shows the opportunities that exist in the automotive market as OEMs are launching newly designed vehicles at a high rate. Each time they do so, they focus on lightweighting and fuel efficiency, which leads to more opportunities for our ultrahigh-strength products.

Just to be clear, the definition of ultrahigh-strength steels are those with tensile strengths greater than 980 megapascals.

As shown on Slide 16, demand for those ultrahigh-strength products is expected to grow significantly, with 2019 through '25 showing a 29% compound annual growth rate. In the category of ultrahigh-strength steels, we offer both hot-stamped, our ULTRALUME product; and cold-stamped, our NEXMET family of steels, along with tooling, stamping and tubular capabilities. Therefore, we are positioned well for this growth no matter which direction is preferred by the different OEMs. These are products which the new capacity is not likely to be making.

We at AK Steel have a healthy respect for competition. We have been competing in the global market for 120 years, and we aren't about to stop competing and winning in those markets. We continue to compete very efficient -- effectively, as we have seen in the past year alone, by gaining market share. And importantly, I would note that we have not been standing still. Our capital investments in our steel facilities and our downstream businesses along with our product innovation have continued to position AK Steel to compete and win, especially in the automotive markets, which make up 70-plus percent of our business.

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. Now our first quarter results reflect a solid performance and aligned with our annual guidance that we provided in January. As Roger mentioned, we reported a net loss of $4.5 million or $0.01 per diluted share due to the charge for closing Ashland Works. Excluding this item, adjusted net income was $72.9 million or $0.23 per diluted share, which compared favorably to net income of $28.7 million or $0.09 or per diluted share in the first quarter a year ago.

As we discussed in January and highlighted on Slide 18, we incurred a first quarter charge of $77.4 million associated with the closure of Ashland Works. The estimated cash impact will be about $15 million in 2019, $30 million in 2020 and $15 million in 2021. The balance of the cash outflows will be incurred in 2022 and beyond. These amounts could have small changes due to several items that will not be finalized until we get nearer to the final closing date. As we've previously disclosed, we expect that the planned closure of Ashland Works will result in annual savings of more than $40 million beginning in 2020.

To review our results in more detail, let me begin with shipments and sales, using Slide 19 as a backdrop. In the first quarter, flat rolled steel shipments were 1.39 million tons and essentially flat from the fourth quarter of 2018 and about 3% lower than the first quarter a year ago. The decline from the first quarter of 2018 was due mostly to extended downtime at multiple assembly plants for a certain automotive OEM as well as the elimination of certain passenger car platforms. We do expect that our automotive market shipments will show year-over-year increases in the second half of 2019 due to increased business awards to AK Steel on several light truck platforms.

Total sales were $1.7 billion in the first quarter and about $20 million or 1% higher than the previous quarter and $39 million or 2% higher than a year ago. The first quarter average flat rolled selling price of $1,112 per ton was about flat with the fourth quarter and 6% higher than the first quarter a year ago. The increase from a year ago mostly reflects the impact of higher average selling prices on our January 1 contract renewals partially offset by lower spot market pricing. And adjusted EBITDA in the recent first quarter of $160.9 million was much higher than the first quarter a year ago and recent fourth quarter, highlighting the successful execution of our strategy.

Turning to Slide 20, you can see the change in our reported first quarter adjusted EBITDA from the previous quarter. Pricing, volume and mix had a $5 million positive impact in the first quarter compared to the fourth quarter. The increase mostly reflected a positive mix impact as a result of higher automotive shipments in the first quarter compared to the fourth quarter.

Raw materials and energy costs were $21 million positive, mostly reflecting lower energy and carbon scrap costs as well as a favorable impact from our hedging programs. Operations was an $8 million negative impact to adjusted EBITDA compared to the fourth quarter due to lower production levels. And the other category was a $7 million positive impact. Included in this category is an $11.6 million gain from the sale of certain high-voltage transmission assets at our Dearborn Works to an energy services company.

I will now turn to the balance sheet and cash flow items, which we highlight on Slide 21. Working capital was a $96 million use of cash in the first quarter, which includes a $12 million use of cash by consolidated variable-interest entities. The first quarter is typically a period where our working capital will be a use of cash because of a buildup in accounts receivable. However, the recent first quarter was higher than normal due to the timing of payments on certain large invoices for raw materials. We do expect that working capital will be a modest source of cash for the full year.

Our capital investments in the first quarter totaled $45 million, which compares to $51 million in the fourth quarter and $38 million a year ago. Also in late April, we increased the size of our revolving credit facility from $1.35 billion to $1.5 billion. This was done in anticipation of potentially utilizing the revolver to pay down the $149 million of convertible notes that mature later this year. Increasing the revolver in size will mitigate the impact on liquidity if we should choose to refinance convertible notes under the revolver. Although this is a debt-neutral trade, we continue to prioritize free cash flows to debt reduction.

Turning to Slide 22, let me conclude my remarks by providing you with an update to our annual guidance. In January, we indicated that our expected adjusted EBITDA would be in the range of $515 million to $535 million. Our guidance was based on a carbon hot-rolled coil spot market price at that time of about $720 per ton. In addition, we indicated that our guidance could change by $5 million to $7 million for every $10 change in carbon hot-rolled coil spot market price on an annualized basis. Based on the average price in April of about $690 per ton, our fiscal year 2019 guidance range for adjusted EBITDA is $505 million to $525 million, which aligns with the expected impact from the change in carbon hot-rolled coil spot market price on an adjusted EBITDA for the balance of the year.

Also want to mention again what we said in January that our second and fourth quarters this year include a higher proportion of our planned outages, which will impact earnings in those quarters. As a result, we should see a similar level of earnings between the first and second halves of fiscal 2019.

The other annual guidance items, which we highlight on Page 23, remain unchanged from our January guidance, with the exception of working capital. As I mentioned, we now expect working capital to be a modest source of cash versus our previous guidance of a small use of cash.

With that, I will now turn the call back to Candice 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) And our first 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 [2]

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I just wanted to ask, first of all, were there any mark-to-market gains or asset sales embedded in your prior full year EBITDA target range?

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

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Yes. There was a -- we had anticipated a small gain on the mark-to-market. Obviously, with the way iron ore moved, it was much higher than what we had anticipated. But let me remind everyone on the call of one thing because I think everybody missed it. Rightfully so, they pulled out of all of the mark-to-market gains. What that simply implies is that we are going to have higher iron ore costs for the balance of the year if everything stays as is. So for those who said we're actually pulling down guidance, that's not the case because we are overcoming higher iron ore costs that we expect to see later in the year. So we're actually doing some very good things to overcome that.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [4]

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And I would comment also that that's one of the reasons we switched to annual guidance because with the volatility in the iron ore hedging, we're doing a good activity of minimizing the risk to our financial statements. But quarter-to-quarter, we will have volatility just because of how the markets move. But for the year, our hedging program is working. We have fixed what a lot of our costs are on the IODEX portion of our iron ore purchases. And so it's really just a timing issue. A little bit of it was related to 2020, but the bulk of it is related to 2019 and is just purely a timing issue. So a gain, in 1Q, as Jaime said, if it stayed at that level, then we would have higher costs coming through. But for the year, it would be an offset.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [5]

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Okay. Just to clarify then, looking ahead, are there other mark-to-market gains embedded in your EBITDA target for the year?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [6]

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No. We hold the $21 million constant, and we're assuming -- because it's higher on the mark-to-market, we're assuming higher iron ore costs.

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

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For example, in 2Q, if IODEX goes up, we could have more mark-to-market gains in 2Q for the remainder of the iron ore that's sitting there for the second half, but we will have higher costs that would come through. If the IODEX drops in 2Q, we would have a mark-to-market loss that would basically just be offsetting part of the gain we had in 1Q. For the year, it's a zero-sum gain. There'll be a little bit that carries over to future hedges for future years, but the volatility currently remains in 2019. And our guidance we have given reflects what the value is of our hedges, knowing that quarter-to-quarter, it's going to fluctuate, but for the year, our guidance reflects what we believe our cost of iron ore will be for the IODEX component.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [8]

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Okay, all right. That's helpful. Just one last question from me, bigger picture. There's obviously been a pretty significant deterioration in the fundamentals near term here. Lead times are reportedly falling. Spot market indices are dropping quite a bit lately. And I'm just wondering, how is this permeating your discussions with your contract customers as these contracts come up for renewal?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [9]

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Well, we don't have any discussions right now with our contract customers, though, as we don't have any of those come up until the end of the third quarter. So our major contracts are taken care of for the year. And we discuss different deals on the spot market based on those spot market prices that you referenced. But knowing that we have a limited capacity there, we can be more selective, as we've talked about before. So we don't have those conversations at this point. We'll have those conversations come the fall, depending on where that market condition is at that point.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [10]

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Okay. I thought you had some contacts rolling off intrayear.

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

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End of the first quarter, and we've taken care of those, David, and did well on all of those as we expected.

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Operator [12]

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And 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 [13]

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I guess just a follow-up to the iron ore question. What -- if we assume that iron ore pricing stays roughly around the current level of $90, so I get that on a mark-to-market basis, you'd have probably some, just, hedging gains. But what do you think your iron ore cost headwind would be year-on-year on a cash basis if pricing kind of stays roughly where it is today?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [14]

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Yes. We haven't talked about our specific iron ore costs. I mean if you look at the IODEX, it's up significantly. That's the proxy I would use. But we have other inflationary indices that are embedded in our iron ore costs. But just to round it out, just to reiterate what Roger said, for us, it's going be a net neutral position if everything stays as is because we had to recognize the gain just from an accounting perspective now but we'll absorb higher iron ore costs as we go through second through fourth quarters.

But as I said, if you look at our guidance, we're only adjusting our guidance for the change in spot market pricing. So we are doing other things. We're constantly focusing on costs. We mentioned that we're gaining some additional share on some automotive light truck platforms. So those are the things that we're doing to overcome these increased costs.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [15]

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And then remember, Curt, that the IODEX is only a small part of what we pay for our iron ore, right? I mean there's several other factors in there as well. And so it's -- it doesn't go up as dramatically as when you see the IODEX go up. That's not the only factor in our costs.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [16]

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Right. I mean that's kind of why I'm asking the question, because just looking at your EBITDA bridge for the 1Q, raws up $21 million sequentially. If you back out the $22 million hedging gain, you had no raw material inflation sequentially, which is a little bit hard to believe because the coking coal contracts reset higher this year. I guess maybe scrap is down a little bit. But that's kind of why I'm asking the question, because I think it is, from where we sit, hard to know exactly what the cash impact is. But if you don't want to give any color on it, that's fine. So...

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [17]

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Yes. For the iron ore costs, again, we're covered on that. And you're right, I mean you had things like coking coal that were up, but there are also other things that had gone down year-over-year.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [18]

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What had gone down?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [19]

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Part of it -- there's other -- alloy and...

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [20]

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Scrap and alloy.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [21]

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Scrap was a big driver of that.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [22]

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Okay. I mean it was a sequential bridge, right? So scrap, I think, was pretty flat, maybe down a little bit. That's fine. And then with respect to 2Q and 4Q, you talked about higher outage costs. I mean specifically, can you quantify what your outage costs you're expecting are for the second quarter?

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

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Yes. The -- for the full year, we had given guidance. It was roughly, I think, in that $70 million range, $70 million to $80 million. So we would expect to see about $30 million to $35 million in the second quarter and pretty much the same in the fourth quarter.

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Operator [24]

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And our next question comes from Timna Tanners of Bank of America.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [25]

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So regarding these first quarter results, can you help me understand why the onetime electrical transmission asset sale is included in the adjusted EBITDA, because I don't know if we were expecting that or maybe we should have been, and also why the $690 for hot-rolled assumption?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [26]

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Yes. The electrical asset sales were included in our original annual guidance, so we just kept that to be consistent. And then the second question you had, Timna?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [27]

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Why $690.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [28]

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Just to understand the assumption behind -- the basis for the $690 hot-rolled assumption.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [29]

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$690 is just the average so far during the month of April. It's kind of a similar method that we used when we had the $720 number in January, so just again to be consistent.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [30]

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Oh, okay. So an average, not the latest spot price?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [31]

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Right, the average for the month. I hate taking one data point.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [32]

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Okay, got you. And then -- and I heard you on the discussion of the new supply, but again, I agree that you have high-quality capacity and that you have a niche auto business. But if you do have quite a few greenfields, brownfields gunning for the auto industry, specifically targeting that, it does seem like that would at a minimum have an impact on price. In talking to some of the auto buyers, they're keen to have new supply, as one would expect. Talking not just in the next 12 months, but beyond that into contract season, one would imagine there's going to be more suppliers in the mix. So have you had any early conversations on that? Do you have any further thoughts on price, not just your above-average quality?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [33]

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Yes. I guess I would say that I think most of the stuff coming online is not automotive. Some will be geared towards that, you're right. I don't think there's any new players in the automotive space. All of those people that have announced that they're building and maybe wanting to expand their automotive footprint are people that are in the market today, and those are a couple of years away. So no, we haven't had that conversation with our automotive suppliers. We wouldn't intend to do that. They have not talked to us about desourcing us or moving away from us. Quite the contrary, as we described before, the product mix is moving, I'll call it, in our direction. It's -- they still need exposed product, and they also need ultrahigh-strength product to be able to get their lightweighting. And that's going to either come in ULTRALUME, which is the hot-stamped side of that piece; or NEXMET, which is the cold-stamped side of that. So whichever way they're going to get their lightweighting or a combination of those things, we're in the right space for that.

And so as new models get introduced, they continue to lightweight, they continue to bring those products our way. Our product mix shifts and improves as we go forward. And actually, we haven't been seeing a deterioration in volume. This year, the market's going to be off by, whatever, a couple or 3%. We're going to off by less than 1%. And it's really due to some transition from cars to SUVs and CUVs, where we have done what we have said we were doing, which is position ourselves on trucks, SUVs and CUVs and those platforms that are selling well. And that puts us in a really good spot going forward. I'm absolutely certain the OEMs understand that there are always going to be customers wanting to supply them. I think that they also want very good, high-quality supply in the kind of products that we offer in the full range.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [34]

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And I'd also add to that, as part of our strategy moving downstream, too, to offer products not just in flat rolled but also with Precision Partners. And we can do the tooling. We can do the hot stamping, the cold stamping, which aligns very well with the products that we make, the new products we've launched and other products, and bring a solution to our customers with how to lower their overall costs. So taking a formed part in, for example, as a trial so they can see it. So that is part of our strategy to help address that, to be a more solutions provider to our customers, to understand what are the best deals to give them the best value for what they need. And also, even in a couple of years when new capacity is up, it still takes time to get qualified, and it takes time to get through the process stream approvals, et cetera.

So we've seen it. There's been capacity come on. I've been in the business for decades. It comes on regularly. And we have continued to position ourselves well with our entire team that we have, whether it's from working on the future platforms, which will work with our auto customers, to how we make the new steels to how we supply to them and ensuring they have steel when they need it. So there's a lot of things that go into it besides just selling a ton of steel to a customer. And that's what the package is that we offer to our customers.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [35]

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Okay. The mic still on? Because I wasn't asking about volume as much as I was trying to ask about price. So maybe if I could just ask it differently. Is there a scenario where spot prices fall and there's extra supply, and there's a differentiation between maybe a lower HRC price, and the grades that you sell don't fall? I mean is it possible, you think, that you could see sustained pricing in the premium grades but see the commodity grades fall? Because typically, they tend to move together, I would think, no?

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

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They do tend to move together within a band. That's what the automotive business is. And so when prices are way high up, those prices of auto go up slightly. When they're down, those prices go down as well. We would expect that to continue to hold true and be the case. So price will be discussed with every OEM at every opportunity. We expect that it fluctuates with the market, just as it always has. But we also expect that they're going to pay for differentiated products, like ultrahigh-strength steels, that will allow them to get their lightweighting and still be able to keep their costs competitive. And so we think we're in a great position from that standpoint, Timna. And this new capacity doesn't really change that narrative. To the effect it moves the spot market to a slight effect, then it has an even lesser effect on the auto space. That's where we would see it, and that's what we would expect to play out.

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Operator [37]

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And our next question comes from David Deterding of Wells Fargo.

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David Kevin Deterding, Wells Fargo Securities, LLC, Research Division - Director and Senior High-Yield Credit Analyst [38]

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I'm just looking at your forward guidance. And it looked like we, at the midpoint, lowered guidance by about $10 million. But you said each $10 move impacts $5 million to $7 million. So if I do the math right, it looks like you lowered guidance by $10 million, but it would imply $15 million to $17 million less in EBITDA based on the $30 move in HRC. Can you just kind of square those 2 for me?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [39]

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Yes. I think you have to -- perhaps you didn't take it -- you were annualizing the number and subtracted that. We only have 3 quarters left, so it's probably your calculation times 0.75.

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David Kevin Deterding, Wells Fargo Securities, LLC, Research Division - Director and Senior High-Yield Credit Analyst [40]

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Okay. Got it, got it. And then just on the coking coal side, can you just talk about potential cost saves? It looks like you're going to go deeper into the coal mine there instead of opening up a new shaft. Is -- will that impact any of your costs this year? Or is that going to be in maybe future years?

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

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Yes. So it's actually going to a lower seam and ramping down to get to that. It will lower our costs with -- that comes online in the second half of this year. There are some costs to get there. And so I would say it's a neutral game for this year. It's all in our plan. And then going forward, we would now have access to a lower-cost seam that we will blend those 2 seams together and get improved quality as well, which allows us to continue to expand that mine if we choose to do that in the future.

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David Kevin Deterding, Wells Fargo Securities, LLC, Research Division - Director and Senior High-Yield Credit Analyst [42]

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And can you just remind us how much internally of your coal need that you are generating off your own mining operations?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [43]

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Yes, somewhere around 15%.

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Operator [44]

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And our next question comes from Martin Englert of Jefferies.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [45]

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So within the release, you provided some of the commentary on the maintenance impacts for 2Q and 4Q. Can you discuss roughly how you think the volumes will be impacted during those quarters?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [46]

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Because we don't provide guidance quarter-to-quarter, but as we prepare for those being heavier in the contract business -- if you think about the automotive market, you'll see more -- just the seasonality swings in the automotive market. Having an outage, example, we have our Dearborn outage in the fourth quarter, we will plan for that, build the appropriate inventories to support our customer shipments. So as we have gone into -- looking forward into each of the quarters, we will -- the adjustment will be some -- maybe in the spot market a little bit. But that's why we have the strategy to minimize our exposure to the spot market. So I would not see any material change quarter-to-quarter really when you look at it more than just really driven by the seasonality.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [47]

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Okay. And then maybe if you could quickly discuss, so volumes were slightly lower in 1Q year-on-year. And looking at the 5.9 million guide for the year, how confident are you that you'll still be able to achieve that with the spot market participation?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [48]

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Very.

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Operator [49]

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And our next question comes from Chris Olin of Longbow Research.

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Christopher David Olin, Longbow Research LLC - Analyst [50]

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Can you guys talk a little bit about this whole new NAFTA trade agreement? I guess curious, your thoughts on how this has infected the current environment. And if there is a change from steel tariffs to quotas, I guess I'm curious if this will have any type of impact on your electrical steel business? And I guess second to that, can you talk a little bit about what you're seeing in terms of trends for electrical right now?

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

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Well, I would comment, time will tell exactly how things come out. There is the USMCA that's in place today. When you look at it from the electrical steel side, we have had discussions and keep bringing it up about the issue of imports coming in. We still see imports coming into the United States.

The other thing we're seeing is, for example, Japan and Korea, we see them bringing in steel. We don't know the exact source, but at least through some of it Asian and the Japanese and the Korean companies, bringing electrical steel into Mexico. And then they're taking and turning that, as I call, legal circumvention, bring it in through Mexico, do something with it, flip it, et cetera, and bring it into the United States.

So our goal is to work with the administration and continue to address things that are going on. And I would say, as you look at it, we want to -- we'd like to see -- I think quotas could help to address some of the situations coming in of products that are coming in. But I think it's really -- the devil's in the detail of what we do because right now, there's trade actions and there's tariffs for all the products. But example, electrical steel, they're able to bring in a flipped product or do something to that product and get around the Trade Act duties and get around the 232 tariffs. So while I think the government and administration has tried to address things, people keep finding loopholes to bring steel into our country. And we're hoping some of those get closed up.

So whether it's quotas, whether it's tariffs, we've had duties, we've had a lot of actions that we've taken, but it's really addressing those. So to your point of what's the impact in -- with USMCA, we're very pleased overall with a lot of the factors of USMCA. The rules of origin and stuff like that is favorable, but there's still some items that are being addressed and are being discussed as we speak.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [52]

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Yes. As far as the electrical steel market today, I think you were asking that as well, we're continuing to see steady increases. And that's -- it's been a good year thus far. We don't expect that to change.

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Christopher David Olin, Longbow Research LLC - Analyst [53]

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Do you get the sense that the uncertainties around all these trade negotiations is impacting how steel buyers approach the market or manage inventories, and that's part of the weakness today?

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [54]

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I think if you look at the inventories, service center inventories have remained relatively flat for many quarters now. When you look back over the last 4 or 5 quarters, there really hasn't been any fluctuation in carbon and stainless inventory. The auto companies are keeping their inventories pretty much in check, so you're not seeing that. So I don't see that there's really any decision-making that's really changing. Most of our contract customers domestic-source anyway. So that really has not been an issue. There's been a few that would buy overseas and probably have had to make some adjustments for that.

But overall, I wouldn't say there's really much different happening out there in the market when you look at all the statistics out there really are saying that. So there's a couple of reports, as we mentioned, about electrical steel or others, but otherwise, nothing major.

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Operator [55]

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And our next question comes from Karl Blunden of Goldman Sachs.

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Karl Blunden, Goldman Sachs Group Inc., Research Division - Senior Analyst [56]

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You made some comments on the upsized revolver in your prepared remarks. I just wanted to be clear, do you intend to use the revolver to pay down the convertible? Are there other alternatives you're exploring still?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [57]

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I think we've been consistent. I mean we have one option to refinance the converts under the revolver. I would say that, that's a potential that we've been considering for a while. And we could also go back to the convert market. That's always open. But I think as we've been saying over the last several quarters, utilizing the revolver to pay down the converts is an option.

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Karl Blunden, Goldman Sachs Group Inc., Research Division - Senior Analyst [58]

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Yes, sure. That makes sense. We discussed some of your sensitivity to HRC price on the call. Are you able to separate out your sensitivity to scrap prices within that? And it sounds like your guidance, that range that you provide assumes an HRC price move and associated correlated move in scrap price. Is there a way to separate those out for when -- those periods when the correlation breaks down?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [59]

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Yes. We're assuming in that, that the correlation more or less holds, but there's a whole bunch of other variables and assumptions that go into that $5 million to $7 million number for every $10 change. So it would be not worthwhile to break it out.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [60]

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And I'd comment, too. That's why part of the reasons we switched to annual guidance were given. And month-to-month, it may see some disconnects occasionally, but over time, it will normalize. And that's what we're reflecting in our guidance.

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Operator [61]

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And our next question comes from Matthew Fields of Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [62]

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Just following up on Karl's question. If the convert market is always open and that's an option, why incur secured debt, which makes refinancing your unsecured debt that much harder down the road?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [63]

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I think there's probably a couple of reasons for that. But we have just a ridiculous amount of available liquidity. So it is a low-cost option. Whether it's unsecured or secured, we're never going to get to a position where we have to worry about how much secured debt we have. This company is in very good financial position. Granted it has to pay down some debt, but given the maturities that we have, which are very manageable, the amount of liquidity that we have, putting it under the revolver is a very easy option at this point.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [64]

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And your borrowing base is big enough to borrow on the entire $1.5 billion?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [65]

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Absolutely.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [66]

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Okay. Great. And then second, on the '21s, knowing that they step down in October to par for the call price, are you waiting until then to address those? Or what's your take on taking advantage of a hot high-yield market when it's open versus a market that may or may not be open enough 6 months from now?

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

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Yes. I think as you wait, you bring on more risk. And as you know, we've been very adept at managing our risk. So yes, I think we'll go to the market when it's right.

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Operator [68]

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And our next question comes from Phil Gibbs of KeyBanc.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [69]

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The Ashland cash costs that you've got outlined for the year, have you made those payments in the first quarter? Or should we expect those for the balance of the year?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [70]

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Those would be in the balance of the year.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [71]

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Okay. And then you did make some comments on the electrical steel market. I think, Kirk, you said you expected some improvement in volume this year. Were you able to get better pricing or spreads on the business?

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [72]

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Yes. So far, the volume has been up thus far. I think for the year, we think it'll be pretty similar to what it was last year. It's gotten off to a hot start because we had some additional business really as a result of some of the hurricanes and wildfires from last year where they had to kind of replenish the supply they had taken away. And we were able to get some, I'd say some slight bit of margin improvement there.

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

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Phil, I'd also comment. I think there was one item that was out there. It was related to the free cash flow. And in the first quarter, as we indicated, we got a use of cash for working capital, and some thought we might have positive cash flow. But I would note that 9 out of the last 10 years for the first quarter, working capital was a use of cash. So hopefully not a surprise to people out there. But I would note that as you look forward for the Ashland cost that as Jaime indicated, we expect working capital to be a slight source of cash for the year. And that does include our guidance that we have out there on cash flows related to Ashland then. So we have factored that in and just to give that note that our working capital, we expect to be slightly positive.

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Operator [74]

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And our next question comes from Piyush Sood of Morgan Stanley.

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Piyush Sood, Morgan Stanley, Research Division - Research Associate [75]

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As you see new capacity being added across the industry, this doesn't have the same history as here in the automotive or the electrical market. I would think there may be some competition for your in-house talent, employees and out in the production and your sales. But just wondering what's been the trend so far and how you're prioritizing talent retention in the future.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [76]

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How we're prioritizing what? I'm sorry.

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Piyush Sood, Morgan Stanley, Research Division - Research Associate [77]

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Retaining that talent, the in-house talent for the future.

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Kirk W. Reich, AK Steel Holding Corporation - President & COO [78]

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Yes. So certainly, the more capacity starts up, the more people that are going to be needed to run those facilities. We understand that people come looking for our folks all the time. It's a tough labor market now in general. Whether you're talking technical skill set or maintenance skill set or engineering, it's difficult. And so what we do is we run a good company. We pay fair market prices, we treat our people really well, and we have a hell of a good team that people want to work here. And so generally, we don't have a whole lot of a problem with people running to other steel plants when they want to start up.

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Operator [79]

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And our final question comes from the line of 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 [80]

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Wondering if you could give us some color just on the downstream business, your expectations for top line growth both at AK Tube, Precision Partners this year as well as the EBITDA contribution from those businesses.

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [81]

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Yes. On the downstream businesses, pretty much hold the same. We had talked revenues being a little bit north of $600 million combined and EBITDA in kind of that $70 million to $80 million range. And I would say both companies are performing exactly as we thought. Kirk talked about a lot of good things going on at both of them. And I would say Precision in particular, we see very strong backlog because they are already looking at 2021, 2022 business. And so they are definitely performing the way we had anticipated them to perform.

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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 [82]

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Okay. Great. And Jaime, I noticed that you reduced your debt-to-EBITDA leverage target from (sic) [to] less than 3 from less than 4, just comparing this quarter's slide presentation versus last quarter's. Could you just walk us through that?

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Jaime Vasquez, AK Steel Holding Corporation - VP of Finance & CFO [83]

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Yes. I mean we have been, I would say, very conservative with those leverage metrics because I'm not sure too many people aspire to be 3x levered. We kind of want to be below that. We were so highly levered that we wanted to do it in steps that we could achieve to gain some more credibility. So ultimately, we want to drive that down. We want to drive it down to a point where we have enough flexibility to really help facilitate our downstream acquisitions. But right now, as we said, priority #1 is debt reduction with free cash flows.

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Operator [84]

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Thank you. And this concludes our question-and-answer session. I'll now ask Mr. Newport for his closing comments.

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Roger K. Newport, AK Steel Holding Corporation - CEO & Director [85]

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

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Operator [86]

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Ladies and gentlemen, this concludes our conference call for today. Thank you for participating, you may disconnect at this time. Everyone, have a great day.