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Edited Transcript of AKS earnings conference call or presentation 25-Jul-17 3:00pm GMT

WEST CHESTER Jul 26, 2017 (Thomson StreetEvents) -- Edited Transcript of AK Steel Holding Corp earnings conference call or presentation Tuesday, July 25, 2017 at 3:00:00pm GMT

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Corporate Participants

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* Douglas O. Mitterholzer

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

* Kirk W. Reich

* Roger K. Newport

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* Michael F. Gambardella

JP Morgan Chase & Co, Research Division - MD, Head of Global Metals and Mining Equity Research and Senior Analyst

* Novid R. Rassouli

Cowen and Company, LLC, Research Division - VP

* Sean-M Wondrack

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to AK Steel's Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

With us today are Mr. Roger K. Newport, Chief Executive Officer; Mr. Kirk W. Reich, President and Chief Operating Officer; Mr. Jaime Vasquez, Vice President, Finance, and Chief Financial Officer; and Mr. Douglas O. Mitterholzer, General Manager, Investor Relations and Assistant Treasurer. At this time, I will turn the conference call over to Doug Mitterholzer. Please go ahead, sir.

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Douglas O. Mitterholzer, AK Steel Holding Corporation - General Manager of IR and Assistant Treasurer [2]

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Thank you, Liz, and good morning, everyone. Welcome to AK Steel's Second Quarter 2017 Earnings Conference Call. In a moment, Roger Newport will offer his comments on our business. Following Roger's remarks, Jaime Vasquez will review our second quarter 2017 financial results, and together, we will field your questions.

Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to the 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 earlier today.

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 Regulation G is available on the company's website at www.aksteel.com.

With that, here's Roger for his comments. Roger?

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Thank you, Doug. Good morning, and thanks for joining us on our second quarter investor conference call. I am pleased to report that we continued to exhibit solid performance across the company during the second quarter of 2017. On a sequential basis, our second quarter performance was very similar to that of our first quarter in terms of our safety, quality, environmental, operations and financial performance. For the second quarter, we reported net income of $61.2 million or $0.19 per share, and we achieved adjusted EBITDA of $142 million.

Our second quarter performance reflected the benefits of the margin enhancement initiatives that were part of the strategy we developed and communicated over 18 months ago. We remain committed to this strategy as we continue to invest in our facilities to ensure the long-term reliability of our equipment while also investing in the development of new and innovative products to meet the future needs of our valued customers. And it is clear that our customers do indeed appreciate the outstanding product quality, delivery and technical support and service that our team delivers to them each and every day.

As an example of this strong performance, we were recently honored by Fiat Chrysler Automotive U.S. by being named their Raw Material Supplier of the Year. We were the only steel company in North America to receive this distinguished award. We are extremely proud to receive recognition for our unwavering commitment to product innovation, quality, costs, delivery and FCA's foundational principles. This award illustrates the degree to which we value our customer partnerships both in the automotive market and in all of the other markets which we serve around the world.

While we remain focused on providing outstanding value to both our customers and our shareholders, we never ever lose sight of our most important priority: the safety of our employees. During the second quarter, we once again posted strong safety performance. In fact, employees at 7 of our facilities worked the entire quarter without a single OSHA recordable case, and 5 of our facilities achieved the ultimate objective of 0 OSHA recordable cases for the entire first half of 2017. I'm proud to give special recognition to all of our employees for making safety such a priority and embracing safe work practices in all that they do each and every day.

One key component of our long-term strategy was to deleverage and derisk our balance sheet. We made additional progress in this during the second quarter as we completed another set of actions that resulted in a further reduction in our long-term debt of $130 million. These actions, along with the balance sheet strengthening activities we completed in 2016, have greatly enhanced our financial flexibility and reduced our interest expense. These recent successful actions to improve our financial position are very important as they position us well to execute on future initiatives to grow and expand our earnings potential.

The most notable demonstration of this is our recent announcement of the strategic acquisition of Precision Partners Holding Company. Precision Partners is a leading North American provider of engineering, tooling, and hot and cold stamp components. Their portfolio of products includes many produced from advanced high strength steel grades, which help automotive customers achieve their lightweighting, emissions and passenger safety requirements. This acquisition expands our portfolio of process and product capabilities as it provides a fully integrated downstream platform. We will utilize this expanded platform to further strengthen our close collaboration with our automotive OEM customers and their Tier 1 suppliers. Furthermore, the acquisition advances our core focus of product innovation, especially in the high-growth automotive lightweighting space. It also enhances our position in advanced high-strength steels to help our customers obtain the best value steel solutions to meet their needs.

Precision Partners specializes in lightweight, complex and hard-to-manufacture components and are known as the go-to problem solver in this space. This dovetails perfectly with our focus at AK Steel as we are viewed as the go-to steel provider for customers needing the highest quality carbon, stainless and electrical steel products, and tubular steel solutions. We are extremely excited about the existing platforms that Precision Partners brings to our company and even more excited about how well this acquisition positions us to expand our capability to provide lightweighting solutions for our automotive customers. This acquisition aligns well with our long-term strategy and I believe it will play a key role in further strengthening the long-term performance of our great company. We believe Precision Partners will serve as a platform to enhance our future earnings and, ultimately, our long-term earnings growth potential as they specialize in niche products and capabilities that typically generate higher margins than we believe are typically achieved in this market.

As we continue to identify ways to enhance the long-term value of our company, we must also take actions to bolster our core business while further expanding our product and service capabilities. As we do so, we remain focused on actions that will improve both revenue growth and margin expansion and growth. In the shorter term, we continuously evaluate what products we sell as well as where and to whom we sell them. Over the longer term, we remain extremely focused on product and process innovation, and we are making great progress in this regard through our expanded research and innovation team. An example of this is our recently introduced NEXMET family of advanced high-strength steels. After providing demonstration samples to numerous automotive customers just a few months ago, customer interest in these products is clearly very high for future vehicle platforms.

Product innovation is not confined to just carbon steels. We also have a wide range of new stainless and electrical steel products in development for numerous end-use markets and applications. And in the world of automotive, these innovations have applicability for all potential future design trends. In other words, whether it's vehicle lightweighting, hotter-burning engines, electrification or adoption of fuel cell technology, we are developing the new steel products today that will be required in the automotive world of tomorrow. In addition, we continue to make progress with our technical collaborations with industry associations, universities and directly with our customers. Our team continues to focus its efforts on long-term value creation for shareholders to drive sustained profitability through the cycle.

I would like to now take a few moments to discuss what we are seeing in the marketplace. Our largest market, automotive, is exhibiting signs of slowing over the past few months. Dealer inventories are presently at high levels and numerous auto companies have begun to scale back production to bring these inventories back in line. Most industry sources are now predicting a modest year-over-year decline of approximately 2% to 3% in light vehicle build rates in North America. Most of this reduction is expected to take place on small- and medium-sized vehicle platforms. Since the majority of our automotive shipments are used in the production of larger vehicles, such as pickup trucks, SUVs and crossovers, we believe our product mix will help mitigate the impact on our automotive shipments going forward. And even if such a decline in North American build rates should take place, 2017 will still rank among one of the strongest years in the history of the auto industry.

Turning to construction. We continue to see slow and steady improvements in this market. New housing starts reached 1.17 million units in 2016 and most forecasters are projecting approximately 1.23 million units in 2017, reflecting a 5% increase over the prior year. This continued growth rate is expected to support demand for a variety of our carbon, stainless and electrical steel products.

With regard to the carbon spot market, pricing has remained more volatile than we would have expected with the completion of the successful trade cases. I believe this volatility reflects the challenges we continue to face in the marketplace as imports continue to flood into our country. While it's always difficult to forecast future spot market prices, we have seen some projections that carbon steel pricing may rise in the second half of 2017. In fact, we just announced another spot increase of $25 per ton last week for carbon steel products, and this is on top of the $30 per ton increase that we had previously announced in June. However, uncertainty regarding the pending Section 232 investigation makes predicting future market prices more difficult than normal. Meanwhile, inventories at steel service centers remain at rather low levels. The seasonally-adjusted inventories are currently estimated at just 2.1 months for carbon products, which would suggest that buying activity may increase should spot market prices continue to gain momentum.

Switching to the electrical steel market. Demand in the United States remains fairly strong as housing starts continue their steady growth. However, we continue to see weakness in international markets as global overcapacity has led to depressed global prices. We believe the international electrical steel market will remain rather volatile for the foreseeable future, but meanwhile, we are well positioned to serve the NAFTA market with outstanding product, quality, delivery and technical support.

As with electrical steel, domestic demand for our non-automotive market stainless products remains stable. Demand for these stainless products is primarily being driven by the improving demand in the housing and construction market. The seasonally-adjusted service center inventories are presently estimated at just 3 months of -- for stainless products, which is generally in line with steel mill lead times. While the successful ruling earlier this year in the stainless trade case against China has helped the domestic market conditions, imports from other countries remained at higher than historic levels. We will continue to monitor this closely and work with the Trump administration to ensure that all duties and trade laws are actively enforced.

To ensure we are well positioned to serve our customers and markets in the future, we are also continuing to invest in existing operations to maintain our solid operating performance and position ourselves well for the future. In the second half of this year, we are making planned investments in our Mansfield melt shop and caster, Middletown blast furnace and melt shop, and our Middletown electrogalvanizing line. The investment at our Mansfield Works will take place during the third quarter and will further enhance the caster performance and provide us additional capacity and product enhancements. We will be investing about $26 million during this outage, and we expect this investment to generate solid return.

Later this year, we will be taking a periodic blast furnace maintenance outage at our Middletown Works. We are performing the normal periodic shotcreting of the interior of the furnace lining, and we are also making some other equipment enhancements that will position the furnace well for the long term. In conjunction with this outage, we will also be performing a number of maintenance tasks and equipment improvements in the steel shop at the Middletown Works including replacing one of our BOF vessels.

I wanted to also comment on the ongoing Section 232 investigation. We believe that the foreign steel import situation in the United States must be addressed and we support the work of the Trump administration to do so. What is amazing and extremely frustrating, particularly given the successful carbon steel trade cases, is that carbon steel imports continue to rise compared to last year and China continues to increase steel production. In addition, grain-oriented electrical steel imports from Japan, China and Korea have surged in the first 5 months of this year compared to the same period last year. They have risen in the range of approximately 150% to 190% and are currently on a pace to be more than double last year's rates. Based upon what we have learned in prior trade cases, we suspect that many of these imports involve unfair trade practices of dumping and/or subsidization.

When speaking of potential trade remedies to address these unfair trade practices, I often hear other words used, such as the word protectionism, which I disagree with. We simply want a fair and level playing field. However, despite all the trade actions, we still have not achieved that goal. We are very pleased that President Trump, Secretary Ross and others in the administration are willing to address this serious situation that endangers our national security. We support the necessary actions and urge the administration to apply them swiftly and broadly. For economic growth in our country, we need to make things in America. To support existing jobs and create an environment for job growth, we need to increase our manufacturing footprint and expand our overall economy. If we allow unfairly-traded imports to continue to penetrate our country, then we risk further irreparable harm to the manufacturing base in America and to our nation's security. We believe it is important for the Trump administration to implement the necessary actions to address the unfairly-traded imports and we look forward to their support of a critical need in our country, steel manufacturing. This is especially important for electrical steels that are used to manufacture the transformers, which are a critical component of our nation's electric power grid. We have invested in our electrical steel manufacturing facilities and we continue to invest in electrical steel innovation to help our customers build more efficient electrical transformers to enhance both the reliability and the efficiency of our nation's electric power grid.

In fact, we were recently honored to have been selected by the U.S. Department of Energy to develop the next generation of advanced non-oriented electrical steels for motors used in a wide variety of industrial and automotive applications including hybrid electric vehicles. The objective of this project is to develop an innovative motor design with non-oriented electrical steels that will improve efficiency by more than 30% compared to existing designs. Through initiatives such as this as well as through our own product development, we look forward to continuing to push the boundaries of electrical steel technology.

Before turning the call over to Jaime for his comments on our financial performance, I'd like to leave you with these thoughts. We can, we will and we are. And by this, I mean that our team can and will actively manage those things within our control. We'll continue to execute on our strategy to further build on the great strides our team has made over the past 18 months including the significant investments in both a new research innovation center and the expansion of our innovation team; solid progress in successfully accelerating our research and innovation activities including the launch of new carbon stainless and electrical products, along with new tubular products; and just in the last 18 months, we have invested over $85 million on the innovation front. In some of the planned outage work in the second half this year, we'll expand this investment in innovative process capabilities. These investments will broaden the foundation for margin expansion. We also substantially reduced our debt levels and lowered our interest cost while also derisking our balance sheet. And we are in the process of acquiring another strategic growth platform for our company, Precision Partners.

Our team is making great progress but we are far from finished. We continue to transform our company into a specialty solutions company of stainless, electrical, carbon and tubular steel products, and as a result of the pending acquisition of Precision Partners, we will expand to be a provider of tooling solutions and complex hot- and cold-stamped components. As we progress...


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