AK Steel Holding (AKS) Roger K. Newport on Q2 2016 Results - Earnings Call Transcript

| About: AK Steel (AKS)

AK Steel Holding Corp. (NYSE:AKS)

Q2 2016 Earnings Call

July 26, 2016 11:00 am ET

Executives

Douglas O. Mitterholzer - General Manager, Investor Relations and Assistant Treasurer

Roger K. Newport - Chief Executive Officer and Director

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Kirk W. Reich - President & Chief Operating Officer

Analysts

Curt Woodworth - Credit Suisse

Evan L. Kurtz - Morgan Stanley & Co. LLC

Timna Beth Tanners - Bank of America Merrill Lynch

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Aldo Mazzaferro - Macquarie Capital (NYSE:USA), Inc.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Garrett Scott Nelson - BB&T Capital Markets

Anthony B. Rizzuto - Cowen & Co. LLC

Seth Rosenfeld - Jefferies International Ltd.

Sean M. Wondrack - Deutsche Bank Securities, Inc.

David Lipschitz - CLSA Americas LLC

Operator

Good morning, ladies and gentlemen, and welcome to AK Steel's Second Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. 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'll turn the conference over to Doug Mitterholzer. Please go ahead, sir.

Douglas O. Mitterholzer - General Manager, Investor Relations and Assistant Treasurer

Thank you, Candice, and good morning everyone. Welcome to AK Steel's Second Quarter 2016 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 2016 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 future shipments, product mix, prices, costs, operating profit, EBITDA, or liquidity. Please note that our actual results may differ materially from what is covered 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 this morning. 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 aksteel.com.

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

Roger K. Newport - Chief Executive Officer and Director

Thank you, Doug. Good morning. I appreciate everyone joining us on today's call. We have completed the first half of 2016, and it has been an exciting year so far for AK Steel, as we continue to execute our strategy

Earlier today, we reported our second quarter results that showed significant improvement from a year ago. The improvement in our performance led to net income of $17.3 million or $0.08 per share. This compares with a net loss of $64 million or a loss of $0.36 per share for the year-ago quarter. And we achieved adjusted EBITDA of $99.3 million, more than double for the same year-ago quarter.

Overall, I am very pleased with our continued progress in 2016. Our improved financial performance was a result of better market conditions and our margin enhancement activities, which encompasses what we buy, what we make, how we make it, where we make it, what we sell, and where we sell it. These actions are being driven by our team members throughout the company.

During the second quarter, we also successfully completed both an equity offering and a bond refinancing transaction. As I have previously indicated, deleveraging balance sheet is a priority for AK Steel. And these were additional steps towards our objective to improve our balance sheet in a systematic and balanced manner.

I'd like to take a moment to personally recognize and thank the entire AK Steel team for their continued efforts to enhance our margins, deleverage our balance sheet and improve our profitability. Their hard work, enthusiasm and engagement is truly making a difference. But we are not resting with these accomplishments, as we all recognize that there are many opportunities that remain, and we still have much work to do.

Over the past year, we and others in our industry have invested a great deal of time and effort to address issues involving unfair trade. We have filed three carbon steel trade cases and one stainless steel trade case. After extensive investigations, the Department of Commerce has since announced positive final determinations in the cold-rolled and corrosion-resistant carbon cases. Despite the significant harm that was caused to our industry by unfair trade, and while import levels are still higher than they have been – historically been, we have seen a reduction in unfairly traded imports and improved domestic steel prices.

We're also pleased with the progress in the stainless steel trade case. The ITC made a unanimous preliminary determination of injury in late March associated with stainless steel imports from China. And in early July, the Commerce Department imposed significant countervailing duty against Chinese stainless steel producers. We expect the Department of Commerce to make preliminary determinations with respect to dumping by the end of the third quarter.

But our work in this area will be ongoing, as we will continue to monitor imports from those countries not named in the trade cases to ensure that fair trade is occurring. Too often, when imports decline from one country, they simply move to another country. For example, we have observed a significant rise in shipments of carbon cold-rolled products from Vietnam, Turkey and Australia. These countries had minimal imports prior to the filing of the trade cases. We are not against steel imports, but rest assured, we will do everything within our control to ensure that we are competing on a fair and level playing field.

In addition, I strongly believe that a vibrant and healthy steel industry is critical to ensuring the security of our country and to support its infrastructure. As such, we will remain diligent in our efforts to enforce fair trade and encourage actions to address the issue of global oversupply that our industry faces.

Now, turning back to the second quarter, our results clearly reflect the progress that we are making on our margin enhancement actions. In 2016, we have expanded our key metrics throughout all areas of our business with the objective to achieve improved financial performance. The entire AK Steel team has been challenged to review every aspect of our business and ensure that we are obtaining a reasonable return on everything that we do. Bottom line, if we are not generating return on any aspect of our business, then we are addressing it.

Enhancing our profitability is critical to our long-term success, and it takes great employees to make this happen safely. Safety is one of the key core values of our company, and our unrelenting focus on safety continues. No matter what market or business conditions we face, safety remains our key priority. We continue to drive our industry-leading safety program with emphasis on educating, equipment and enforcing our safety program throughout the entire company.

I am very pleased that our employees at our Ashland, Mansfield, Rockport and Zanesville Works as well as AK Coal and AK Tubes Columbus facility worked the entire second quarter without an OSHA recordable injury. That is an outstanding effort, and it clearly reflects their ongoing commitment to always put safety first. I would like to pass on my personal thanks to all the employees at these facilities for a job well done.

Speaking of our employees, I want to congratulate our blast furnace technology group at Dearborn Works, who were recently recognized by the American Iron and Steel Institute for distinguished research related to improving blast furnace reliability. I would also like to congratulate our Dearborn Works employees and others, whose efforts were recognized recently by American Metal Market with the Best Operational Improvement award. Dearborn Works has proven to be an outstanding addition to our asset portfolio, and it aligns well with our long-term strategy.

Lastly, I am pleased that AK Steel was recognized in conjunction with NanoSteel, with the Breakthrough Product Solution of the Year [Breakthrough Solution of the Year] award from Platts Global Metals. This innovative product, the world's first third-generation advanced high-strength steel represents a major leap in performance over existing steel products. Its unique combination of very high-strength and outstanding formability will permit automotive design engineers to achieve new levels of lightweighting and fuel economy. These awards in operations and product innovation reflect our unwavering attention to continuous improvement and collaboration with key stakeholders. They also underscore our commitment to creating improved processes and products, which ultimately allow us to meet the evolving needs of our customers, both now and in the future.

Now, I would like to update you on various steel market conditions. First, our primary market, automotive, remains solid as high rates in both light vehicle production and sales continue and are being driven by low interest rates, low fuel prices and an aging domestic fleet, which currently is hovering around 11.5 years. We have also benefited from our ability to continue to gain market share. This is true for both carbon products, as well as our 400 series stainless exhaust products. Strength in the auto industry is expected to continue throughout the second half of 2016.

On the carbon steel market front, we have observed a significant recovery in domestic steel prices since the bottom late last year. In fact, in May, we announced our fifth spot market price increase this year for carbon steel products. We make no apologies for seeking higher prices, as our focus is to generate a fair return on our products. These strengthening market condition trends clearly reflect the benefit of leveling the playing field with regards to imported steel products.

We believe that reduced import levels coupled with the current low levels of service center inventories will provide stability in prices and demand for both carbon and stainless steel products throughout the third quarter. We will continue to monitor these trends closely, as the gap between foreign and domestic prices has the potential to encourage increased import levels. The partial recovery of steel pricing in the carbon market has benefited us in our market-based contracts, which generally reset with steel market prices every three months to six months. We also believe that the recovery in steel prices will offer benefits in negotiating our other annual contracts, as they come up for renewal. We recognize this will be dependent on market conditions at the time of negotiations, but the trend is definitely positive.

Switching to electrical steel market, the trends were a bit more varied. For our Grain Oriented Electrical Steels, or better known as our GOES products, the North American market continues to exhibit signs of steady growth. This is especially true for distribution transformer applications. In the power transformer market, we are also seeing slow and steady growth, as the need for replacement transformers continues. The trends for each of these products are being driven by both improving rates in new housing starts and the more stringent Department of Energy efficiency standards that went into effect in the United States in 2016. These new standards are causing our customers to design more efficient transformers, incorporating higher efficiency GOES products, which increases the demand for these products. In the international markets, demand for our high permeability electrical steels remains fairly robust, however, global steelmaking overcapacity coupled with the effects of various international trade cases around the world have put pressure on pricing and shipments in the overseas markets.

While market conditions can change frequently, one thing that remains constant is our commitment to investing in our future and the future of our customers. We have made significant enhancements to our process for driving innovation, in both products and operations. And we have a great pipeline of potential new products in development. These new products span the full spectrum of our portfolio, including carbon, stainless, and electrical steels and our tubular products. This is critical to our long-term success, as we must continue to develop new products and new technologies for our customers to better meet their needs.

Why is innovation so important? We see innovation as similar to planting a fruit tree. You start with the seed, once you plant the seed, it then begins to grow and bears fruit, as the tree develops and grows. This is what happens with new steel products. We develop new products, and then we focus on nurturing new and existing customers and markets with these new products. We also recognize that not all the seeds will grow to bear fruit. But often, the innovative ideas will generate other great offshoots from these products, which leads to further product improvements and innovation.

For example, while we currently offer the most advanced automotive exhaust products available in the market, we are also focused on meeting the challenges to handle hotter-running engines. We're also excited about several new specialty products that we currently anticipate bringing to the market in the near future. This includes a high alloy stainless steel product, which provides superior corrosion resistance over any ferritic stainless product we currently offer.

In addition, we are looking forward to furthering our global leadership in Grain Oriented Electrical Steels. While we provide some of the lowest core loss GOES products available in the world, we intend to further this trend by focusing our efforts to introduce a new grade of electrical steel that will provide even lower core loss than those we currently provide, increasing the value that we deliver to our customers. These are just a few of the exciting developments in our strategic innovation push to expand our product capabilities.

And speaking of growing, we continue to make progress on our new Research and Innovation Center, and we plan to have the new facility completed later this year. We are very excited about this investment in our future. This will be a great state-of-the-art facility that is designed to create an even better platform for innovation and for serving the needs of our customers.

We are also progressing well with our capital investment at Dearborn Works to install new equipment that will expand our next-generation advanced high-strength steel product offerings. We expect to complete the installation early in the fourth quarter and expect to produce initial trial material for our customers shortly thereafter.

In addition to pushing the technological boundaries of steel material, we are also expanding our geographical boundaries. Just last month, our AK Tube operations commissioned their new manufacturing facility in Queto, (14:24) Mexico. This plant will produce stainless welded tubing for use in many applications produced throughout the region, including automotive and truck exhaust systems. The plant will be ramping up production throughout the third quarter. This investment positions us well to meet the needs of the fast-growing automotive market in Mexico.

I am proud of the many accomplishments our employees have made recently to return our company to profitability and to enhance our liquidity. However, our work is never finished in our quest to provide an attractive return to our investors. We've gone through some very challenging market conditions and face many headwinds since the Great Recession. But throughout it all, we have continued to move AK Steel forward. I believe our successes are the result of our employees embracing the culture that collectively we can and we will make AK Steel a better company by continuing our focus in the areas of safety, environmental, quality, productivity, innovation, costs and margins.

So, before turning it over to Jaime, I would like to leave you with these thoughts. I believe, we are uniquely positioned in the marketplace, given our multi-material product offerings of carbon, stainless, electrical and tubular steel products. We continue to make progress in product innovation with a vast array of new products and many more in the works. We have made great strides to align our resources with the needs of our customers to ensure that we are generating an appropriate return on those resources. Our capital market transactions in the second quarter have further enhanced our financial flexibility to invest in those areas that will provide – that will improve our profitability as we drive to provide an adequate return for all our stakeholders. And we will control those items within our control because, as demonstrated in the second quarter, our entire team can and will make AK Steel a stronger company.

Now, I would like to turn it over to Jaime. Jaime?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Thank you, Roger. As Roger discussed, our second quarter results highlighted the benefit of the strategic actions that we implemented, including our decision to deemphasize commodity products in carbon, stainless and electrical steels and invest our resources in higher-value products. These actions, along with our continued focus on operational improvements in a more favorable selling environment allowed us to generate significantly improved results from a year ago.

I'm also very pleased with progress that we made on our initiatives to strengthen our balance sheet. I would like to thank our finance and legal teams for their collective efforts on two successful capital market transactions that I'll discuss in a few moments.

Now, turning to the income statement. For the second quarter, AK Steel reported net income of $17.3 million or $0.08 per diluted share compared to a net loss of $64 million or $0.36 per diluted share in the year-ago second quarter. The results were achieved despite nearly $35 million of expense associated with unrealized hedge losses and a LIFO charge, which I will address in a few moments. This operating performance reflects the collective efforts of the AK Steel team that are helping to drive real change within our company.

Our margin enhancement initiatives to reduce low margin and unprofitable volume resulted in shipments that were 14% lower in the second quarter a year ago. The reduction in volume was most notable in our commodity product shipments to distributors and converters, which declined 48% from a year ago. Partially offsetting the decline were strong shipments of carbon and stainless material to the automotive market. Shipments to this market jumped nearly 10% compared to the second quarter of 2015.

Primarily as a result of reduced shipments to the commodity spot market and lower automotive contract pricing, second quarter sales declined to $1.49 billion or 12% from the second quarter a year ago. Despite a $197 million decline in second quarter sales from a year ago, adjusted EBITDA more than doubled to $99 million. And just as important, adjusted EBITDA margin increased to 6.7% of net sales versus 2.8% in the second quarter a year ago.

The margin expansion was achieved despite the headwinds of certain fixed price automotive contracts that were renewed effective January 1 at lower pricing than a year ago. And although we benefited from a rising price environment for our index-based contracts, those contracts represent less than one third of our shipments. The majority of our margin expansion was driven by our strategy to rightsize our footprint, improve our product mix as well as our continued focus on operational improvements and cost-reduction efforts. That was great work by the entire AK Steel team across the organization.

The second quarter of 2016 included a LIFO charge of $20.7 million compared to a LIFO credit of $34.8 million for the same quarter a year ago. The LIFO charge is based on the expectation of increasing costs for certain raw materials through the fourth quarter. Also included in the second quarter of 2016 was $18 million of cost associated with planned maintenance outages, which is about the same as the second quarter a year ago, but higher than the $3.4 million incurred in the first quarter of 2016. Also, in the quarter, we had a favorable tax benefit of $10.6 million, most of which was associated with the change in the company's LIFO reserve.

Turning to the balance sheet and cash flow, let me start by saying we are very pleased with the support that we received from investors and the ultimate outcome of our capital market activities during the recent second quarter. This included our May equity offering that raised net proceeds of $249 million and was used to pay down debt as part of our $700 million debt reduction target.

Additionally, in June, we issued new seven-year senior secured notes with a 7.5% coupon. Proceeds from this issue were used to tender for our old senior secured notes that were to mature in 2018, which had an 8.75% coupon. About two-thirds or $252 million of the notes were tendered, which was completed on June 20. That same day, we called the remaining $128 million of the old senior secured notes, and that was settled on July 20.

Because the call settlement period crossed the quarter end, we still show $128 million of the old senior secured notes on the balance sheet at June 30. However, there is approximately $135 million of restricted cash held as a long-term asset on the balance sheet at June 30 and the repayment of the notes including the call premium and accrued interest. While we still have more work to do, we are executing our strategy and have significantly improved our balance sheet. Our capital investments in the second quarter totaled $25 million, down slightly from $29 million in the previous quarter.

I would also note that in addition to reducing borrowings under our revolving credit facility with the $249 million in equity issuance proceeds, we further reduced borrowings by $121 million through free cash flow generations and cash previously held on the balance sheet. The first six months of this year, we have reduced borrowings under the revolving credit facility by $400 million. Liquidity at June 30 was $945 million.

Let me conclude my remarks by providing you with some insight on our current outlook for the third quarter of 2016. We expect a modest decline in shipments compared to the second quarter due to our planned manufacturing outages, as well as from the annual summer shutdowns at certain automotive customer facilities. Although sales to the automotive customers will be lower than the second quarter, the expected shipment level is healthy for what is typically one of the lower shipping quarters for automotive products. We also expect shipments to the distributor and converter markets to decline further as we continue to intentionally reduce exposure to the commodity spot market. Our move towards a more value-added product mix in conjunction with higher selling prices in the spot market should result in an increase in our average selling price per ton of approximately $25 compared to the second quarter based on our current outlook.

We anticipate a small LIFO income in the third quarter, as we expect raw material costs at year end to decline from current levels based on our current projections. Our LIFO estimate also takes into account our anticipated year-end inventory levels. Changes in any of these factors, especially raw material costs, will affect our LIFO estimate and the amount recorded in the third quarter. Also, our planned maintenance outage costs are expected to be similar to the second quarter. But overall, taking all of these factors into account, we expect EBITDA margins to show some improvement during the third quarter compared to the recent second quarter. I also want to note that our share count for the third quarter will be around 239 million shares, reflecting the increased number of shares from May's equity offering.

In closing, I would like to thank the entire AK Steel team for its continued efforts in helping to implement positive change within our company. Across our entire organization, our people are truly making a difference. I would also like to thank our investors, who supported us through two capital market transactions during the quarter.

And at this time, we would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Vasquez. We will now begin the question-and-answer portion of our conference call. Due to time constraints, we ask that you limit the number of questions that you ask. One moment, please, for our first question. And our first question comes from Curt Woodworth of Credit Suisse. Your line is now open.

Curt Woodworth - Credit Suisse

Yes. Hi. Good morning.

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Good morning.

Roger K. Newport - Chief Executive Officer and Director

Good morning.

Curt Woodworth - Credit Suisse

Just a question on the ASP guidance for the third quarter. I thought that you guys had said around 10% of your business is pure spot, and then roughly a quarter of the contract business has some index component. So, if you say, roughly 30% of your business is on spot and call it roughly a three-month lag, it looks like coated and cold rolled are up roughly $180 to $200 a ton sequentially on that level of lag. So, 30% off that would imply closer to $55 to $60 a ton up on ASP. So, I'm just curious, is there going to be a mix shift in the quarter, or is that analysis on your spot exposure, is it not as levered as kind of that calculation?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Curt, this is Jaime. No, I think, you've got the numbers right. We say about a third of our business is exposed to kind of the index-type of base contracts. And some of those are with a lag. That could be a month or up to two months or a quarter. But the drive and the change is more so from just intentionally reducing the exposure to the spot market. The majority of our business now is under fixed-price contracts. So, we have some exposure, but not a lot of exposure that's going to drive the real change in the average selling price.

Roger K. Newport - Chief Executive Officer and Director

And also, as Jaime had mentioned, we see a little bit of change in – just in automotive shipments, just with the seasonality from quarter to quarter. I mentioned in my call – or in my comments was on electrical steel side that overseas, had seen some weakness overseas in electrical steels, both in demand because of the trade cases that have been implemented over there just recently by China and others that are putting pressure on both selling prices and demand for products over there because of the supply situation.

Curt Woodworth - Credit Suisse

Okay. That's helpful. And then just as a follow-up, I guess, to the point on electrical. I mean, you've announced three price hikes on the stainless strip and, I think, electrical for domestic products. Can you comment on how successful those price hikes have been, and then roughly, when does that start to flow through your revenue?

Kirk W. Reich - President & Chief Operating Officer

Yes, electrical, is – we haven't announced price hikes, because those are an annual contract type situation. And we have seen that pricing hold domestically. Internationally, where we play more in the spot market, as Roger described, those prices have fallen, as a result of some international trade cases that have really led to more supply than is needed and lower prices. And so, we will kind of move in and out of those markets as those prices ebb and flow.

As for the stainless portion though, Curt, we've – we have seen improved pricing in the stainless arena. Certainly, the trade case preliminary announcements help that. And generally, we don't play though in the commodity space, we play in the higher value portions of that area. And those markets have been fairly strong and steady. Chrome, of course, being a big part of what we do there, and that's annual price based as well.

Curt Woodworth - Credit Suisse

Okay, great. Thanks a lot, guys.

Operator

Thank you. And our next question comes from Evan Kurtz of Morgan Stanley. Your line is now open.

Evan L. Kurtz - Morgan Stanley & Co. LLC

Hey. Good morning, guys.

Douglas O. Mitterholzer - General Manager, Investor Relations and Assistant Treasurer

Good morning.

Evan L. Kurtz - Morgan Stanley & Co. LLC

I had a question on NanoSteel. I was hoping to get an update. I know you're trialing some product with GM. How's that going? When might we expect some news on that front? And just on NanoSteel, do you view that more as a competitor for older grades of advanced high-strength steel, or is that more of a competitor against aluminum and aluminum sheet for body and light?

Kirk W. Reich - President & Chief Operating Officer

Yeah. Okay. On Nano, in general, what we've seen is very good, I'll call it, market acceptance of the product and interest in the product. We have met with a number of folks. As you mentioned, we've provided some samples to GM. That's still in the testing phase and will be in that phase for a while. We have given also multiple other customers samples as well, and they're starting to look at that product.

I would say, Evan, it's more of a – it will compete with aluminum, but it's kind of a third-generation, it's a quantum leap in properties from where we are today. And, so it's more of a long-range, slower to implement likely type of product than some of our others. The one that's right on the horizon here is our next-generation advanced high-strength steel, which is almost double the elongation of our existing product and is something that we're implementing here construction-wise in the third quarter at Dearborn Works at our coating line there. And then we'll be providing samples as early as first quarter next year.

And that product will be a near in next-generation just as is described of advanced high-strength steel. So, it kind of takes what we've already accomplished with advanced high-strength steel and moves it to the next level, allows for lightweighting of vehicles and is really part of our overall strategy on lightweighting. We're doing that through not just NanoSteel, but also that next-generation advanced high-strength steel. We've got other products that we're working on that will really bridge that gap as well. And we've got an exposed high-strength product that will be a direct competitor on the external skins of vehicles that we're qualifying now as well. So, several things that work in the lightweighting arena.

But if you will, Evan, the overall piece – or the overall thing that's important to remember from an AK Steel perspective is it's not just about lightweighting, it's about overall CAFE standards, which is what the auto companies are trying to accomplish. And as a result of that, its lightweighting, but there's also many other ways of skinning that cat, if you will. One way is more electric vehicles. We are participating in that category by our non-oriented electrical steel that we have developed and are working on for what will be a high-efficiency motors for those applications. And so, that will be a growing market for us.

In the stainless arena, as Roger touched on earlier, the standards will have the OEMs moving towards smaller, hotter-burning engines. That means higher alloy exhaust systems. That's again right in our wheelhouse. And we provide all of those products now, but our THERMAK 17 is kind of the latest generation of product there that pushes that envelope. And we're working on even further grade that will be able to take that even higher. So, it's not just the NanoSteel. That kind of represents kind of what we can do and how far out into the future we are, but we're truly showing that we're innovative across all fronts of that work in the CAFE standard area.

Roger K. Newport - Chief Executive Officer and Director

And I would say, as a mentioned earlier, our multi-material solutions that we have, whether it is on carbon, stainless or electrical steels for any of the applications that Kirk just talked about, and also even on the tubular side, when you look at exhaust systems, we're providing a solution to our customers that could be different types of materials to help them lightweight and achieve their fuel standards.

And in some cases, we believe we'll be able to get them the weight savings that they're looking for. In other cases, get them pretty close to the pin, which makes the switch to go to aluminum or that type of product a very costly investment for the customers to utilize to have to invest in aluminum. So, we're looking to provide them a value – the lowest cost, but the best value to them to lower and to meet the CAFE standards that they're seeking to achieve.

Evan L. Kurtz - Morgan Stanley & Co. LLC

Thanks for all that. I look forward to learning more. Just on the next-gen advanced high-strength steel that's more near term, is that a hot-stamped product, or is that a cold-stamped product?

Kirk W. Reich - President & Chief Operating Officer

No. That's cold-stamped product, which makes it even more exciting. And it's not just a coated product, we also are putting in the capability of producing cold-roll product as well. So, we're going to accomplish both of those in a project that we're again completing here in the third quarter.

Evan L. Kurtz - Morgan Stanley & Co. LLC

Interesting. And then my other question was on electrical steel. I'm sure you saw China was out with some anti-dumping duties on Europe, Japan and South Korea. And I know that you guys used to sell a lot of electrical steel to China before they tried a similar case against U.S. and ultimately wound up getting it appealed, and they lost. But does that open up a new opportunity for you to go back into China again at this point, or have they built so much domestic electrical steel capacity that, that's no longer a market of interest?

Kirk W. Reich - President & Chief Operating Officer

Yes. The really the second thing you said there. There is opportunity to get back in there, and we continue to dialogue with them but are doing really very little because of exactly what you said. They've played it well and implemented so much of their own capacity that the market just isn't there for our product

Operator

Thank you. And our next question comes from Timna Tanners of Bank of America Merrill Lynch. Your line is now open.

Timna Beth Tanners - Bank of America Merrill Lynch

Yeah. Hey. Good morning, guys.

Roger K. Newport - Chief Executive Officer and Director

Good morning.

Kirk W. Reich - President & Chief Operating Officer

Good morning.

Timna Beth Tanners - Bank of America Merrill Lynch

Sorry to be pedantic, I think, I know the answer, but I want to follow up with a couple of clarification points. One is, on the auto outlook, it sounds like with the high-strength steels and with the initiatives there, you have ability to hold onto, if not gain, market share going forward, even if the outlook is a little flatter going forward. Is that what I should understand? Because I just feel like everyone tells us they gained market share, but it sounds like with these initiatives, this is why you would have conviction. Is that fair?

Kirk W. Reich - President & Chief Operating Officer

Yeah. We've gained over 10% this year with a market that obviously has gained more something like 3% or 4%. So, we're taking market share this year. And our intent with developing all these products is exactly that, Timna. We think we've got a really good, exciting portfolio of products that we'll be introducing along with all the products we currently offer. And it gives us an advantage going forward.

Timna Beth Tanners - Bank of America Merrill Lynch

Got you.

Roger K. Newport - Chief Executive Officer and Director

And I would say, also, it's partly the infrastructure we have to help the people. That's really where it really matters a lot is providing the technical support, the applications engineering, being there on the floor to help them and having our research innovation team very involved with our customers to help them. So, that's the other piece of it, I would say, besides the product. It's the people that are very important. And we have a long history of what we have done in the auto industry with whether it is coated steels, electrical steels, stainless steels, auto exhaust systems, et cetera. We take that very serious. It's our major market for our business, and we'll continue to serve that market and provide what we focus on is providing the best value in our customers' eyes.

Timna Beth Tanners - Bank of America Merrill Lynch

Got you. And then it sounds like you've continued to move away from commodity grades. I mean, can you take that to zero? Is there a minimum level you need to do? And then along those same lines, it sounds like you're not leaning toward any restart of Ashland any time soon. Is that also fair?

Kirk W. Reich - President & Chief Operating Officer

From a commodity standpoint, we're really focused on that across the board, Timna. The Ashland temporarily idling probably gets the most attention, because it's the most number of tons, and it's the obvious commodity space in carbon. But same thing really applies in our approach in stainless, where we've largely exited that commodity market, and in electrical, where we've largely exited what would be more the non-oriented down and dirty kind of electrical steels that we have chosen to not participate in near the level. So, it's really across the board that we've taken that approach.

As far as going to zero, I don't think that's where we want to go either. Our coating lines and our facilities kind of operate with a mix of products. And some of those products are helpful from an operational efficiency standpoint. So, I always see us participating there. And then, we need a little bit of flexibility or float there, and so, that provides us with that.

As for the Ashland restart, it's a very complicated kind of discussion. It's sustained levels of profitability is what we want to see in order to restart that facility. And that has to do with spot prices, import level, demand for our products, overall world economy, where are the raw material prices headed, all of those things really factor in. And so, while we've seen some positive signs since we've temporary idled it, it hasn't changed, I would say, materially and given us indication that it's consistently going to be now different that would force us to be in a position to start that up at this point. So, we're continuing to evaluate that.

Roger K. Newport - Chief Executive Officer and Director

Yeah. And we're evaluating what's happening globally with trade cases across the globe, whether it's carbon, stainless or electrical products, but in also what's being done to address the major oversupply that we've got as a global industry of over 400 million tons of overcapacity. Because that has to be addressed to understand what's the long-term outlook, as we move forward with steel products. And there's a lot of activity going on with our government in the administrative side to help address that as long as with the industry assisting in that. And so, that one has to also be addressed, and that's a big issue that we have never faced in the past as being that type of overcapacity.

And as Kirk mentioned, on the commodity side, we're not a big player in that, and it's our intent not to be. But, ultimately, we're going to sell our products where we get a return. So, whatever markets are supporting that, that's going to be our focus of making sure we're getting adequate return on it. So, there'll be some commodity business. We will have some of it, but for the most part, we're focused on what we're good at, which is providing value to our customers and getting return on that.

Timna Beth Tanners - Bank of America Merrill Lynch

Okay, great. Thanks very much.

Operator

Thank you. And our next question comes from Phil Gibbs of KeyBanc Capital Markets. Your line is now open.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Good morning.

Roger K. Newport - Chief Executive Officer and Director

Good morning

Kirk W. Reich - President & Chief Operating Officer

Good morning.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

I just had a question on the automotive contracts and when the season is for that for renegotiation, meaning when your customers come to you and you come to them and the talks really get started for next year?

Kirk W. Reich - President & Chief Operating Officer

Yeah. It seems to always be the season for that. But we have spread those contracts out. Some start as early as the third quarter – end of the third quarter. So, those negotiations will begin fairly soon. We're already having some, I'll call it, early dialogue with contracts that expire at the end of the year, which there's a quite a few of those. And then there's another portion that expires at the end of the first quarter.

So, we're coming into that time, to your point, and certainly looking for the higher spot price to kind of held serve with the same kind of metrics that we saw when it was reduced last year and reduce some of our contractual prices. We would expect that given the fact that it has increased this year, we should see a reversal of that, if you will.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Okay. I appreciate that. And on the GOES business, Roger, I think, earlier in the year, you had pointed to, I think, something close to 15% improvement in volume. We've obviously seen more – or incremental weakness in the international side as you've pointed out. How does that outlook that you set there compared to today, compared to what you set then? And how should we think about net pricing relative to last year with all of those moving pieces?

Roger K. Newport - Chief Executive Officer and Director

Well, the biggest part of our business is the NAFTA business, and we are seeing an increase year-over-year in the NAFTA business. And that just still with demand for transformers and housing starts, and that progresses through the year. But we're still seeing that up year-over-year. What I'll say, we're seeing a weakness is specially driven by the announcement this year recently by China to put their trade cases in place, which can put a lot more pressure overseas. And the demand for products is where the supply's now going to go. Time will tell on that. And also putting a lot of pressure on pricing, so if we're not getting a return on that, it makes no sense for us to be selling those products.

So from the NAFTA side, we're still seeing decent performance and decent demand there in our industry, especially with the new CAFE standards, so – but it's definitely a small – the international side is definitely a small piece of our business now compared to the first half.

Kirk W. Reich - President & Chief Operating Officer

So I think for the year, we probably still end up a bit higher in volume, and overall margins on that product are a bit improved.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Okay. Terrific. And just for clarification, within the liquidity you provided, Jaime, does that include the restricted cash for the bond paydown in Q3?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

The $945 million of liquidities, that's a pure number. And on the balance sheet, under long-term assets, you'll see $135 million of restricted cash, and that's the $128 million for the principal, and then the call premium, and the accrued interest.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Okay. So the $945 million is inclusive of that or would be additional?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yeah, it would be additional. It's exclusive of the $135 million held as a long-term asset.

Philip N. Gibbs - KeyBanc Capital Markets, Inc.

Perfect. Thanks, guys. Congratulations.

Roger K. Newport - Chief Executive Officer and Director

Thank you.

Operator

Thank you. And our next question comes from Aldo Mazzaferro of Macquarie. Your line is now open.

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

Hi. Good morning, gentlemen.

Roger K. Newport - Chief Executive Officer and Director

Good morning.

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

A question on raw materials. I see you had a LIFO charge in the quarter. You are expecting a LIFO income in the third quarter. So I would – it seems like you're changing your view on at least some of the raw materials. I wonder, could you give us a little breakdown of what you think about iron ore (43:27) cost, coal cost, scrap cost and any other raw material costs you'd care to mention that might trend from second quarter, third quarter, fourth quarter?

Roger K. Newport - Chief Executive Officer and Director

Just commented in general on raw materials. In really estimating what LIFO is going to be is a challenge. As Jaime indicated, we expect it could possibly be a slight credit, but when we gave guidance at the beginning of the quarter, we thought it'd be less of a charge, and prices have risen for those raw materials. So, it still will be a moving target what happens. But if you look at some of the commodities, coal has annual contracts, so that pricing is known, what that will be for our coal purchases.

On the scrap side, that will be the most volatile. It can be the most volatile in the future. We see it fairly stable here in the third quarter, but as you look out in the fourth quarter, that could go either way right now directionally. And the iron ore side, if you look – I'll give an indicator of the IODEX, when you look at the Vale model, which is the three-month lag, just give you a trend to what's been going on there – or a four-month lag.

The – at the beginning of the year, our first quarter IODEX would've $52 based on that, and then it dropped to $43, and then it went up to $57 a ton here in the third quarter. And it looks like it's dropping a little bit here for the fourth quarter. The fourth quarter period is based on June through August. So, we're seeing a little bit of weakness there, though, currently, the market price of the IODEX is at around $57.

So, what drives the LIFO will be those factors, and then other one will be what happens on the stainless side, what happens with nickel, that's the other biggest driver that drives our LIFO. So, I would say those are the – really the key factors. And then inventory levels at the end of the year are the other factor that can impact LIFO, so...

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

Thank you. Thank you very much. That was very insightful. The second question I had is on Ashland. Can you talk about what the labor situation is there at this point? Are you still paying – I think, it was roughly 900 people that were affected by the closure of the hot rolled. And I'm wondering, are those people still being paid at a certain percentage of their total, or have you seen benefits yet from the labor cost reduction?

Roger K. Newport - Chief Executive Officer and Director

Well, what I would say there in general, if you look at our cost at Ashland, we had estimated that it'd cost us $2 million to $3 million a month to keep that running. We were a little bit north of $7 million in the first quarter. In the second quarter we were $5.4 million. So, we're running closer to the lower end of that roughly $2 million a month, and that's for some of the benefit costs. So, we estimate that ongoing for the rest of this year to support that.

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

But is that incrementally better than the loss you were seeing earlier?

Roger K. Newport - Chief Executive Officer and Director

Yes. I mean, it's definitely better. We've lowered the cost. We were – again, we were over $7 million in the first quarter, we've dropped it to $5 million. So, we have reduced our fixed costs down there and some of the other ongoing benefits. If you remember though, back in the fourth quarter, we did take a charge for the benefits, so that is not really hitting our P&L, because we took a charge, roughly $28 million in the fourth quarter. So, that is being, I'll say, amortized as we've made those benefit payments as that reduces throughout the year.

Kirk W. Reich - President & Chief Operating Officer

And we still are running our coating line there as well.

Roger K. Newport - Chief Executive Officer and Director

Yeah.

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

Right.

Kirk W. Reich - President & Chief Operating Officer

And we're utilizing some of the folks there and have distributed some of the other folks throughout the company and then have some on layoff, as you described.

Aldo Mazzaferro - Macquarie Capital (USA), Inc.

Is there a point in the labor contract there that after a certain period of time, the savings would increase further? For example, the labor costs could go down a lot more?

Kirk W. Reich - President & Chief Operating Officer

No.

Roger K. Newport - Chief Executive Officer and Director

No. This is – most of the costs that we're incurring, the $2 million to $3 million a month, that is related cost of the operations being idle. Keeping the furnace in good condition, we brought it down in a very orderly manner. We are keeping a close eye on the equipment, because we want to have it ready if we make the decision to start it up that it's in good shape to start it back up.

Operator

Thank you. And our next question comes from Jorge Beristain of Deutsche Bank. Your line is now open.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Hey, guys. Just to recap, you gave some volume guidance. You'd mentioned into the third quarter you were exciting to see less commoditized product sales, and then something about the auto changeover as well. Can you just give us some more explicit guidance quarter-on-quarter where you see volumes going?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

What we said in the guidance part is that we expected a modest decline similar to kind of the transition we saw from the first quarter to the second quarter.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

Great. And then in terms of your working capital gains, you've seen very impressive gains in the first half, around $140 million. Can you give us any guidance for the second half of the year? And then if you were to do an Ashland restart, I'm assuming that would be a use of working capital.

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yes. The working capital side for the full year, we probably expect that to be around a small source of cash. We're trying to replenish inventories. Demand has been very good, so it's been a challenge to replenish inventories. So, we should see a use of cash in the third quarter, but over the full year should be – should end up with a small source of cash.

Kirk W. Reich - President & Chief Operating Officer

Then we'll obviously be building raw material inventories to prepare for the winter by the end of the year as well.

Jorge M. Beristain - Deutsche Bank Securities, Inc.

And you did mention this last time we've met but maybe just on – in terms of how you plan to achieve your $700 million debt reduction over the next few years. Could you just give us some timeframe around that, and how you would see generating that if the intent is mostly to do it through internal cash flow, asset sales, bringing in a joint venture partner to subsidiary? Just maybe talk about how you see making that goal?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yeah. I mean, free cash flow generation is – that's what we're striving towards to be a component of that. And as we said very publicly, we're going to look at – if the market exists, we will look to issue additional shares of stock. We have been opportunistically taking in some bonds. I would say asset sales – the assets we have are very good assets, so – and that they're what we want to build off of. So, I would say that's off the table. But we're looking at all other opportunities. But I would say, free cash flow generation, some type of taking in of the unsecured bonds and equity issuance are probably the high probabilities.

Operator

Thank you. And our next question comes from Garrett Nelson of BB&T Capital Markets. Your line is now open.

Garrett Scott Nelson - BB&T Capital Markets

Hi. Most of my questions have been answered. But on the last call, I think, you provided CapEx guidance of $120 million to $140 million, is that still what you're expecting?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yes, that's still a good estimate. We'll be in that $120 million to $140 million range right now.

Garrett Scott Nelson - BB&T Capital Markets

Great. Thanks very much.

Operator

Thank you. And our next question comes from Tony Rizzuto of Cowen & Co. Your line is now open.

Anthony B. Rizzuto - Cowen & Co. LLC

Hi, Roger and Jaime. Listen, I just jumped on from another call. So, my apologies if my questions are redundant here. But I was wondering what's your sense of auto inventories in the pipeline? I mean, we are hearing of some OEM production cuts. And are you comfortable with the platforms you are serving right now? And then, second, what would it take for you to make a decision to restart Ashland?

Roger K. Newport - Chief Executive Officer and Director

On the auto inventories, they are currently, I think, sitting around – light vehicles are sitting around 66 days. So, they're up a little bit from last month or the prior quarter, but not too concerned there. The biggest demand has been on the trucks – light trucks, which has increased quite a bit for their share of the market. I think, they were close to 60% of the market now. So, our platforms were on, we feel pretty good about. And there's two products that are affected by, so to remind you of is, one is on the carbon side, which really is more driven by what platform's the other one. The other is auto exhaust, and we're a major player in the auto exhaust system, so whichever vehicles are selling well.

Kirk W. Reich - President & Chief Operating Officer

Yeah. There's a couple of small vehicle platforms that aren't selling as well. That's all factored into our forecast. But, as Roger said, the trucks and SUVs are performing very well, and we have a good share on those vehicles.

As for Ashland, it's – same thing we have talked about in the past, which is it's sustained profitability that we're going to be looking for in trying to understand market conditions, pricing – hot band pricing, import levels, demand, pricing of raw materials. All of those will be factors that will be included in our analysis. And while it's improved from where it was when we made the decision to idle it, it hasn't changed materially enough to have – made our decision to start that facility. And so, we'll continue to evaluate that as we move forward.

Anthony B. Rizzuto - Cowen & Co. LLC

Thanks very much.

Operator

Thank you. And our next question comes from Seth Rosenfeld of Jefferies. Your line is now open.

Seth Rosenfeld - Jefferies International Ltd.

Good morning. Just a couple of last follow-up questions. First, on U.S. stainless, I was wondering if you can comment where you see a parent demand in the market right now? Have you seen any signs of restocking at the states, given the recent price hikes and news on duties? And then also, clearly, your business has refocused on (53:00) are you seeing any knock-on effects benefiting from recent recovery in nickel prices?

And then separately, moving back onto your kind of carbon business. I was a bit surprised to see the extent of the decrease in cold-rolled and coated volumes Q-over-Q. I would expect perhaps more weakness for HRC, given the reduced emphasis on spot market. Can you just clarify what's driving the delta, even in the higher value-added products? Thank you.

Roger K. Newport - Chief Executive Officer and Director

I'll comment on the last one first, on the carbon business. Really, what's driving it there is the idling of Ashland that – we idled that at the end of last year. And we did had some inventory that carried over into the first half of the year, so that inventory is moving out.

Kirk W. Reich - President & Chief Operating Officer

Mostly in the first quarter.

Roger K. Newport - Chief Executive Officer and Director

Right. Mostly in the first quarter, but also some planned outages that we had. We had higher planned outages here in the second quarter. So, that is – that's what I would say on the hot-rolled and cold-rolled. And our focus is on the automotive side. And we've seen very strong demands on the automotive side, which has tightened up what our – what we have available to sell into that market. So, that's caused those products to decline.

Kirk W. Reich - President & Chief Operating Officer

Yeah. And I would say, on the stainless market, we have seen some improvement. The nickel price has gone up a bit and improved that as well as the trade cases you described before. So, we've seen, I call it, some general strengthening there. And as for ferritic, we again that – as nickel tin's up, that drives that some. But the majority of our ferritic business is really just based on the automotive exhaust, and so it trends with the automotive build rates – is the main driver there for us.

Roger K. Newport - Chief Executive Officer and Director

And we have seen that – the decline in service center inventories with the stainless side too. They're down about 2.8 months.

Operator

Thank you. And our next question comes from Sean Wondrack of Deutsche Bank. Your line is now open.

Sean M. Wondrack - Deutsche Bank Securities, Inc.

Good morning, and congratulations on a good quarter. As I look at your capital structure, I believe on a slide at the Deutsche Bank Industrials Conference, you had mentioned that you're considering equitizing the converts. Is that still in the game plan?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

It's going to depend on the kind of market conditions and how the converts are trading. So, it's definitely an option, as are the other things that we laid out. And it's really just going to depend on market conditions.

Sean M. Wondrack - Deutsche Bank Securities, Inc.

Okay. Fair enough. And then can you just remind us, please, what is your current secured debt capacity?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

The secured debt capacity is very minimal at this point.

Sean M. Wondrack - Deutsche Bank Securities, Inc.

Okay.

Roger K. Newport - Chief Executive Officer and Director

The comment I'd give on our capital structure, as you've seen what we accomplished here and Jaime leading the efforts with our team in the second quarter, we'll be very flexible, and we'll be ready to move to market when things make sense. Our goal is to improve our balance sheet, deleverage it and lower our interest expense. That has been one of our key factors. And we'll take a very balanced approach to it and very systematic approach to what we do, as we move forward in the market. And we have moved our debt maturities out. We have no near-term debt securities of any size, so that's very manageable now with this refinancing we completed. So, that's really our focus and, really, the market conditions will drive the direction we go in the future.

Operator

Thank you. And our final question comes from the line of David Lipschitz of CLSA. Your line is now open.

David Lipschitz - CLSA Americas LLC

Good morning.

Roger K. Newport - Chief Executive Officer and Director

Good morning.

David Lipschitz - CLSA Americas LLC

Two quickies. Just, first, in terms of the tax benefit, or what's your tax rate for the rest of the year, do you expect more tax benefit the rest of the year, because LIFO is going the other way, it will be?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yeah. It's a quarter-by-quarter assessment. It's largely driven by LIFO.

David Lipschitz - CLSA Americas LLC

And then my second one, I just want to make sure I heard you correctly. You said for – your EBITDA margin would be slightly higher. Is that on a quarter-over-quarter basis, year-over-year?

Jaime Vasquez - Vice President, Finance and Chief Financial Officer

Yeah. It was in comparison to the just completed second quarter.

David Lipschitz - CLSA Americas LLC

Okay, so... Okay. Thank you.

Operator

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

Roger K. Newport - Chief Executive Officer and Director

On behalf of the entire AK Steel management team, I would like to thank you for joining us on today's call. As I indicated on our investor conference call earlier this year, our management team is ultimately measured on our performance. We accept this, and we remain committed on improving our performance in all areas that we can control. We are focused on the long term, and our goal remains simple, add value to our company. We look forward to providing you an update on our continued progress in October. Thank you.

Operator

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

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