U.S. Steel’s cost-cutting effort paved with red ink
Here’s how U.S. Steel quantifies the savings that the Pittsburgh steel producer has realized from CEO Mario Longhi’s Carnegie Way efficiency and cost-cutting initiative: $575 million in 2014; $815 million in 2015; $745 million in 2016; and $310 million so far this year.
By U.S. Steel’s accounting, each number represents incremental savings over the prior year. But adding them all up to total about $2.4 billion is not the way U.S. Steel tracks, measures and reports the benefits, a company spokeswoman said in an email.
No matter how you do the math, it’s a big number.
So why, despite enormously more efficient operations and rising prices, did U.S. Steel stun analysts last week by reporting a $180 million first-quarter loss and slashing its 2017 profit outlook in half?
Axiom Capital analyst Gordon Johnson offered this blunt explanation: “They have dated assets that effectively drive their costs above their peers.”
The miserable performance makes U.S. Steel’s constant contention that the company can compete with anybody if only Washington would crack down on predatory, subsidized imports look pretty ridiculous.
“They can’t compete with anybody on a level playing field. They have the highest costs in the industry,” Mr. Johnson said.
To be fair, Mr. Longhi, Carnegie Way’s sponsor, has maintained ever since he took charge in September 2013 that the project was a “transformation journey” that would take a number of years. He has stuck to that story through thick and thin — mostly thin, since U.S. Steel has made money in only one year — $102 million in 2014 — since 2008.
In announcing the company’s $440 million loss last year, Mr. Longhi emphasized that “Carnegie Way transformation efforts” have improved the company’s cost structure.
“These substantive changes and improvements have increased our earnings power,” he said in a statement.
New York-based metals analyst Charles Bradford went looking for the improved earnings power in U.S. Steel’s first-quarter numbers. “Where is it?” he asked. Oh, it’s there. U.S. Steel told analysts Wednesday that the company completed nearly 450 Carnegie Way projects in the first quarter and has over 3,500 more in the pipeline. Such pronouncements make skeptics think the critical elements of the Carnegie Way are smoke and mirrors.
“How many ways can you cut costs as a public company?” Mr. Johnson asked.
He believes the problem is that for years, U.S. Steel has spent less on capital expenditures to modernize its mills than it has reported in depreciation and amortization expenses — an accounting measure that expenses the cost of the company’s steelmaking equipment over its useful life and measures how much book value the equipment loses each year.
When depreciation and amortization exceed capital expenditures, it is a strong indication that a company is not investing enough to keep its plant and equipment up to date.
“This is a company that has under maintained its facilities for 80 years,” Mr. Bradford said.
He’s been listening to the company’s pronouncement about being able to compete on a level playing field for decades and isn’t buying it.
“This is the same garbage story we heard in the ’70s when [former chairman] David Roderick claimed they could compete with anybody,” he said.
U.S. Steel acknowledged last week that its mills need to be updated. The company said it will spend more than $1 billion over the next three or four years to “revitalize” its assets. The work includes the projects at the steelmaking shop at the Edgar Thomson plant in Braddock and the rolling mill at the Irvin plant in West Mifflin.
Mr. Johnson credited Mr. Longhi for leading the industry’s drive to get government aid on the import front.
But he said that effort may have distracted U.S. Steel from addressing its operational issues.
If Mr. Longhi had paid more attention to his mills instead of government handouts, “Maybe things would have been a little different,” Mr. Johnson said.
Instead, Mr. Longhi’s “transformation journey” just got three or four years longer.