WALL STREET JOURNAL -- Sept. 22, 2014
U.S. Steel's Mario Longhi Says 'Everything Is on the Table' in Restructuring
By JOHN MILLER
PITTSBURGH--When Mario Longhi took the reins of U.S. Steel Corp. a year ago, the company was, in his words, on "a road to destruction."
Bloated costs, expensive projects, fat compensation packages and generous labor pacts had pushed the company into the red for five consecutive years. Mr. Longhi began to cut costs, leading to last week's announcement that U.S. Steel was halting over $800 million in projects and the company's Canadian operations were seeking bankruptcy protection.
An even more radical reshaping could be ahead.
"Everything is on the table," Mr. Longhi said in his first extensive interview since becoming chief executive. One option is to move toward a minimill strategy, in which steel is made from scrap metal, usually at lower cost than using iron ore and coal.
"The world changes, and U.S. Steel has to adapt," Mr. Longhi said.
Indeed, the 113-year old company, believed to be the first American company to generate more than $1 billion in annual revenue, faces stiff challenges, including competition from imports. It will have to negotiate a new collective- bargaining agreement with its union next year.
Mr. Longhi, a former Alcoa Inc. executive and CEO of Brazilian minimill Gerdau SA, was promoted from chief operations officer and given a mandate for change.
The board "was a group that's not happy with [its] five years of consecutive losses," a person familiar with the matter. "He's creating a new culture" focused on shareholder returns, which hasn't always been the primary focus at U.S. Steel, the person said.
U.S. Steel's share price has more than doubled since Mr. Longhi took over, largely because investors are excited about his cost-cutting initiative, dubbed "the Carnegie Way," after notable steelmaker Andrew Carnegie. The company is cutting $435 million in costs this year and said it can make similar cuts in the next several years.
Under Mr. Longhi, U.S. Steel hired two former Caterpillar Inc. executives, Geoff Turk, as vice president for innovation, and David Burritt, as chief financial officer, citing their experience in making an industrial company more efficient.
Sam Halpert, who manages U.S. Steel's holding for money manager Van Eck Global, one of the steelmaker's 10 biggest shareholders, said U.S. Steel's attitude is changing under Mr. Longhi. CEO compensation, for example, had been based partly on the amount of steel the company shipped. "They changed it so Mr. Longhi is paid based on profitable tons and other metrics, he is comfortable shrinking the company to make it more profitable," Mr. Halpert said. "That's a massive shift in mind-set."
U.S. Steel said that as of 2011, when John Surma was CEO, shipments accounted for 20% of compensation incentives and that shipments remain among several factors in compensation.
Others expressed skepticism of the company's strategy. "It's hard to buy into their plan when they're not really saying what they're doing," said Andrew Lane of Morningstar Inc.
Mr. Longhi defended the lack of detail in his plans. "This a competitive world. We're not going to be specific about everything we do." The plan isn't about a handful of changes, he said. "It's about over a thousand things, and some are million-dollar projects and some are $5,000" endeavors.
At the Gary Works mills in Indiana, workers complained that they were wasting as much as 3 inches of steel when impurities were removed off the top of molten metal, according to company and union officials. Sending less metal to scrap resulted in higher yields, Mr. Turk said. An engineer in Indiana also discovered that the company could make coils 1% thinner on 84,000 tons a year and still meet customer requirements.
At one plant U.S. Steel typically would buy the cheapest bearing, Mr. Longhi said. "Now maybe we pay 30% more for this other type of bearing, but it lasts twice as long."
He also is pushing cultural change. Some supervisors now carry three chips in their pockets to remind them to question employees three times a day, Mr. Longhi said.
U.S. Steel has laid off nonunion staff and recorded $14 million in severance-related charges for the first half. The company declined to say how many people have lost their jobs.
But the company also is bringing back work that had been done by outside contractors, such as inspections and mechanical repairs, at a saving of about $ 30 million this year. "We don't have a goal to succeed by firing people," Mr. Longhi said.
Such tactics are welcomed by workers, said Tom Conway, who negotiates with U.S. Steel for the United Steelworkers union.
"U.S. Steel wasn't always as screwed up as it got," said Mr. Conway. Some of Mr. Longhi's changes, like more efficient maintenance, "should have been put in 20 years ago."
The union's goodwill could evaporate next summer, when U.S. Steel will have to hammer out a new labor agreement. "There is nothing in the Carnegie Way [ that] goes against what the union wants, which is the success of the company," Mr. Longhi said.
Benefits might be on the negotiating table. At the end of last year, medical and life insurance for U.S. Steel's 136,000 retirees was underfunded by $1.4 billion and pension plans were underfunded by $1.1 billion.
Among the most telling of the cost-cutting moves announced last week were the cancellation of plans to expand production of iron-ore pellets in Minnesota and dropping investments in Gary, Ind., aimed at making a substitutes for industrial coke, which is typically made out of coal. Coal and iron ore are the basic raw materials needed to make steel in traditional blast furnaces.
Analysts believed the cuts signaled a move toward minimills. U.S. Steel has already drafted plans to replace a traditional blast furnace in Alabama with such a plant.
Minimills "are going to be part of the portfolio," Mr. Longhi said. "Is it going to be all? It is too early to tell, but we are embarking on that journey."
Joann S. Lublin contributed to this article.
Write to John W. Miller at [email protected]
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
09-21-14 1604ET
Copyright (c) 2014 Dow Jones & Company, Inc.
U.S. Steel's Mario Longhi Says 'Everything Is on the Table' in Restructuring
By JOHN MILLER
PITTSBURGH--When Mario Longhi took the reins of U.S. Steel Corp. a year ago, the company was, in his words, on "a road to destruction."
Bloated costs, expensive projects, fat compensation packages and generous labor pacts had pushed the company into the red for five consecutive years. Mr. Longhi began to cut costs, leading to last week's announcement that U.S. Steel was halting over $800 million in projects and the company's Canadian operations were seeking bankruptcy protection.
An even more radical reshaping could be ahead.
"Everything is on the table," Mr. Longhi said in his first extensive interview since becoming chief executive. One option is to move toward a minimill strategy, in which steel is made from scrap metal, usually at lower cost than using iron ore and coal.
"The world changes, and U.S. Steel has to adapt," Mr. Longhi said.
Indeed, the 113-year old company, believed to be the first American company to generate more than $1 billion in annual revenue, faces stiff challenges, including competition from imports. It will have to negotiate a new collective- bargaining agreement with its union next year.
Mr. Longhi, a former Alcoa Inc. executive and CEO of Brazilian minimill Gerdau SA, was promoted from chief operations officer and given a mandate for change.
The board "was a group that's not happy with [its] five years of consecutive losses," a person familiar with the matter. "He's creating a new culture" focused on shareholder returns, which hasn't always been the primary focus at U.S. Steel, the person said.
U.S. Steel's share price has more than doubled since Mr. Longhi took over, largely because investors are excited about his cost-cutting initiative, dubbed "the Carnegie Way," after notable steelmaker Andrew Carnegie. The company is cutting $435 million in costs this year and said it can make similar cuts in the next several years.
Under Mr. Longhi, U.S. Steel hired two former Caterpillar Inc. executives, Geoff Turk, as vice president for innovation, and David Burritt, as chief financial officer, citing their experience in making an industrial company more efficient.
Sam Halpert, who manages U.S. Steel's holding for money manager Van Eck Global, one of the steelmaker's 10 biggest shareholders, said U.S. Steel's attitude is changing under Mr. Longhi. CEO compensation, for example, had been based partly on the amount of steel the company shipped. "They changed it so Mr. Longhi is paid based on profitable tons and other metrics, he is comfortable shrinking the company to make it more profitable," Mr. Halpert said. "That's a massive shift in mind-set."
U.S. Steel said that as of 2011, when John Surma was CEO, shipments accounted for 20% of compensation incentives and that shipments remain among several factors in compensation.
Others expressed skepticism of the company's strategy. "It's hard to buy into their plan when they're not really saying what they're doing," said Andrew Lane of Morningstar Inc.
Mr. Longhi defended the lack of detail in his plans. "This a competitive world. We're not going to be specific about everything we do." The plan isn't about a handful of changes, he said. "It's about over a thousand things, and some are million-dollar projects and some are $5,000" endeavors.
At the Gary Works mills in Indiana, workers complained that they were wasting as much as 3 inches of steel when impurities were removed off the top of molten metal, according to company and union officials. Sending less metal to scrap resulted in higher yields, Mr. Turk said. An engineer in Indiana also discovered that the company could make coils 1% thinner on 84,000 tons a year and still meet customer requirements.
At one plant U.S. Steel typically would buy the cheapest bearing, Mr. Longhi said. "Now maybe we pay 30% more for this other type of bearing, but it lasts twice as long."
He also is pushing cultural change. Some supervisors now carry three chips in their pockets to remind them to question employees three times a day, Mr. Longhi said.
U.S. Steel has laid off nonunion staff and recorded $14 million in severance-related charges for the first half. The company declined to say how many people have lost their jobs.
But the company also is bringing back work that had been done by outside contractors, such as inspections and mechanical repairs, at a saving of about $ 30 million this year. "We don't have a goal to succeed by firing people," Mr. Longhi said.
Such tactics are welcomed by workers, said Tom Conway, who negotiates with U.S. Steel for the United Steelworkers union.
"U.S. Steel wasn't always as screwed up as it got," said Mr. Conway. Some of Mr. Longhi's changes, like more efficient maintenance, "should have been put in 20 years ago."
The union's goodwill could evaporate next summer, when U.S. Steel will have to hammer out a new labor agreement. "There is nothing in the Carnegie Way [ that] goes against what the union wants, which is the success of the company," Mr. Longhi said.
Benefits might be on the negotiating table. At the end of last year, medical and life insurance for U.S. Steel's 136,000 retirees was underfunded by $1.4 billion and pension plans were underfunded by $1.1 billion.
Among the most telling of the cost-cutting moves announced last week were the cancellation of plans to expand production of iron-ore pellets in Minnesota and dropping investments in Gary, Ind., aimed at making a substitutes for industrial coke, which is typically made out of coal. Coal and iron ore are the basic raw materials needed to make steel in traditional blast furnaces.
Analysts believed the cuts signaled a move toward minimills. U.S. Steel has already drafted plans to replace a traditional blast furnace in Alabama with such a plant.
Minimills "are going to be part of the portfolio," Mr. Longhi said. "Is it going to be all? It is too early to tell, but we are embarking on that journey."
Joann S. Lublin contributed to this article.
Write to John W. Miller at [email protected]
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
09-21-14 1604ET
Copyright (c) 2014 Dow Jones & Company, Inc.