Must-know: Can “Carnegie Way” make US Steel profitable again?
What is Carnegie Way?
After four years of consecutive losses, in 2013 U.S. Steel (X) started working on a transformation strategy to drive and sustain profitable growth. Through a disciplined approach, now commonly known as “The Carnegie Way,” named after the co-founder of the company, it’s working to strengthen its balance sheet with intense focus on cash flows, improve operational efficiency, optimize the supply chain, and right size its operations.
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The financial impact of Carnegie Way
The previous chart shows the financial impact arising from the Carnegie Way program at U.S. Steel (X). In the second quarter it resulted in cost reduction of $145 million. After adding the savings of $290 million already announced, the total financial benefits total $435 million. The manufacturing and supply chain remain the key focus areas under this program, where 85% of these savings came from. If you look at the segments, the flat rolled segment accounted for the primary share with 61% savings. That’s understandable given the low profitability and greater scope of improvements in this segment.
Can U.S Steel extract more benefits out of “Carnegie Way”?
The question investors’ need to ask is how much more can U.S. Steel extract out of its Carnegie Way program. The management indicated during the conference call that they’re still looking for further financial benefits to come out of this program. Carnegie Way at U.S. Steel is a focused and broad based program aimed at restoring the profitability of the company across business cycles. The company is also scouting for acquisitions and capital expenditures to enhance shareholder value. Through a focused approach U.S. Steel has been able to improve its balance sheet ratios, which we will see in the next section.
ArcelorMittal (MT) also launched a program under the name “management gains program” and has been successful at realizing the financial benefits. It’s important to note that apart from the companies listed above, Nucor (NUE), Reliance Steel & Aluminum (RS), and the SPDR S&P Metals and Mining ETF (XME) are alternate means of getting exposure to the steel industry.