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Ak Steel Holding Corp (NYSE:AKS)
Q3 2019 Earnings Call
Oct 31, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the AK Steel's Third Quarter 2019 Financial Results Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session. [Operator Instructions]

At this time, I will turn the conference call over to Douglas Mitterholzer, General Manager of Investor Relations & Assistant Treasurer. Please go ahead, sir.

Douglas Mitterholzer -- Investor Relations and Assistant Treasurer

Thank you, Shannon, and good morning, everyone. I also would like to welcome you AK Steel's conference call to review our third quarter 2019 financial and operating results. With us today are Roger Newport, Chief Executive Officer. Kirk Reich, President and Chief Operating Officer and Jaime Vasquez , Vice President of Finance and Chief Financial Officer. In a moment, Roger will offer his comments on our business and overall market conditions. Following Roger's remarks, Kirk will provide an update on our progress on some of the projects initiatives Underway at AK Steel. Following Kirk's remarks, Jamie will review our third quarter results. And together, we will field your questions.

Please note that during today's call, we will refer to presentation materials, which were posted on AK Steel's website yesterday afternoon. If you have connected to this call via the webcast, you should see those slides on your screen.

For those of you who've dialed in, the presentation slides are available at our website, aksteel.com under the Investors tab, where you can then click on Investor Presentations. We'd encourage you to refer to that information during this call. However, it will remain posted on our website subsequent to the call.

As noted on Slide 3, 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 items such as future shipments, product mix, prices, costs, operating profits, EBITDA or liquidity. Please note, 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 yesterday after the market close. 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 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, once again at www.aksteel.com. With that, here's Roger with his comments, Roger.

Roger Newport -- Chief Executive Officer

Thank you, Doug. Good morning, and thanks for joining us on our call.

Despite facing some headwinds, our company performed well overall during the third quarter. We generated net income of $2.8 million or $0.01 per share and adjusted EBITDA of $86.9 million. It should be noted that these results include a negative mark-to-market charge of $15.3 million or $0.05 per share, and most of this relates to hedges for 2020.

These results demonstrate the effectiveness of our strategy when navigating through periods of challenging spot market conditions. In just a few moments, Jamie will provide further details and highlights of our third quarter results.

Moving to Slide 5. Throughout all that we do, the safety of our employees is our highest priority and the core foundation of operating our business. We had numerous plans to deliver outstanding results for our key safety categories, including two of our facilities working the entire quarter without a single occupational injury. Our 9500 employees are to be commended for their vigilance in adopting safe work practices and for making AK Steel an industry leader in overall safety performance.

From an environmental standpoint, as highlighted on Slide 6, we are making great progress in our ongoing efforts to further increase our recycling rates, reduce the generation of hazardous waste, and increase our use of renewable energy. We have made significant investments of over $20 million in the last several months in pollution control equipment and technology at our facility in Dearborn, Michigan.

This was just one part of a much larger planned investment to further enhance the long-term sustainability and environmental performance of our Dearborn operations and I'd like to take a moment to comment on our Dearborn facility since we acquired it about five years ago.

We are delivering on a vastly improved environmental record. We are making major investments in an important pollution control device and related equipment. We are continuing to engage in the community initiatives and we are providing high paying jobs to our employees and hundreds of local contractors every day.

In other words, we are doing what we said we would do, and we look forward to continuing to operate in an environmentally responsible manner Dearborn works which bears the rich history of being the original Henry Ford's Steel Making Facility. Just as we continue to enhance the sustainability of our manufacturing operations, the steel products that we manufacture are also having a positive impact on the global environment. For example, the fuel efficiency of vehicles is being improved through the tremendous properties afforded by our family of advanced high strength steels. Vehicle emissions are being reduced through technology made possible by our high alloy stainless steels. And the efficiency of our nation's electrical distribution system is continually being improved as our [Indecipherable] electrical steels are playing an absolutely vital role. Our innovative steel products are providing our customers with a sustainable cost effective solution, especially when compared to competing metals such as aluminum. In short, our innovative steel solutions are helping our customers, our society and our world assuring a more sustainable future.

Turning to slide 7, we continue to pursue actions to enhance our operating assets to improve our competitive cost position, further strengthen our balance sheet, and reduce our pension plan's exposure to the financial market volatility.

Highlights in the third quarter include the construction of a new facility at Precision Partners, completion of a significant hot-end outage at our Dearborn works here in October, and the successful planned transition of numerous customer items from our Ashland Works coating line to our other lower-cost coating facilities. These actions and investments are in keeping with our 3-pronged strategy to improve our competitive cost position, commercialize our innovative new steel products and grow our downstream operations.

Moving to slide 8, we are on track to complete the closure of our Ashland Works Facility by the end of this year. As previously communicated, we expect to realize at least $40 million of annual run rate savings as a result of This footprint optimization of which we have realized some of the benefits already. I would like to thank our Ashland Works team for their tremendous dedication to our company and for all that they have done to make this transition a smooth one. Many of our Ashland employees have already accepted positions at other AK Steel locations and I'm hopeful that even more, we'll do so going forward.

Turning to Slide 9, I would like to discuss what we are seeing in the markets that we serve. Overall demand for our core automotive market remained fairly strong during the third quarter, although it was negatively impacted by the 40 days labor strike at General Motors. We presently expect 2019 North American vehicle production of approximately 16.6 million units. While this would represent a slight reduction compared to the prior year, it remains a very strong year by historical standards. Similar overall production levels are forecasted for calendar year 2020. Likewise, we continue to see stability in the residential and commercial construction. New housing starts for 2019 are projected at 1.26 million units. And we currently anticipate comparable levels in 2020 along with improving construction spending. Seasonally adjusted inventories at steel distributors are currently estimated at roughly two months for carbon products and 2.8 months for stainless products. These levels have declined modestly throughout the year and some degree of restocking is expected to take place here in the fourth quarter. Both refilling of the General Motors supply chain and the recent round of steel price increases that were announced should also further support improved market conditions over the course of the coming weeks and months.

On the trade front, we continue to urge Congress to pass the USMCA which will incentivize a higher level of consumption of North American made steel. From the standpoint of enforcement, we support the efforts of the administration to establish the needed mechanisms to swiftly address any surge in steel imports from Canada or Mexico as a result of their exemption from the 232 tariffs . Along these lines, we are currently working with multiple agencies to address what we believe is circumvention activity by numerous foreign electrical steel producers. These companies are now routing their products through Canada and Mexico performing minor modification to this deal and then shipping this material into the United States without having to pay a tariff. Such loopholes must be closed in order to ensure a level playing deal. Addressing global steel overcapacity is also fundamental to our fight for fair steel trade and the preservation of manufacturing jobs in the United States. This requires a vigilant focus on China, who continues to make steel without regard for either supply and demand balance or environmental stewardship. The steel industry in the United States faces some of the Stringent environmental rules in all of the world. And companies like AK Steel are committed to meeting them each and every day. But unfortunately the steel industry in China does not have to adhere to the same stringent rules. We were pleased to see the statement issued last week by the collective steel industries for more than a dozen nations across the globe, calling for their governments to address the trade distortions that have encouraged global overcapacity. We trust that this is just the first step of many and we encourage these countries and our government to work together to develop a definitive timeline to deliver tangible results.

Moving to Slide 10, our overarching strategy remains clear. We will commercialize our innovative products and services, transform our operations to significantly improve our competitive position and drive further growth both in current businesses and in new markets and downstream businesses. We have made great strides over the past few years in executing this strategy. We have grown our downstream businesses and increased our automotive market position among the major OEMs. We have improved our cost position, lowered our debt levels and substantially de-risked our balance sheet. And we have returned to our long established routes of product and process innovation. In summary, we are doing what we said we would do, and we're focused on the long term to deliver value to our shareholders.

I would now like to turn the call over to Kirk to comment further on innovation along with our capital investments and downstream businesses. Kirk,

Kirk Reich -- President, Chief Operating Officer

Thanks, Roger. I'd like to touch on a few items beginning with an update on Precision Partners.

Slide 12 shows the new Precision Partners state-of-the-art Stamping Facility, which is progressing well and remains on schedule and on budget. The equipment installation is well under way and we are very excited about this new facility and the value it will bring to our customers and our shareholders in the future. As we have noted before, this investment puts us into fairly exclusive territory with the capability to produce single piece hot-stamped or rings and large sub-assemblies. This positions us well to more strategically aligned with our customers going forward. In addition, Precision Partners remains on track to deliver the higher EBITDA performance that we were targeting for this year with even further EBITDA growth anticipated in 2020.

From an operational perspective, I'm happy to report another quarter of solid performance throughout the company including the execution of a very successful planned maintenance outage at our Dearborn Works blast furnace and steel shop.

Slide 13 shows some of the extensive work that was done. The outage was performed safely. We completed all of the planned work and have been running well since restarting the facility. This major investment will improve both the efficiency and environmental sustainability of the operations. And will result in a reduction of our manufacturing costs at Dearborn Works by at least $10 a ton or over $25 million annually. In addition to highlighting our investments and our equipment, I wanted to make a few comments regarding artificial intelligence and Big Data. Although these topics often make headlines and appear to be all the rage with some of our competitors, we at AK Steel have traditionally not provided much public commentary on the subject. This may lead to the incorrect belief that we have not yet embraced such technology. In reality however, we've been utilizing AI for many years now in our operations to provide adaptive learning and to continually improve the quality and consistency of our products. We've also been making good progress improving our systems allowing us to centralize the massive amounts of data that we have from the shop floor processing records and then analyzing this aggregated big data to drive process improvements. And through a recent grant from the US Department of Energy, we will soon be taking the adaptive learning science on hot mill modeling to the next level. We are steel makers. That is what we are great at and we do it in a way the results and innovative solutions from raw materials all the way through to finished steel components. We combined data and process innovation throughout our company to deliver unparalleled value and great steel products and engineered solutions to our customers.

Turning now to some market updates, we have begun the annual cycle of contract negotiations with some of our major automotive customers. We are only in the very early stages of this process and thus it's a bit premature for us to offer much color at this time. I would remind you however that while directionally our auto contract prices typically move in tandem with the spot market pricing, the magnitude of the moves are generally far more muted than the overall market, which provides more stable pricing over time. Regarding the recent strike at General Motors, it did have a modest negative impact on our third quarter shipments and an even larger impact will be felt in the fourth quarter. Although, it remains to be seen how much loss production GM will make up over the coming weeks and months, we do anticipate a reduction in shipments of both our carbon and stainless steel products as a result of this unforeseen labor disruption. Looking ahead to next year, we anticipate further market share gains in our primary market of automotive. As noted on Slide 14, despite the consensus of forecast calling for reduced vehicle production in 2020 versus 2019, we are planning to ship a greater volume of carbon automotive steel next year while also realizing further product mix development. Being a top tier supplier to the automotive volumes requires a great team of professionals and we are uniquely qualified Within North America to provide these diverse products and services. As indicated on slide 15, the use of ultra high strength steels such as our ULTRALUME and NEXMET products is expected to increase rapidly. In 2020, we will grow our sales of both exposed galvanized products and ULTRALUME our aluminum-coated press hardened steel for hot-stamping. In addition, we will supply our first production orders of NEXMET third generation advanced high strength steel for an upcoming new vehicle platform in 2020.

Turning to slide 16, and speaking of our ULTRALUME press hard steel product, we were happy to announce earlier this week that we have entered into a licensing agreement for this high strength high form ability steel that is hot stamped and the parts for light-weighting in the automotive industry. Under this agreement with ArcelorMittal and aside from them, we will have the sole license to manufacture this product in the US, Canada and Mexico, for the hot-stamping parts. Additionally, stampers will be permitted to process our material in accordance with the ArcelorMittal patents, which cover the hot-stamping process for this product. This agreement is part of the settlement of all of the pending patent infringement litigation between the two parties. We are pleased with this outcome and believe with the dispute now finally resolved, we will significantly expand the sales of our ULTRALUME material, which is an important growing automotive product. With that I will now turn the call over to Jaime.

Jaime Vasquez -- Chief Financial Officer, Vice President-Finance

Thank you, Kirk. The third quarter was essentially in line with our expectations despite having experienced more challenging market conditions than originally anticipated. Turning to slide 18, our third quarter adjusted EBITDA of $86.9 million compared to $160.8 million in the third quarter a year ago and $151.5 million in the second quarter of this year. The recent third quarter included $15 million of unrealized mark-to-market losses from our iron ore derivatives compared to mark-to-market gains of $35 million in the second quarter. Also in the recent third quarter, we had realized gains on derivatives of about $13.5 million that settled, but did not flow through the income statement, and those gains have been recognized in prior quarters. The third quarter decline that we experienced in sales and earnings from the second quarter of 2019, and the third quarter a year ago, primarily reflecting significant drop in carbon hot-rolled coil spot prices or HRC on our index-based contracts. To put that into context, the average spot HRC price in the third quarter of last year was $899 per ton compared to just $562 in the third quarter of this year. Also the sharp drop in pricing of nearly $100 per ton that occurred during the month of June caused many customers to place orders at minimum levels in anticipation of further price declines. This negatively impacted our third quarter shipment volumes.

Turning to Slide 19, we highlight the changes and reported third quarter adjusted EBITDA from the previous quarter. Pricing, volume and mix had a $60 million negative impact in the third quarter compared to the second quarter. The decrease mostly reflected the decline in HRC prices on our steel index-based contracts as well as lower shipments. Raw materials and energy costs were a positive $13 million mostly that mostly reflected lower carbon scrap and other alloy costs. Operations was a $26 million positive impact to adjust the EBITDA compared to the second quarter due to lower outage costs, increase utilization of certain assets and reduced spending on supplies. Here we also note some dramatic shift in our unrealized mark-to-market gains and losses related to iron ore derivatives. This was caused by a sharp movement in the IODEX which went from nearly $110 per ton at the end of the second quarter to $93 per ton at the end of the third quarter. The other categories primarily comprised of several non-operating items including lower selling and administrative expenses.

Turning to Slide 20, let me conclude my remarks by providing you with an update to our annual guidance. In July, we indicated that our expected adjusted EBITDA would be in the range of $470 to $490 million and our guidance was based on an HRC price at that time of approximately $555 per ton. We also provided guidance that for every 10 dollar change in HRC pricing, our earnings could be impacted by $5 to $7 million on an annual basis. However since July, the pricing for HRC has fallen more sharply than previously anticipated. It has also caused many service center customers to order at minimum levels. These volatile events, combined with the strike at General Motors will most likely result in a deviation from our anticipated range of $5 million to $7 million for every $10 dollar change in HRC pricing. Accordingly, we now expect adjusted EBITDA for 2019 to be in the range of $450 to $465 million. Our guidance excludes any fourth quarter mark-to-market changes in iron ore derivatives and any potential pension and other post retirement benefit quarter charges. In addition, it excludes the charge previously taken in the first quarter related to the closure of Ashland Works.

On slide 21, we highlight the other annual guidance items, which include a change in expected shipments for fiscal year 2019.

I will now turn the call back to Shannon who will assist us in taking your questions.

Questions and Answers:

Operator

Thank you, Mr. Vasquez. We will now begin the question-and-answer portion of our conference call.

[Operator Instructions] Martin Englert of Jefferies. Please go ahead with your question.

Martin Englert -- Jefferies -- Analyst

Hi, good morning everyone.

Unidentified Speaker

Good morning.

Martin Englert -- Jefferies -- Analyst

With the permanent closure of Ashland, you expect over $40 million in savings starting next year. Are there any potential offsets as you're transitioning the coating volumes across the other assets and you mentioned earlier in the call that some of these savings have been realized this year. If you had to estimate how much of the 40 million do you think you're realizing now this year.

Kirk Reich -- President, Chief Operating Officer

Yeah. The number for this year will be fairly small I would say, Martin, but as far as the expenses for transitioning, if we saw any of those, it would have been this year as we kind of move products requalified in different coating lines and made that happen. So going forward, we have very little of that left to do and it's more of now kind of having a more fully utilized set of assets from our coating lines that are lower cost. So we should see the advantage going forward.

Martin Englert -- Jefferies -- Analyst

Fair to say then the net savings year-on-year in 2020 would be around that 40 million that you've highlighted there. Correct?

Kirk Reich -- President, Chief Operating Officer

Fairly close to that I would say.

Martin Englert -- Jefferies -- Analyst

Okay, got it. And if I could one more within autos can you remind us again of your expected platform exposure for next year between cars versus truck SUV also touch on the share gains, specifically what products are you gaining share within carbon next year.

Kirk Reich -- President, Chief Operating Officer

Sure, I can highlight some of those, so we're more than 75% of our businesses in trucks and SUVs and crossover vehicles, much the same as what the market segment would be. We're actually a little more heavily weighted in those areas and next year as we gain market share, I would say that all continue to increase. Seeing some people ask the question on why are we so confident in 2020. It is because we're already awarded the business. And in some cases, their platforms that started in 2019 midyear and are continuing next year and are going to ramp up into next year, and so we know we'll be on that book of business, we know those are good selling vehicles and we'll get more advantage there. And then we are on some new platforms that begin next year almost very extensively their trucks, SUVs and some of those major vehicle platforms that are coming out that you would know of that are hot selling. So we're on the right platforms, we're on the right material and we know that's going to grow As I said in my remarks, we also know that we're growing on our ULTRALUME, the hot stamp product. We're seeing more market increase in that product. Next year, we expect with the resolution of the of the issues with ArcelorMittal, that will grow going forward. And then our partnership with Precision Partners is certainly helping as well. They're seeing their book of business grow and we're kind of being able to provide full spectrum solution to our customers in that perspective.

Martin Englert -- Jefferies -- Analyst

Okay. But not necessarily anything incremental on advanced high strength steels there. So it sounds like maybe on the ULTRALUME front

Kirk Reich -- President, Chief Operating Officer

It's our hot-stamped version of that. Out cold-stamped version would be NEXMET, that's on the ultra high strength category and we're shipping our first production parts of that next year as well, and then some of our other products, the dual Phase 780's and 980's and some of those things that are more advanced high strength steels were continuing to make advancements in those areas as well. So it's really across the spectrum, but our product mix is improving, not just we're getting more volume.

Martin Englert -- Jefferies -- Analyst

Okay. Any color on the mix improvement there year-on-year basis points toward the mix [Phonetic]

Kirk Reich -- President, Chief Operating Officer

Say that one more time.

Martin Englert -- Jefferies -- Analyst

Any color on the percentage mix, year-on-year for that mix improvement looking out into 20. Based on what you can tell today, are you gaining a couple of hundred basis points of improved mix versus where you are at today.

Kirk Reich -- President, Chief Operating Officer

I'd say, our market share is increasing. I don't know, maybe 5% from where we are now overall, and it's more heavily weighted toward those high-value products that we discussed, the product mix improvements that we have anticipated are coming. We anticipate we'll continue that direction.

Martin Englert -- Jefferies -- Analyst

Okay. I appreciate all the color there. And good luck.

Operator

Our next question comes from Karl Blunden of Goldman Sachs.

Karl Blunden -- Goldman Sachs -- Analyst

Hi, good morning guys. Thanks very much for taking the question. I was interested on the capital structure. How you think about timing and means of addressing some of the upcoming maturities. I know that the convertible is likely that's you've kind of looked at the revolver for that, but for the 2021, it seems like the maturity is now approaching. You've outlined a pretty optimistic growth in scenario in terms of market share. So do you wait for those gains to show before you look to address the 21's and are you still thinking about the unsecured market as of something that's feasible. And the way you would like to do that. One of your peers has issued a convertible bond recently. So, we are just interested in the range of options you have for addressing that.

Kirk Reich -- President, Chief Operating Officer

Yeah, on the convertible. As you indicated, that's going to be refinanced under the revolving credit facility, we had increased in liquidity under that facility assuming that this may happen. On 2021, we do have some time and it's in October maturity in 2021. So we have a little bit of time, we continue to assess the market conditions as you know, but it haven't been too receptive to steel companies. But as indicated, we do have a variety of options that we could pursue. So we're just going to continue to evaluate the market. So we're not going to put the company at risk waiting to kind of [Phonetic] fourth quarter of doing things, but we'll get things done in I think plenty of time.

Karl Blunden -- Goldman Sachs -- Analyst

it is from the [Phonetic] only options of those include equity linked options and revolver draws other than just straight debt refinancing?

Unidentified Speaker

Yeah, I think we're going to look at the full menu of refinancing options and then do what's most cost effective.

Karl Blunden -- Goldman Sachs -- Analyst

Fantastic. Thanks for the help.

Operator

Our next question comes from Chris Terry of Deutsche Bank.

Chris Terry -- Deutsche Bank -- Analyst

Good morning, guys. A couple of questions from me. Could just start on the set up into the next year, a lot of moving parts, so I guess savings at Ashland, Dearborn coal presumably down into next year. Just wondering if you could comment specifically on how you see the margins shaping up for 2020 versus the end of '19. Thanks.

Douglas Mitterholzer -- Investor Relations and Assistant Treasurer

Yeah, just from a margin perspective and you know we'll obviously give our guidance in January, but as you know as Kirk alluded to to automotive contract pricing. It is going to follow directionally with where spot market pricing is going. Obviously not dollar-for-dollar, something much less. So that's going to put a little bit of downward pressure on margins, the offset to that is all the cost savings that we do have, as well as raw material costs have come down. I think as you noted, coal has been down, we've essentially done with those contracts. So there'll be decreases in coal costs, energy probably about the same. We don't want to get into too much detail as we still have a lot of negotiations going on both from a supplier standpoint and with the automotive contracts.

Chris Terry -- Deutsche Bank -- Analyst

Okay, thanks for the color there. A couple of others from me, just on Slide 16, when you talked about the ULTRALUME. I just wondered if you could put some numbers around that opportunity?

Thanks. I'd say ULTRALUME right now is probably in the range of 3% to 4% of our automotive carbon shipment tons and we see that growing just as our piece of it in the next few years to 10% may be more

Kirk Reich -- President, Chief Operating Officer

more depends on how quickly those products are adapted. And that would be our ULTRALUME. That's not speaking of our NEXMET. Our NEXMET as I said we're shipping our first tons of that on production vehicles next year in 2020, and then we anticipate that starts to ramp up as well. How quickly that ramps up we'll have to see as things develop, but we know it's getting qualified and getting a whole lot of interest and so we expect as the new models roll over, the use of those steels will increase and we expect to be a big player in those areas.

Jaime Vasquez -- Chief Financial Officer, Vice President-Finance

And I'll also comment, we would see some benefits coming to on the AK Tube front as they have continue to find applications to utilize these new high strength steels.

Chris Terry -- Deutsche Bank -- Analyst

Thanks a lot. And the last one from me, just in terms of the price hike that was announced last week, just wondering if you could comment on the behavior you've seen since that in the market and then also just tying that into your overall EBITDA guidance obviously you quoting the 5 to 10 per ton and we're below those levels today. Just wanted to should we be adjusting for the view around where steel prices are today or have you done that specifically in the guidance. Thanks.

Kirk Reich -- President, Chief Operating Officer

Yeah, I'd say we've done that in the guidance where we don't have that many more tons left to sell for this year. What we've seen in the market is a little bit of a bounce since then where it is that the scrap prices are going to be going up and hopefully we'll see some of that as we've hopefully reached the bottom and now started heading back up. We're going to continue to do what we've always done, which is be disciplined in those markets and not make dumb deals. We're going to pay attention to where the market is headed and we're going to participate where and when we should and you've seen the volume reductions that we've made in the forecast, and that's as a result of simply not doing some deals that don't make sense for us. So we'll continue to do that and I think all that's booked into what you heard in the forecast today.

Jaime Vasquez -- Chief Financial Officer, Vice President-Finance

In our comment, you know our focus is making sure we get a return. If we're not able to get a return, we don't move the time. We do have flexibility in the carbon market with our Butler EAF that we can produce carbon. So that is what I would call is our flexibility to turn to switch on or off, depending on what market conditions are and do we ultimately generated return. When we idled Ashland years ago, we decreased our position in the spot market and as we go forward, we do have some flexibility and will serve that market as it makes sense.

Chris Terry -- Deutsche Bank -- Analyst

Okay. Thanks guys for the color.

Operator

[Operator Instructions] Our next question comes from David Gagliano of BMO Capital Markets.

Matthew Fields -- Bank of America -- Analyst

All right, great, thanks for taking my questions. I just actually have a few follow-ups to the prior questions actually. I ask it almost every quarter. Can you update us on specifically how much volume this year is priced under these annual contracts that are expected to reset at the end of the 4th quarter.

Kirk Reich -- President, Chief Operating Officer

Yeah, the fixed price contract is typically about 70% of our overall volume. So you're talking probably close to roughly 3 million tons and those maybe in some of the markets reset at the at the end of the year, but keep in mind, David. Some of those are from an automotive standpoint, particularly were divided between going to into the end of the 3rd quarter, which I know has already happened, but we haven't settled those deals yet. So those will be retroactive to them. Others at the end of the year and then others at the end of the first quarter. And so some of those are staggered from that perspective as well.

Matthew Fields -- Bank of America -- Analyst

Okay. So as we think about 2020, you know at the end of the 4th quarter, is it 3 million that we should be adjusting for contract reset, or is it, what's the number that we should be adjusting for the contrast reset at the end of the 4th quarter?

Kirk Reich -- President, Chief Operating Officer

So that's predominantly I would say the heavyweight there is the automotive side and we've always said a little bit more than half of our automotive tonnage resets January one and then it's roughly 25%, April 1 renewals and then 25% on October 1 renewals.

Matthew Fields -- Bank of America -- Analyst

That's helpful. Thank you. And then on the met coal side, can you remind us again the volume tied to the resets at the end of the year on the met side and since those contracts are done at this point. What was the year-over-year reductions in the in the contracts this year?

Kirk Reich -- President, Chief Operating Officer

I'll answer one of those two and then avoid the other one. So 3 million tons thereabouts and the prices down and we think we've got a really good price, but we're not going to talk about that separately. It will be all part of the overall forecast that we will give in January, but we've certainly done well there.

Matthew Fields -- Bank of America -- Analyst

Okay and then just my last one, how much is actually being produced at Dearborn these days, as $10 per tonne cost it, what's the total volume there.

Kirk Reich -- President, Chief Operating Officer

For more than $2.5 million.

Analyst

All right, thank you very much. [Speech Overlap] Got it. Perfect. Thanks a lot. Appreciate it.

Operator

Our next question comes from Matthew Fields of Bank of America.

Matthew Fields -- Bank of America -- Analyst

Hey, guys. I just wanted to ask about stainless and electrical this quarter. It looks like the volume in the quarter was your lowest kind in the last decade despite imports of stainless at least being down 10% to 20%. What's going on in that market and is that kind of the way to look at things going forward.

Kirk Reich -- President, Chief Operating Officer

Yeah, it's a good question. A couple of things in that. So maybe starting on the stainless Imports are down as you referenced. We've done a couple of things, first of all we don't supply into the commodity market when it doesn't make sense and it doesn't make sense based on where the pricing is currently in the pure down and dirty commodity markets and so we shrink our position there. That's some of what you're seeing in the third quarter that really probably continues into the fourth quarter. The other piece of stainless is we did start seeing some impact as a result of our automotive exhaust book of business and so automotive exhaust has been impacted by a couple of things. Auto builds in general, been down a little bit, and while we're heavily weighted truck SUV on our direct sales of carbon steel, our sales of stainless steel go into the overall market and so, anytime less vehicles get produced that impacts it a bit. And then we started to see a little bit of the impact of the General Motors strike because a lot of that material goes into General Motors from that standpoint and so I'd say those are the pieces that make up the Stainless business decrease in volume. I don't know that that's where that remains long term, it depends on where the spot market goes for 300 series and certainly with the General Motors strike resolved, we anticipate that business picking back up, obviously. So hopefully that answers the question on the stainless side. On the electrical side, it's a fairly complicated one. As you know, there's a lot of trade things going on, but as we've referenced several times, we have customers who have elected to take their business and move to Mexico and buy foreign steel and cut it into laminations and put it in the cores and ship it into the United States and assemble transformers in the United States made foreign steel, it's exactly what we warned of when the trade cases came and it's exactly what has happened. It's not too dissimilar from, if you go back in history, a couple of years before, the EU put in minimum import pricing. The same thing has happened there. The vast majority of transformers cores' laminations are now being produced in Turkey and in the UAE, and those are being imported into Europe in the same fashion, because people want to avoid the tariff in our case or the minimum import price in their case. And so we have seen a reduction in our business in our volume there. I would say the domestic market itself, the demand is good. Some of the transformer producers are seeing record breaking years and so it's not a demand issue, it's the circumvention of the tariff being done through Mexico that is bringing the steel into our marketplace and therefore they're not buying it from us. So that's the volume reduction that you're seeing and will it continue going forward?. Unfortunately it appears to be the case. They continue to move some of their Business away and we think that's going to be tough sledding from that perspective.

Jaime Vasquez -- Chief Financial Officer, Vice President-Finance

And as I indicated earlier, we're looking at trying to get support, whether it's on the USMCA or other trade actions, because this is basically just circumvention of the intent of the trade cases and also the 232 actions and we're seeing this deal come in from multiple countries. So people had figured out how to beat our system and as I indicated earlier, we have figured out how to close the loop holes because everyone seems to find them.

Matthew Fields -- Bank of America -- Analyst

Okay, got it, thanks. And then just looking at 2020 sort of trying to get a handle on sort of EBITDA for that year, you've sort of ran through a variety of cost savings that you're going to do a $40 million from Ashland and $10 per ton at Dearborn. Can you just like run us through like a preview of an EBITDA bridge what it should look like by the end of 2020 of all these different cost savings programs that you are expecting to be benefiting 2020.

Kirk Reich -- President, Chief Operating Officer

Yeah, I think it's probably premature to do that. Obviously, as you highlighted, we have cost savings, there'll be some offsets. But we're going to save that for January.

Matthew Fields -- Bank of America -- Analyst

Okay. Good luck.

Kirk Reich -- President, Chief Operating Officer

Thank you.

Operator

Our next question comes from Matthew Korn of Goldman Sachs.

Unidentified Participant

Hi, this is Hunter Alley on for Matthew Korn. I was thinking whether [Phonetic] you can provide us some margin for the downstream business or just kind of let us know how that business is performing relative to the broader steel mills business.

Kirk Reich -- President, Chief Operating Officer

Yeah, the margins are better in that business and it is performing well. Our tubing business is a little pressured with some of the automotive pressure going down a bit and but Precision Partners has been, I'd say both of those are doing very well. Precision Partners is going to be right on what we expected and as I referenced in my comments, we see another pretty significant step up next year as a result of continued growth in that business and some of the investments we've made with our new facility will start paying dividends right toward the very end of the year. So that business is going very well for us.

Douglas Mitterholzer -- Investor Relations and Assistant Treasurer

Yeah. And we had previously indicated an EBITDA range for the downstream businesses of $70 million to $80 million and they are certainly within that range.

Unidentified Participant

Got it. Thank you. And then inventory destocking by the service centers continues to be an issue for nearly all of the steel mills, are there any kind of catalyst that you all see in the near term you think could lead the restocking.

Kirk Reich -- President, Chief Operating Officer

Yeah, I think, as we referenced earlier, they announced price increases in scrap that we expect to bump up, probably starts to spur some of that activity on So we have agreed it.

Unidentified Speaker

And also the service center inventories remain low, the carbons service center inventories is around 2 months of that it's actually probably the lowest point of the year. So usually when you see you get down to that level, you would also see its burn. People basically are sitting on the sideline to see where the bottom is and we think it's bounced off the bottom and heading back up. But what we're seeing currently time obviously will tell, but that's what we're seeing, as we look forward.

Unidentified Participant

Got it, thank you for taking my questions.

Operator

Our final question comes from Sean Wondrack of Deutsche Bank.

Sean Wondrack -- Deutsche Bank -- Analyst

Hi, good morning. [Speech Overlap] Just a couple from me. Obviously over time as you've been growing your sort of higher value business in new stickier business you mean shirking some of the lower margin business. So we expect that trend to continue sort of throughout 2020 or do you think you've sort of backed away from some of that and we'll see some growth now, just curious. Thank you.

Kirk Reich -- President, Chief Operating Officer

Yeah. So I think we'll continue to do what we've been doing, which is participate in the markets that provide us the right return, and the right margins. And so, to your point, we're going to continue to reduce our footprint in the spot markets or the commodity spots where we don't see that being possible. And so the obvious places what we've done with Ashland in a few years ago, our continued flywheel piece with the Ashland carbon tons that we can or can't make depending on where the market goes there and so we're going to continue to do that from a stainless perspective as I referenced earlier, the 300 series commodity business when it's not good, we're not participating to that degree. And in electrical steel, there is a product called [Indecipherable] the kind of the lower grades of that. We do the same thing. When the commodity market works, we participate. When it doesn't, we don't. And you're going to continue to see that. Now we do grow in the places where it makes sense for us to. We referenced next year we expect a volume growth in the automotive space and those are in higher value automotive products in the better product mix shift and I assure you while we have gained market share, we are not doing it by buying the business. We're doing it by producing the right products and providing the right services and having the right innovative stuff going forward. I don't think our track record has ever shown that we would go out and sell stuff for too lower price. That's not what our reputation is, that's not what our product deserves. And so we're not buying business, we are increasing market share because we're doing the right things despite the fact that volume overall in the automotive business automotive builds are going down, we're seeing more of that share and in the right products. And on the right platforms.

Sean Wondrack -- Deutsche Bank -- Analyst

All right. Okay that's great, I appreciate that. And then your specialty business is growing nicely 70-89 I think of EBITDA this year, which is almost, call it 15% of your EBITDA guidance. As we think about this over time, maybe over the next few years. How big you think [Indecipherable] thing grow as a piece of the entire pie.

Kirk Reich -- President, Chief Operating Officer

And I'll comment on that. I think what you remaining is our down-stream businesses versus our specialties deals. Jamie indicated, we've given guidance on its continue to grow. We see growth going forward. We have our investment going on at Precision Partners for new hot stamping equipment capabilities there and when we laid out our strategy a few years ago. We said we want at least 30% of our EBITDA to be coming from our down-stream businesses. So we see the opportunities in Precision Partners. We see opportunities to make tube, little small acquisitions that we've done to be bolt on to some of those to basically continue to grow that side of the business. So that's our goal. We laid it out of it heading in that direction. We made great progress so far.

Sean Wondrack -- Deutsche Bank -- Analyst

Okay, great. Thank you for answering my questions.

Operator

My question this concludes our question-and-answer session. I would now ask Mr. Newport for his closing comments.

Roger Newport -- Chief Executive Officer

Thank you for joining us today. We appreciate your questions and your comments and we appreciate your continued interest in AK Steel and look forward to updating you on our progress in January.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Douglas Mitterholzer -- Investor Relations and Assistant Treasurer

Roger Newport -- Chief Executive Officer

Kirk Reich -- President, Chief Operating Officer

Jaime Vasquez -- Chief Financial Officer, Vice President-Finance

Unidentified Speaker

Martin Englert -- Jefferies -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Chris Terry -- Deutsche Bank -- Analyst

Matthew Fields -- Bank of America -- Analyst

Analyst

Unidentified Participant

Sean Wondrack -- Deutsche Bank -- Analyst

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