美國鋼鐵 (X) 2020 Q2 法說會逐字稿

Good morning, everyone, and welcome to the United States Steel Corporation's Second Quarter 2020 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded.

I'll now hand the call over to Kevin Lewis, Vice President of Investor Relations and Corporate FP&A.

Thank you, and good morning. We appreciate your continued interest in U.S. Steel and welcome you to our second quarter earnings call. On the call with me this morning will be U.S. Steel President and CEO, Dave Burritt; Senior Vice President and CFO, Christie Breves; and Senior Vice President, Chief Strategy and Development Officer, Rich Fruehauf.

After the close of business yesterday, we posted our earnings release and earnings presentation under the Investors section of our website. On today's call, we will walk through via webcast select slides and our second quarter results. The link and slides for today's call can also be found on our website.

Before we begin, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings, and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today, are made as of today, and we undertake no duty to update them as actual events unfold.

I would now like to turn the conference call over to U.S. Steel President and CEO, Dave Burritt, who'll begin today's presentation on Slide 4.

Thank you, Kevin. Good morning, everyone, and thank you for joining in this morning's call and for your interest in U.S. Steel. I hope you and your families are staying healthy and safe.

The past few months have certainly been trying, but I'm thankful for the U.S. Steel team and the collective response of the organization to keep each other safe and healthy so that we can be well positioned to support our customers in the recovery. We don't take for granted the critical role we play in customers' regional supply chain and the importance steel plays, especially U.S. Steel, in all of our lives. I hope you hear today the optimism I have about the future, the encouraging signs we are seeing in our order book and our longer-term future as the only best of both steel company.

Our results in the second quarter, while not surprising given the impacts of COVID-19, are a reminder of why we need to change. Our industry is volatile, and our best of both strategy will ultimately position us to make money in the trough. Without giving up the upside, we have always benefited from -- in recovering and strengthening markets. The second quarter was clearly the trough, and we have to get better at making money when the market hits bottom. All the more reason for us to move faster with the future with our best of both strategy. We are responding to the recovery that is underway to support our customers and deliver for our stockholders.

To get to our best of both future faster, we are focused on what we control, which means delivering on the commitments we have made. Of course, we've always committed to safety, and we continue to make record improvements on safety. We made a commitment to reduce fixed cost, and we are delivering a year ahead of schedule run rate fixed cost reductions of $200 million. We made a commitment to extract incremental value from our iron ore assets, and we delivered $100 million this year, entered into a new pellet supply agreement with EBITDA uplift and have the potential for an additional $500 million from Stelco. And we delivered a multiyear contract with a new long-term customer in Algoma.

We made a commitment to add an electric arc furnace this year to our footprint, and we are delivering with the completion of our tubular EAF in the fourth quarter. We made a commitment to extract value from step 1 of our River Steel transaction with acquiring the remaining 50.1% as our top strategic priority. And we are delivering on joint product development with Big River, and we are delivering on sharing technical and talent resources with Big River. We made a commitment to continue to grow our customer leadership position in advanced high-strength steel, and we are delivering with improved win rates, outsized exposure to winning truck and SUV platforms and strengthening relationships with new and existing customers through significant technical engagement. And finally, we made a commitment to make cash and liquidity top financial priorities, and we delivered by adding approximately $1.4 billion of incremental capital to the balance sheet in the second quarter.

Let's get into today's presentation with a business update. First, on our top priority, safety. We will update you on how we are enhancing our safety initiatives by protecting lives and livelihoods and living within our Steel principles. Next, we'll reinforce our top financial priority, liquidity. We took additional action in the second quarter to fortify the balance sheet to ensure strong liquidity in an unprecedented market. We'll also update you on our strategy. Executing our best of both strategy is critical to U.S. Steel's future, including our #1 strategic priority, acquiring the remaining stake in Big River Steel.

We'll also update you on our operations and the commercial landscape. We are taking action to support increasing customer demand and are encouraged by the trajectory of improvement. And before we take your questions, Christie will share our financial outlook for the third quarter and our progress on key liquidity drivers.

Let's turn to Slide 5 with an update on safety. We are focused on what we control, and there is no better proof of our performance than our year-to-date safety results. Safety is our #1 priority, and we continue to vigilantly enforce our COVID-19 protocols, promote physical distancing, limit visitors to our sites and continue our enhanced cleaning activities. Thank you to all the U.S. Steel employees for continuing to work safely. By practicing our COVID-19 protocols, you are keeping your families, coworkers, communities and yourselves safe.

At U.S. Steel, safety also includes environmental stewardship and the commitment to protecting our shared environment. In May, we published our 2019 sustainability report, which builds on our 2017 report that introduced many of the company's sustainability initiatives and priorities. Our 2019 report provided additional details on our goals and achievements to date in a variety of ESG topic areas, including our 2030 greenhouse gas emissions intensity reduction target of 20%. Our report also includes a materiality assessment, in line with best practices and global reporting initiative standards. This assessment identify the areas that matter most to our stakeholders and form the basis for where we will devote the majority of our efforts and investments.

If you haven't already, please review our 2019 sustainability report and our best of both strategy will transform the company into a sustainable competitive business that will contribute to the future well-being of our employees, customers, suppliers, partners, stockholders and the communities where we operate.

Slide 6 highlights how we are building an industry-leading safety program to emphasize psychological safety, what we call 360 safety. We must continue to promote an inclusive environment where all employees feel that they belong no matter their background, experiences, gender, race, ethnicity or national origin, and are encouraged to contribute their unique ideas and perspectives. This is particularly important given current events and the larger conversations happening around the country regarding diversity and race. We are having similar conversations throughout the company to provide support and opportunities for more learning and understanding by everyone.

We are proud to be partnering with the National Safety Council on our 360 safety initiative to incorporate all aspects of a safe working environment.

Let's turn to Slide 7 to discuss our top financial priority, cash and liquidity. The capital we raised in the second quarter bolstered liquidity and strengthened our balance sheet, positioning us to invest in the recovery and continue to execute our best of both strategy. In the second quarter, we raised approximately $1.4 billion in cash to safeguard our business, enhance downside protection and, of course, for general corporate purposes, to position us to opportunistically benefit from the upside we expect to see as the overall market recovers. We ended the quarter with $2.7 billion of liquidity, including $2.3 billion of cash.

Slide 8 has the details. Strong liquidity has always been a cornerstone of our financial strategy, and especially during these uncertain times caused by COVID-19 pandemic. Our second quarter ending liquidity of $2.7 billion is in line with historical levels. While liquidity has been bolstered and the balance sheet strengthened, we also continue to actively market noncore assets, including our highly attractive portfolio of real estate assets. Additionally, we are evaluating strategic options for our UPI finishing business and related properties. We are optimistic that we will be able to extract value from these assets in support of the strategy. While we have taken significant steps to fortify the balance sheet, preserving cash in today's uncertain market environment remains a top priority.

Current market events and dynamics do not deter our continued focus on executing our best of both strategy, and we believe we will emerge from the market downturn well positioned. Today's uncertain market confirms our need to change, and our best of both strategy is our path to creating a stronger and more profitable U.S. Steel in any market environment.

Core to the best of both strategy remains acquiring the remainder of Big River, highlighted on Slide 9. This continues to be our #1 strategic priority, and we have over 3 years to exercise the call option.

Big River operated profitably from an EBITDA perspective during the second quarter and ran at full capacity. Big River is ahead of schedule in completing its Phase 2a expansion where it will double capacity while only adding approximately 100 new employees. Upon completion, we continue to expect Big River to unlock significant operating efficiencies and additional margin expansion. The U.S. Steel and Big River teams continue to pursue areas of collaboration, particularly around joint product development efforts.

Turning to the market on Slide 10, where we are seeing positive developments in demand across key end markets. We have seen a noticeable improvement in our automotive customer business since June as shelter in place orders were lifted and OEMs restarted. The restart was initially slower than anticipated, but OEMs quickly ramped as the month progressed. Improving production levels are expected to continue in order to restock vehicle inventories, especially on truck and SUV platforms that tie to our strength in platform participation.

The appliances end market has also rebounded nicely. While the appliance business did briefly pause at the onset of COVID-19, their unit production rebounded quickly almost to pre-COVID-19 levels, before the end of the second quarter and remains on a similar pace into the third quarter. Construction has remained resilient throughout the COVID-19 environment.

Our third quarter construction order book has so far exceeded expectations. Packaging is another end market that has performed well through the crisis. We are supplying packaging customers with the high-quality steel we are uniquely positioned to produce during the pandemic to ensure food and other essential supplies remain available for consumers. The steel made by our employees helps feed families, clean surfaces and protect people. The typical seasonal activity in the second quarter came a bit earlier this year in response to the pandemic. We expect demand for this differentiated value-add product to remain robust.

For context, let me provide some additional details on order entry rates. We took blast furnace capacity off-line in April due to the rapid decrease in demand seen across several industries at the onset of COVID-19 lockdowns, yet we did sell in a way to remain nimble when those industries rebounded.

The rebound is currently underway in these 4 key industries: automotive, appliance, construction and packaging. Our new order intake in the months of June and July are 174% of the levels in April and May. Furthermore, 59% of new orders on our mills in the month of July are tied to demand signals from our customers in September and October. In other words, we have line of sight to these end user volumes continuing at least into the fourth quarter. This increased demand supported our restart of 2 blast furnaces at Gary Works and a blast furnace at Mon Valley in the beginning of June. As I said previously, we remain nimble to ensure we continue to serve our customers as demand increases.

As we see positive signs of improvements in these markets, we continue to believe that the second quarter was the trough for the year. In Europe, demand is also improving, but at a more gradual pace. Like in the U.S., green shoots are emerging as automotive activity is accelerating and construction and packaging remain relatively strong compared with the broader economy. We continue to operate 2, 3 blast furnaces at our Slovakian mill and remain flexible to support future demand from customers.

In Tubular, we believe the market is nearing the bottom, but expect difficult market conditions to persist. Our production operations remain consolidated to our Fairfield seamless operations, as Fairfield is our most modern tubular production facility and is able to serve the majority of our markets based on its product capabilities. While conditions remain challenged, we continue to emphasize our suite of proprietary connections. Year-to-date bookings have already matched our premium shipments from 2019, and we expect to set a new record for premium shipments in 2020.

I'll now hand it over to Christie.

All right. Thank you, Dave. Good morning, everyone. Thank you for joining us.

I'll begin on Slide 11. As expected, our second quarter performance was significantly impacted by the nonrecurring costs associated with idling iron ore and steelmaking assets in the quarter to control inventory and manage costs in response to the impacts of COVID-19. These nonrecurring operating inefficiencies in our Flat-rolled segment, coupled with reduced shipments, distorted our earnings in the second quarter. In Europe, market activity was weak throughout much of the quarter. We took advantage of the reduced demand environment by pulling forward a 10-day hot strip mill outage into late May, originally scheduled for the third quarter.

Nonrecurring COVID-19-related government relief helped to offset some of the commercial headwinds in the quarter. Market conditions have just recently begun to improve, but off a very low base.

In Tubular, our decision to consolidate production to our Fairfield facility helped mitigate a portion of the commercial headwinds compared to the first quarter. Based on today's rig count and oil and natural gas prices, we would expect production to remain consolidated to Fairfield tubular.

Despite the difficult quarter, our second quarter performance was better than the guidance provided on June 17. Slide 12 provides more details of what Dave mentioned earlier regarding June shipments. In the second half of June, the pace of shipments increased by approximately 50% in our Flat-rolled segment. While much of the economic restart was delayed throughout the second quarter, we believe the second half of June was a tipping point for our order book as shipments have accelerated and have continued to improve into the third quarter.

As demand increases, we currently expect our Flat-Rolled third quarter results to improve versus the second quarter, but still expect third quarter EBITDA to be negative. While market conditions are improving, headwinds remain. We currently expect 2 U.S. blast furnaces that were idled in response to COVID-19 to remain temporary idle for the remainder of the year. As a result, we also expect our Keetac iron ore mine to remain indefinitely idle, and we continue to extend our coking times at Clairton to better manage inventory. While these actions make sense to balance production with demand, they inherently result in operational inefficiencies that will continue to impact our results in the third quarter. Additionally, the impact of lower steel selling prices will begin to flow through our third quarter results. Approximately 40% of our flat-rolled shipments are fixed-price contracts, the remaining portion will have varying degrees of exposure to index prices.

In Europe, activity is improving, but it remains gradual. We currently expect third quarter results for USSK to be similar to the second quarter. While the tubular market remains challenging, we believe the actions we've taken to consolidate our operations limits any further downside risk. We currently expect third quarter tubular results to be flat to slightly better than the second quarter.

Before I hand it back to Dave, let me spend a moment reinforcing our commitment to cash and liquidity. In the second quarter, we proactively fortified our balance sheet by adding an additional $1.4 billion of cash to our balance sheet. Slide 13 details our expectations for key liquidity drivers for the second half of the year, which are progressing as expected. As we said earlier, we currently believe the second quarter marks the trough for the year as we expect EBITDA to improve throughout the second half of the year.

We continue to evaluate and execute cost improvement actions and are evaluating new opportunities, like integrating work from home into our work plans. For example, we are analyzing opportunities to reduce our lease costs across our footprint, including consolidated lease space at our headquarters location in Pittsburgh. Last quarter, we stated working capital would be a source of cash for the year as we work down slab, work in process and finished goods inventories. In the second quarter, we saw a $120 million release from working capital and expect an additional $250 million release in the second half.

We are on track to meet our reduced capital spending target of $750 million for the year. We spent $173 million in CapEx in the second quarter and expect the second half of the year to total approximately $300 million. We will continue to be prudent in how we execute our strategic capital spending into 2021 as we prioritize cash and liquidity.

Cash interest in the second quarter totaled approximately $50 million. We expect the second half to total approximately $175 million, including approximately $65 million associated with the senior secured notes issued in May. Additionally, we expect to receive the remaining $60 million of cash from Stelco for their option payment by year-end.

Dave, back to you.

Thanks, Christie. Let's turn to Slide 14. Before we begin Q&A, let me summarize the key takeaways from today's call. Our priorities remain unchanged. We are protecting lives and livelihoods, which means our top priorities are safety and environmental stewardship and cash and liquidity to ensure the resilience of the business. We are focused on maintaining ample liquidity in today's environment while continuing to advance our best of both strategy, including our top strategic priority to acquire the remaining 50.1% of Big River Steel. Best of both remains our future, a future that will deliver for all of our stakeholders. We are doing everything we can to get to the future faster.

Kevin, let's move to Q&A.

Thank you, Dave. (Operator Instructions)

Operator, can you please queue the line for questions.

(Operator Instructions) And we'll get to our first question on the line, from the line of David Gagliano from BMO Capital Markets.

I was wondering if you could just give us a little more insight, obviously, into -- you gave us the insight, obviously, into the demand side, the recovery that we're seeing and the justification for restarting the blast furnaces on your side. There's obviously a number of blast furnaces restarting, and you find Big River ramping up as well. There was a $40 per ton of tempted price increase about 2 weeks ago. I'm wondering if you can just give us a sense as to your view on pricing in the near term, given all the supply that's coming on and how has that receptivity been for that attempted price increase.

Well, thanks, Dave. It's good to hear your voice, and hope you're doing well. As far as the price increase goes, I think it was July 21 when we put the price increase in place. And while it's probably too early to determine the full acceptance, we do see some early successes based on some of the recent order status. As far as the market conditions and the demand, certainly North American Flat-Rolled segment is returning. The second quarter is the low, the third quarter book looks good. We expect things to improve, but we don't expect this quick recovery in the third quarter. It will be a bit episodic following probably the COVID-19 pandemic. Once we have a vaccine in place, we feel really good about the future and pivoting quickly to the future. We think it's incredibly bright.

Longer term, as we see an infrastructure bill, we see the election being over, a lot of the decisiveness going away. And we think there's a lot of money that's sitting on the sidelines wanting to go to work, and it's largely dependent upon the success of how the world deals with the pandemic. But longer term, I got to say, with our best of both strategy, we're cautiously bullish about the longer term and feel really good about finding our way through the short term into the future. And we'll turn on blast furnaces when the orders demand us to do that. In fact, we are scheduled tomorrow to have blast furnace No. 8 at Gary turned on.

Kevin, you had some more color?

Yes. I think the one thing that I want to build upon, Dave, in the point you made is that our decision to restart blast furnaces is not speculative. The demand we're seeing in our order book supports these restarts. They're coming from fixed contracts that we have in place with our customers and many of the end markets, Dave, that you described. So I wanted to make sure we emphasize that orders are in hand. The order book supports the melt that's coming back online. And there's really nothing speculative about how our company has reacted to the return in demand from our customers.

Okay. That's helpful. My follow-up, and I'll just switch gears. Just in terms of the liquidity, the improvement in liquidity. Obviously, it did come with increased leverage. And I'm wondering if you can just give us a sense as to what the view is with regards to optimal leverage metrics over time and how U.S. Steel plans to accomplish those metrics.

Well, first and foremost, just let me reiterate it, we want to make sure that we're highly liquid during this difficult time and be well -- and able to respond quickly when things do recover. We do think it ultimately will happen. So this extra cash, this extra liquidity is certainly, we believe, a smart move to find our way through however long this lasts.

So Christie, maybe a little more color?

Yes. I would just say, we did take on incremental debt to ensure that we can weather the COVID-19 downturn, but we're regularly pressure testing the business under various scenarios to make sure that we can handle the leverage that we have. And we're very comfortable with our current cash position. We very intentionally took on this additional liquidity so that we could navigate the downturn, be ready to invest in the recovery. So we feel very comfortable. We -- currently, at the end of the quarter, we had $2.7 billion of liquidity, which compares very favorably to our historical average of about $2.6 billion. And we even have a small footprint now. So we feel pretty comfortable about the liquidity that we have.

And we'll proceed with our next question on the line, from the line of Seth Rosenfeld from Exane BNP.

If I can start out, please, with Big River Steel, please. Can you please give us a little bit more color on recent earnings performance at Big River? We did see that earnings from investees reporting Q2 came a bit below recent trend. To what extent was that BRS versus other investments? And what's your view for profitability from that investment going into the second half of the year? I'll start there, please.

Well, I'll start, and then I'll ask Rich Fruehauf to provide some additional information on this. And just to be clear to everybody, we can't say this off and off and loud enough. This is our top strategic priority. We want EBITDA. We want their entrepreneurial spirit. We want to build the best with them. And we think this strategically is a really good thing for our company. They've got a great team. They got autonomous work teams, and we're very impressed with what we've seen so far.

As far as their EBITDA margins and the way they're running the business, we're pleased with where they are so far. And I think, together, we can create something special.

Rich, can you more specifically answer this question on maybe some of more -- of the more current information?

Yes. Sure. So I mean, I think they've performed pretty well. They've run more or less at full capacity through the quarter even in the downturn. And I would think one would be able to continue that. I think as we've said before, their EBITDA margins were comparable in Q1 to an SDI or Nucor. And there's no reason, especially as Phase 2a gets wrapped up, and you get that operating leverage, as Dave mentioned earlier, next year, of 3.3 million tons with a little over 600 employees. I think it's just going to be an amazing business as they really start bringing that second line on.

Again, we're very excited about the possibilities with them as we move forward. And we do have time. We have over 3 years to get this thing done, and we're going to continue to work together and make sure that we leverage each other's capabilities for a better future.

And if I can shift gears, just separate question on the European business, please. Can you just touch on your efforts to control cost during the second quarter and potentially use of state-backed short-time work or furlough schemes? For your operations, how significant were those cost savings measures and the government support? And on over what time horizon would you expect that to potentially roll off looking into the second half of the year?

Yes, Seth, this is Kevin. I would draw your attention to our first quarter over second quarter earnings bridge for the European segment. The other bar included in that analysis is largely reflective of the COVID-19 relief that we received. So that should help you put into context kind of the size of that benefit in the quarter. We're optimistic that, that support will continue as we look forward, but we're certainly more focused on what we can control within our European business, and that business has performed exceptionally well, getting after costs, driving labor efficiencies and offsetting any volume efficiencies that business has experienced. So I would say the COVID-19 relief, you should see that in the numbers. But I think more importantly, the way that business has been run throughout this downturn has been remarkable, and we'll continue our focus on controlling costs.

I think that's a really good point, Kevin, the leadership team over there as well as the employees, these are tough times. And obviously, this -- it's business. European markets had entered a recession, and yet they continue to get the job done. Working with each other, working with the customers, working with the local governments and the European government to make sure that we have a successful business that gets back to our top priorities, protecting lives and livelihoods. These are tough times all the way around, but they understand cost control and they understand how to run a mill. And frankly, we strongly believe that this is the best mill in Eastern Europe.

I will now proceed to our next question on the line, from the line of Chris Terry with Deutsche Bank

I just wanted to talk a little bit more about Big River. I appreciate you've got the 3 years to exercise as an option. Just wondering if you could help us think a little bit more on the timing of that, though. And I know that you've got the option, but it's -- market's changing, you've changed your liquidity during the quarter. What's your thought process there heading into, I guess, 2021 with a higher production out of Big River?

Yes. Well, thanks for the question. I'm sure that question is on a lot of people's minds in terms of what's going to happen and when we're going to pull the trigger. It's certainly something that we discuss very frequently and look at various scenarios in order to do that. But just let me restate. We have like 3.25 years left to exercise that call option. We're in the midst of a pandemic. We're also trying to understand more deeply the business, learn with Big River Steel. And so at an appropriate time when it makes sense, we'll pull the trigger. We have our hands full today. And that could change tomorrow, all depends on how well we find our way into the future with COVID-19, the pandemic, and what's happening with our customers. We want to be incredibly responsive to our customers and make sure that, again, our first priority is lives and livelihoods and staying liquid.

And just as a follow-up, going through your other operations. How do we think about Granite City? It obviously was restarted around the time of Section 232 being implemented. I think the key end markets there, construction containers, predominantly, I think if I've got that right. Is it really around -- is it the location? Or is it the end market specifically around there that have sort of meant that, that one has stayed online while some of your other furnaces came off-line during the last quarter or so?

Well, of course, we're -- this is Dave. We're focused on the customer. So when the customer markets are down, that's when you end up having to turn down a blast furnace. As far as Granite City goes, that's responsive to the energy market, which is largely dried up. But the packaging market is very robust and going very well. So Granite City, as long as it has customers to serve and continues to perform at good levels, we'll continue to keep that open. It's going to be customer-driven, customer-focused as it always is.

We'll get to our next question on the line from Matthew Fields with Bank of America.

I just wanted to ask about cash and then another one about capital structure. So in the offering memo and the sort of bond process for the secured, you mentioned that your cash needs for the last 3 quarters of the year were going to be $700 million. You burned $400 million in the second quarter, so does that kind of implicitly guide to a negative $300 million cash flow for the back half? Is that still the case?

Our cash usage forecast, we did put out $700 million as our cash forecast, cash usage for the Q2 through Q4, and we are still on track for that. So working capital was a source in the second quarter, and it will be a source of about $250 million in the second half of the year. And we are looking for opportunities to generate incremental release of working capital. But right now, we're pretty sure of the $250 million.

As far as CapEx, first half CapEx was $450 million, which is 60% of the annual budget of $750 million. We do not expect that to continue at that same rate. So we expect the quarterly CapEx for the remainder of the year to trend lower and to meet that annual budget of $750 million.

As far as interest, we expect cash interest to total about $275 million in 2020, $175 million of that will be spent in the second half, and that does include $65 million associated with the senior secured notes, which was not a part of that $700 million forecast. We did exclude that from that $700 million forecast. As far as EBITDA, we know adjusted EBITDA in the second quarter was the trough. And so adjusted EBITDA should improve through the second half. So most of those are the primary components of that $700 million cash usage forecast. As I said, we're on track to meet that.

A couple of other factors that will figure into our cash. We have the Stelco deal, which is $100 million of cash, Q2 through Q4. And we also have repaid $100 million on our ABL in the second quarter. And that also was not a part of the $700 million number.

So the $300 million of free cash flow previously adding another $65 million of cash burn from the new secured notes of $365 million. And then working backwards with all those discrete items, you get to EBITDA of about negative $200 million for the back half, give or take, right?

We won't comment on our EBITDA projections for the full year. But hopefully, the clarity we've given around some of the moving pieces that influence cash usage should help you directionally size the expectations for the remainder of the year.

Yes. Good point. We're looking at cash every day here. And I know you're asking a modeling question. I'm sure Kevin will have time after the call. But we look at cash daily, the fixed cost, the way to manage working capital. We're also monetizing the mindsets. We also have real estate assets that we're monetizing. We have some processes on those. So we feel comfortable with where we are on cash.

Okay. Great. And then my follow-up. I have a follow-up to Dave's question earlier in the call about sort of optimal capital structure post Big River. So you're in the high-$5 billion debt now. You're going to have to fund an equity purchase of Big River for $700 million plus and then consolidate Big River's debt onto your balance sheet. So that gets you, I don't know, $7 billion plus of total debt. I mean what's -- if it's your #1 strategic priority, how do you think about the capital structure to accommodate that strategic priority?

Well, I think the key issue here is while it's our top strategic priority, we have time to address this, and we're going to address it at the appropriate time. Obviously, in the midst of a pandemic, it's a big challenge. But you've seen our balance sheet. You've seen our liquidity. Depending upon the pandemic and how all things play out, we could go sooner or we could wait until 3.25 years from now to get it done. So that's one of the things that we'll work through over time. And certainly, we'll have enough cash to get this done as our top priority.

Matt, the only thing I would add to Dave's comments there is you've talked about consolidating the debt and the financing to ultimately purchase the remaining 50.1%. But I think the one thing we always need to be mindful of is the EBITDA contribution and the cash flow generation we expect this business to have. I mean that is why it is our #1 strategic priority.

The EBITDA margin profile, the free cash flow generation of the mini mill is something we must have in our business. So while we're going to take on some incremental leverage to make that happen, we believe our business will be much better positioned with Big River as a part of U.S. Steel to have the right capital structure in place and generate value for shareholders and have a credit rating kind of accretive business model to work from. So we understand the capital requirements to get this done, but we're really excited about the EBITDA performance and the cash flow generation that is to come.

We'll get to our next question on the line. It is from the line of Andreas Bokkenheuser from UBS.

Just one question from me. Slide 13, you always have that great slide. You kind of show what's operational and what's idled in terms of capacity and then definitely idled. Just operationally, how we should think about this. You obviously have blast furnace for Gary and blast furnace at Granite City just idled, and that looks to be something that you guys could kind of pull the trigger on and bring back online when demand dictates it. How should we think about Great Lakes? So that's definitely idled operationally. Is that a section of being cold idled now at this point in time? Or are you still keeping that warm, so to speak?

Sure. Go ahead, Kevin.

Yes. Sure, Andreas. I'm happy to provide some color there on the kind of the operating footprint. So let me touch on a few things. First, our decision to return blast furnaces to service. As we mentioned earlier in today's call, very much a reflection of the strength of the order book and bringing the melt back online into Mon Valley and Gary to support the strength of the automotive order book as well as the appliance and construction order book. So demand-driven, order book-driven and not speculative in any way. I think if we look forward, we would need -- we would like to see continued strength in the order book around some of our key end markets as we make decisions about the future operating footprint. But I would think, for now, the order book we have in hand and the continuing strength we're seeing, we're comfortable with kind of the 3 blast furnace configuration at Gary, 1 at Granite City and 2 at the Mon Valley within the Flat-Rolled segment.

As it relates to Great Lakes, we made that decision pre-COVID-19. We talked about some of the strategic logic behind making that decision around focusing on mills that are cost- and capability-driven. And at this point in time, the visibility we have into the Great Lakes steelmaking assets just don't necessarily meet that criteria. So taking a bit more of a longer-term view on Great Lakes, but remain very flexible to return idled furnaces in the U.S. at Granite City, and Gary as well as in Europe back online to support customer demand. I will say the Great Lakes Works finishing lines are extremely important to how we serve the automotive market and continue to run to support customers. And that's how we -- at least in the near term, what we envision from that facility.

I think the key point there is its customer base. Customer will decide where we take this business. The stronger the customer need, the more we're going to be responding to them, and that means we'll be turning things on. If things go badly, then we have to turn them off. But it's customer-focused always.

Yes. That's very clear on the demand side. I guess just one follow-up, because I remember back when you kind of took down Granite City around 2015. There were obviously some costs associated with that, and then there were some costs associated with kind of keeping it down and then restarting it again. Is that kind of similar how we should think about Great Lakes that effectively there will be some costs associated with bringing them down as they are now and then keeping them down until you bring them back up? Is that the similarity, how we have to think about it?

Yes. So let's maybe compare and contrast kind of what we call a banked blast furnace versus more of an indefinitely idled blast furnace. A banked blast furnace like we had in response to COVID-19, you should think about that as a couple of million dollars a month in order to keep that furnace in a flexible state in order to respond to increased customer demand. We saw a lot of that impact, our second quarter results, given the furnaces we had off-line in the second quarter. If more indefinite, you can remove some of those frictional costs. Obviously, take out some of the fixed costs that are associated with that part of the steel production process. You have some frictional costs, like at Great Lakes that we identified earlier on in previous quarters. But the recurring costs associated with -- and indefinitely are far less than it would be more of an indefinite bank state.

We'll get to our next question on the line from Timna Tanners with Bank of America.

I wanted to ask a little bit if you take a step back and we're talking about strategic priorities of Big River. And also, in the past, of course, we talked a lot about asset revitalization and the need to invest in your existing assets to bring the cost of those down. So I know we're just looking at Slide 13, but if you go 1 before that, you have Slide 12, where you talk about kind of your projects on your existing portfolio. Can you remind us like how important those are, and how long they can be delayed for and what's the total amount that we should be contemplating on the requirement here for these investments?

Yes. So Timna, I think if you look on that page, you'll see the 4 strategic investments -- capital investments that we believe are cornerstones of the best of both strategy related to EAF. We plan to have that project completed here in the fourth quarter of 2020, a little bit of CapEx probably remaining on that project. We anticipate about $150 million in the full year of 2020. We probably spent about half of that so far throughout the first half of the year. So another half to go. I will remind you that, that was pre-funded with environmental revenue bonds. So you'll see kind of a pull from restricted cash as we spend on EAF to offset that.

When it comes to the project at the Mon Valley and was casting and rolling extremely important project to our best of both future, especially when you think about in the context of being invested at the Mon Valley, which is our low-cost liquid steel producer, we think that will ultimately give the Mon Valley a differentiated cost position as well as differentiated capabilities to serve highly attractive strategic markets like automotive. That's going to be at least $1.5 billion investment, temporarily kind of pause construction on that, but we still remain extremely optimistic about the value that project will deliver longer term.

There are permitting delays associated with COVID-19 for and what's casting and rolling, which has driven some of the timing around executing that project. If you think about the Gary hot strip mill, another facility that's extremely important to our future, differentiated capabilities to serve margins that, quite frankly, the mini mills can't currently serve given their technical capabilities. So we continue to invest in that hot strip mill to build upon the strategic advantage we have. We're being prudent in how we allocate capital to that asset right now given the COVID-19 environment, but over the next few years, we'll certainly look to make additional investments to build on the competitive advantage we have at Gary.

And then the Dynamo line in USSK has been paused, and we'll get back to that as market conditions improve. But hopefully, that provides you with some context as well as reemphasizes the strategic importance of all of these projects to our best of both future.

Okay. Cool. And then just my follow-up, I know Christie mentioned in her discussion back to Slide 13 that the 2 furnaces, Gary and Granite City, I believe, would expect to be remained off-line for the rest of the year. So just kind of wondering if you could elaborate on what conditions would need to be met in order to restart those? I know Gary's generally more automotive. I don't know if every single furnace is automotive. And Granite City, I thought was energy and construction and container, as we just heard. So do we need to see those markets improve a bit from here or have better visibility? Or could you just give us some more details?

Yes, sure. I would just emphasize a few points have been made earlier, which is the order book tells us and our customers tell us when we should return production to -- back online. And so we would need to see continued strengthening of the order book and a lot of the strategic markets you talked about. And since we don't just speculate and bring facilities back online without having the order book in hand, we would really -- we would need to see the customer orders to bring those furnaces back online. So we remain flexible, open for business, and we're ready to respond very quickly to continued strength in the order book. But for now, this is the configuration we need to support the order book.

Yes. Timna, one thing I'd add to that is one of those furnaces is banked, so it can be brought back quickly if needed. So it will be in response to the order book.

We'll get to our next question on the line, from the line of Karl Blunden with Goldman Sachs.

Just had one on the current asset base and then one on noncore asset sales. Just with the current asset base and taking some off-line for a while and now ramping back, of course, with orders to support your customers. We've heard some noise, I'd say, mostly from the mini mills, about accelerated share gains, kind of accelerating that longer-term trend. Just be interested in your thoughts on that. Maybe it's, in some ways, in line with the types of markets you want to target that are better margin longer term. So what you're losing is lower margin. But just like to understand if there are implications you have for your longer-term earnings potential?

That's a really good question. Thanks for highlighting that because that's -- that highlights kind of the best of both strategy in terms of where we're taking this business. And yes, we are winning in strategic markets where we have the capability differentiation, especially in advanced high-strength steel. And so our strategy is focused on differentiation as the basis of capability and cost. So those 2 things. If we can build the best capability, obviously, we have the best business. And certainly, in the advanced high-strength steel, the XG3, the work that we're doing to serve not just the automotive, but expanding into other areas where our steel has a competitive advantage is where we want to play.

At the low end of the market, no doubt about it. The mini mills and the trough of the business, if they make it, they're going to take it, which tells us we can't get to the future fast enough because with Big River Steel, we'll make money in the trough. And of course, with integrated mills, we outperform the peak. So together, we should be able to construct a model here in the next couple of years that puts us in a position to outperform. We believe that our best of both strategy will ultimately create a powerful combination of highly capable, low-cost differentiated steel solutions. And frankly, we're excited about it.

Thank you very much. I will now turn the call back over to U.S. Steel's CEO for any closing remarks.

Thanks, everyone, for your interest in U.S. Steel, and a special thank you to our employees. Thank you for staying safe and staying focused on delivering for our customers. These are uncertain times, but I am excited and confident about our future. Now let's get back to work safely.

Thank you very much. And that does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone.