美國鋼鐵 (X) 2019 Q3 法說會逐字稿

Good morning, everyone, and welcome to the United States Steel Corporation's Third Quarter 2019 Earnings Conference Call and Webcast.

As a reminder, today's call is being recorded.

I'll now hand this call over to Kevin Lewis, General Manager of Investor Relations.

Thank you, and good morning.

We appreciate your continued interest in U. S. Steel and welcome you to our Third Quarter Earnings Call.

On the call with me this morning will be U. S. Steel President and CEO, Dave Burritt; our Executive Vice President and CFO, Kevin Bradley; as well as Christie Breves, who will transition into the CFO role beginning on November 4. Also on today's call is Senior Vice President of Strategic Planning and Corporate Development, 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 in our third quarter results.

The link and slide for today's call can also be found on our website.

Before we start, 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 will begin today's presentation on Slide 4.

Thank you, Kevin.

Good morning, everyone, and thank you for your interest in U. S. Steel.

We've been making big changes over the past few months, positioning U. S. Steel for a brighter future.

Our strategy should be coming into focus for you with our investment in Big River Steel, which closed yesterday.

But this strategy has been the plan all along, to become the world-competitive, best of both, best of the integrated model and the best of the mini mill model.

Our investment in Big River helps us to get to where we were going faster.

Still, significant market headwinds remain across all 3 operating segments, but this does not deter us.

It provides clarity that our strategy is the right one for our success.

As a result, we are moving quickly towards centering our North American flat-rolled footprint around 3 world-class assets.

This includes rescoping our asset revitalization programming, reducing fixed costs, reprioritizing cash and building a team in support of the business we are becoming, and with ultimately acquiring 100% of Big River, our #1 strategic priority.

But let's be clear.

While our investment in Big River Steel is our #1 strategic priority, we will be flexible with our portfolio of strategic investment spending, and we intend to get all of the projects completed because of their fit in our strategic profile.

We also announced plans to enhance our operating model to better align with executing our strategy, and we made important progress financing our strategy in October, as Kevin Bradley will cover in full detail.

But first, here are today's highlights.

We reported third quarter adjusted EBITDA of $144 million.

This was ahead of our guidance issued on September 18 and at the top end of the range provided in the preliminary earnings issued on October 10.

As a reminder, we issued preliminary earnings on October 10, ahead of our Environmental Revenue Bonds and senior convertible notes offerings.

This, as you know, is required in advance of significant capital market transaction.

Our flat-rolled facilities operated well in the face of a significant market headwinds.

Our operations teams outperformed expectations and delivered cost savings and commercial results above our plan.

In Europe, market challenges continue, and margins remain under significant pressure.

And in our Tubular segment, market conditions worsened as rig counts continue to decline.

In all, market conditions to close out the year remain challenging based on what transpired in the flat-rolled market over the past 2 months.

But signs of life are emerging.

The end of the UAW strike at GM removes a significant steel demand gap that existed in the market.

Lead times have extended, and our flat-rolled order rates have materially improved.

And scrap prices are expected to increase approximately $20 a ton, providing support for steel selling prices.

All of these factors provide us confidence that the market is poised to improve from here.

Turning to Slide 5. Safety is a core value and a pillar of our steel principles, and we are delivering on these principles.

Our Days Away from Work metric showcases our continued improvement in safety, and we are a safety leader in our industry.

At U. S. Steel, safety is first, and we are committed to being first in safety and take our environmental stewardship duties very seriously.

Thank you to our employees for their continued focus and commitment to work safely.

Let's turn to Slide 6. On October 8, we announced Kevin Bradley will transition out of the CFO role.

Kevin has been a critical part in setting U. S. Steel on its strategic path.

His leadership was instrumental in transforming our balance sheet and providing the flexibility to embark on our strategic projects.

And he was at the negotiating table helping to make our investment in Big River Steel a reality.

Since the Big River announcement, Kevin has been directly engaged to ensure strong execution across our financing activities.

Thank you, Kevin, for your contributions to create a stronger and more successful future for U. S. Steel.

Kevin has agreed to stay with us as Executive Vice President and adviser to me through the end of the year.

Starting next week, Christie Breves, will become CFO, and it couldn't be more well-deserved.

Christie is another big contributor to setting the company on today's strategic path.

Her work to establish U. S. Steel as a steel leader in cash conversion cycle and her leadership in our asset revitalization program have provided the foundation for U. S. Steel's future.

I look forward to you meeting her and finding out for yourselves what makes Christie so special.

She has been a behind-the-scenes leader but not anymore.

Congratulations, Christie.

Also announced that same day was an enhancement to our operating model focused around operational, commercial and technological excellence.

This detail is on Slide 7. We are getting to the future faster, and we are implementing an enhanced operating model and organizational structure to accelerate the company's transformation.

This new structure will create a more nimble and efficient executive function, allowing us to accelerate our strategy.

We are enhancing our focus on operational and commercial excellence and promoting technological innovation so we can establish a more competitive cost structure and enhance our capabilities.

Two key drivers to our strategy.

Slide 8 illustrates our world-competitive, best-of-both strategic framework and highlights the key actions that transform our business.

Over the past several years, we've taken steps to transform our balance sheet, as shown in the 'As-Is' portion of the diagram.

We use the strength and foundation of our business to align our balance sheet with the investment horizon to execute our strategy.

In just 2 years, we have proactively extended our debt maturity profile to support our strategy.

Our next senior notes maturity isn't until 2025.

The next step of our strategy, 'Operating Improvements', is focused on our critical success factors, move down the cost curve, win in strategic markets and move up the talent curve.

Investments we have announced will position us to deliver on these key attributes.

Let's take our recently announced investment in Big River Steel as an example, which we intend to ultimately acquire through exercise of the call option.

It will move us down the cost curve due to a slow cost, fixed cost, highly flexible cost structure and minimal sustaining capital requirements.

This combination should help provide long-term financial stability, in any market dynamic.

Big River also positions us to win in strategic markets.

This mill is strategically located to serve the Southern U.S. and Mexico, and broadens our offerings in existing end markets and expands our presence in other attractive markets.

And adding Big River to our portfolio will move us up the talent curve.

We are investing in the best EAF-based mini mill asset in North America and some of the best steel talent available.

We will learn from them and with them.

And we have a lot to offer Big River as well in terms of commercial capability, qualifying and running trials faster and valuable R&D and intellectual property.

The third step in our strategy, 'Strategic Projects', outlines key investments that, when complete, will equip us with the industry's most advanced and sustainable steel-making technology.

Our investment in Big River's mill is aligned with these investments, with each building on or creating a distinct cost or capability advantage.

And we are now less than a year out from beginning to realize some of the EBITDA benefits of our electric arc furnace at Tubular.

Our Big River Steel investment, the 'Portfolio Moves' step in the strategy, unlocks the value across our entire footprint and accelerates our path towards a world-competitive, best of both footprint.

Big River is the newest, most technologically advanced mill in North America but is essentially still in startup mode as they execute on Phase 2a of the expansion to double capacity and drive significant efficiencies.

Slide 9 showcases this strategy.

By bringing together the best of both integrated and mini mill capabilities, we will enhance our competitive positioning in high-margin end markets and enable us to offer an unparalleled product platform to customers.

We believe this world-competitive, best of both strategy will drive long-term cash flow through industry cycles, but we are being conscious of the current market environment.

We can flex our spending and do what works best to support strategic priority number one to acquire 100% of Big River.

Slide 10 outlines how we will prioritize our investments to achieve the deliverables of our strategy.

Our strategy will deliver cost and capability differentiation to create a world-competitive, best of both footprint, but we are being flexible to ensure this strategy is executed.

Ultimately, acquiring 100% of Big River is our number one strategic priority because mini mills make money in the trough, and we need the ability to do the same.

Our Tubular EAF is also high priority.

We have financing completed to support the project, and the EBITDA benefits are largely derisked since we are in-sourcing the round substrate for seamless pipe production that we currently procure from a third party.

The Endless Casting and Rolling project at Mon Valley is the definition of best of both.

Here, we are combining our lowest-cost liquid steel at Mon Valley, achieved through our fully integrated mining and cokemaking with best-in-class mini mill technology not available today in the United States.

And of course, we can be flexible in stage gating this project, if needed, to manage cash flows appropriately while still meeting our commitments.

But make no mistake, this is a critical, strategic project, which will deliver both cost and capability differentiation.

This project is expected to deliver $275 million of run rate EBITDA annual benefits when complete.

We are implementing a series of projects at our Gary hot strip mill that will expand the line's competitive advantages, particularly in heavy gauge products.

This project is part of the asset revitalization program and is approximately 30% through the expected $500 million investment.

We have the ability to pace the remaining portion of these projects as well.

And we are evaluating the pace of the USSK Dynamo line investment due to the significant market challenges in Europe.

This remains a compelling investment to expand our capabilities in a strategic market.

As we have discussed many times, flexibility and optionality is a key component of our engineering, contract and project management strategies, especially for these growth projects.

Based on current market conditions, we currently expect 2020 capital spending to be approximately $950 million.

Big River is our number one priority, and we will finish the tubular EAF in the second half of 2020.

We are demonstrating our flexibility on our other projects to ensure we execute through the cycle.

I will turn it to Kevin Bradley now to give us a financing update.

Kevin?

Thanks, Dave.

Given it's my last call, I just want to take the opportunity to thank you, Dave, and the Board, for giving me the opportunity to serve this great company.

It's been a privilege for me to work with an incredible leadership team and a truly exceptional global finance team.

In the last couple of years, there's been tremendous change in the global landscape for steel.

But I've got to say that everything that I've seen and learned over the last couple of years, I couldn't be more excited about the bold strategy that this company has chosen and committed to.

I think it's an absolute game changer, and I'm proud to have played a small part in making that happen.

I have zero doubt that this leadership team will execute the heck out of this game-changing strategy.

Dave, I also want to echo your comments related to Christie.

I've had the opportunity to work closely with Christie, and what people on this call will come to see in the coming quarters is she is a true talent and an exceptional individual.

She's been quietly owning a lot of the -- owning and improving a lot of the plumbing that makes this place work, from IT and engineering, S&OP, commercial pricing, so many things, Christie, that you've been able to touch and improve.

I think this company is in great hands going forward, and I think it's just a matter of time before everybody on this call gets a chance to see you in action.

So congratulations.

Thank you, Kevin.

Okay.

So let's jump into Slide 11.

With the announcement of Big River, we've been able to begin financing our world-competitive, best of both strategy.

And as Dave referred to earlier, in the last few weeks, we've closed on approximately $2.6 billion of financing activity and added an incremental $1.1 billion of capital availability.

The $1.1 billion breaks down as follows: approximately $350 million in senior convertible notes; approximately $275 million in Environmental Revenue Bonds; and approximately $500 million from upsizing our U.S. ABL.

The $350 million of senior convertible notes had a 7-year maturity and a 5% coupon.

The Environmental Revenue Bonds closed on October 25.

They represent approximately $250 million of unsecured, 30-year new money at a coupon of 5.75%.

And last week, we closed on our $2 billion ABL facility.

We extended the term out to 5 years and increased availability by $500 million.

We were very pleased with the appetite and support we saw from our bank group.

As announced yesterday, we drew on this facility to fund the initial investment in Big River Steel.

Bottom line, we've made good progress in the last couple of weeks to raise a meaningful portion of the strategic funding needs of this company.

We will continue to evaluate additional financing opportunities as our cash requirements and market conditions evolve over the investment horizon.

So let's talk about financial results on Slide 12.

We closed out Q3 stronger than we expected, delivering $144 million in adjusted EBITDA.

This was above our initial expectation and at the top of the preliminary range we provided on October 10.

Our Flat-Rolled segment adjusted EBITDA of $167 million was lower than the second quarter primarily related to market price erosion.

We foreshadowed this on our Q2 earnings call as roughly 60% of our Flat-Rolled segment our shipments -- are directly impacted by short-term changes in market price.

We expect the similar dynamic to occur in the fourth quarter as the market declines have continued into October.

Additionally, we are anticipating a shipment decline in Q4.

Weakness across our European markets continue to erode our segment's financial performance.

This was compounded by seasonal weakness we typically see in Q3.

Commercial headwinds will persist in the fourth quarter but should be largely offset by lower raw material costs primarily iron ore contract pricing.

Energy costs should also be a tailwind in Europe versus the third quarter.

The tubular market continues to be difficult.

Commercial market dynamics drove more than 100% of the sequential segment EBITDA decline.

This commercial decline was partially offset by lower substrate costs.

We expect to narrow the loss in tubular for the fourth quarter as lower substrate costs should more than offset commercial headwinds.

With that, I'll turn it back to Dave.

Thank you, Kevin.

Let's turn to Slide 13.

We're in a difficult market environment right now.

This is not lost on anyone here.

But our current reality is proof that our world-competitive, best of both strategy is the right one.

We are focused on what we can control and are taking action.

For example, again, we raised approximately $1.1 billion of incremental capital in support of our strategy and have articulated that ultimately acquiring 100% of Big River is our number one strategic priority.

We will remain flexible to manage the pace of our other strategic investments.

We are focusing on what we can control, rescoping our asset revitalization investment and reducing associated CapEx by approximately $200 million to $250 million and reducing fixed costs by approximately $200 million over the next couple of years.

And we have already begun prioritizing cash towards the business we are becoming and remain value-focused over the long term.

Kevin, let's move to Q&A.

Thank you, Dave.

(Operator Instructions)

Operator, could you please queue the line for questions?

(Operator Instructions)

The first question comes from Martin Englert from Jefferies.

Congratulations on completing the Big River acquisitions and financing there.

Now that it's concluded, if Big River does pursue a greenfield project, can you talk to us a little bit about if U. S. Steel would be required to provide financing based on its JV share today?

Sure.

We have Rich Fruehauf here who is heavily involved in that strategy and the negotiations.

So Rich?

Yes.

Thank you, Dave.

So as Dave said, we're really excited to be getting this relationship off the ground.

We did close on the 49.9% acquisition yesterday, and we're really excited to be a member of the ownership team with Koch Minerals, with TPG Growth, with the Arkansas Teachers Retirement System and, of course, with Dave Stickler and his very talented team.

I know they're focused on completing Phase 2a, which is the second line getting to the 3.3 million tons.

And so that's going to be our focus going forward.

But to your question, we do have customary consent rights over certain material actions.

And so we're going to have to evaluate any of the projects that Big River may have on the table or bring to the investor group going forward.

So that's how we're going to approach it.

We're very much impressed with the entire Big River team.

So we're going to learn from them and work with them and make a much better company together.

Okay.

So it sounds like if something were to come to fruition on a greenfield project, you would have the ability to take a look at it, evaluate it at that time and make a decision whether you wanted to go along and provide the incremental capital or stay away from it, correct?

I think the way I'd say it, yes, we as an investor, will have the customary rights you'd expect any investor to have.

And we'll use those rights as we evaluate any of the projects that come along.

Okay.

I appreciate that detail.

And moving on also on Big River.

Regarding the call option to acquire the remaining stake, can you provide some framework on the agreed-upon formula to help us understand the potential capital outlay there in the future?

Yes.

So the way it works, and I'm not going to get into a lot of detail because some of it is still confidential.

But in fact, effectively, in the first couple of years of the 4-year period, the second 50.1% can be acquired based on a fixed formula.

As you get into years 3 and 4, that formula can move based on the business' performance against certain metrics.

It could be adjusted up or down.

Those metrics are tied to the business performance, the free cash flow, completion of Phase 2a and certain other performance metrics.

And so that's how it's going to be calculated.

The next question comes from David Gagliano from BMO Capital Markets.

I was wondering if we could focus in on the 2020 capital spending for a minute.

If you could just walk through the allocation of that $950 million between the major buckets, sustaining CapEx, Mon Valley, asset revitalization and Fairfield.

Sure.

This is David.

Before I get into the details on the 2020 capital spend, I want to make sure I touch on a few key points on this.

Everybody should know we strongly believe in this world-competitive, best of both strategy.

We're transforming this business, and the investments we have announced are required to position our company for the future.

The second part is you all agree with this strategy, the strategic logic, the feedback has been all positive, and we're committed to delivering on this strategy for our customers, our employees and stockholders.

We also know that delivering this strategy requires flexibility, and that's to the $950 million that you asked about.

Given today's market realities, we know that in order to deliver this strategy, we've got to be flexible.

And we're working hard to ensure that we build this optionality into our project management, our engineering, our procurement and so on.

And as I said earlier, we're focused on what we can control.

We're not going to predict what the market fundamentals in U.S. or Europe are going to be or how they're going to change, but we're going to be adaptable.

We're going to focus on executing, and we believe the $950 million of CapEx in 2020 is the appropriate investment at this point in time.

So that being said, here's some examples of our flexibility in action and how we're currently thinking about next year.

So if you think about the base capital spending, currently projecting the spend between $550 million to $600 million across our footprint, including the continued investment in the Gary hot strip mill.

Related to the electric arc furnace, this is a great project with attractive returns.

And recently, we completed the Environmental Revenue Bond offering that allows us to complete this project next year, and we expect to spend around $150 million in 2020 to complete this project.

And then the Endless Casting and Rolling at Mon Valley, this is an investment we continue to be extremely excited about.

As you know, this transforms our lowest-cost mill into our most capable mill because it -- that it is so important to our future.

Our engineering teams have been working hard to develop the 2020 budget that fits within our current spending profile without compromising the business case or our timeline.

So in 2020, we currently expect to spend less than the $200 million with an emphasis on permitting, site development and early phase construction and fabrication and things like that.

And then on the Dynamo line at USSK, this project delivers, as you know, state-of-the-art electrical steel for our customers in Europe.

And as you also know, we already have a partnership in place for some of the volume off this line.

But market conditions in Europe are challenging, and we're working with our customers to ensure we deliver this project when they need it.

And we have the opportunity to flex this project a bit and delay some of the spending without materially changing the timeline.

So we're looking at about $35 million or so next year, and are working closely with our customers in that region to meet their needs.

Okay.

That's helpful.

Very helpful.

Now just to follow-up on that.

When I look at this versus prior indications, it looks to me like -- so for example, Mon Valley, I think there was a $400 million number previously.

Now it's less than $200 million, if I'm not mistaken.

And then it doesn't look like there's anything or at least, the best I can tell from this side, allocated to asset revitalization, whereas I think, historically, as much as $600 million at one point, at least as of the second quarter.

I know that's come down a bit.

Can you just validate the numbers I just mentioned in terms of the changes?

I think (inaudible)

And also, what does this do to the timeline -- sorry, go ahead.

No.

You want -- second -- another question or you want me to answer the first one?

Well, just to finish the question.

Just validate those changes if those are accurate.

And then secondly, what does this do to the timeline of the incremental EBITDA target of $390 million by 2022, 2023?

Okay.

The first part of that, if you think about the asset revitalization program and effect it with the changes that we're making here, the big changes organizationally and with our desire to ultimately own 100% of Big River and get the best of both strategy, we're doing the pivot toward that strategy.

And so when you think about the base capital spending, as I mentioned, it's in the $550 million to $600 million range.

And you're right, the project icon we've said before is around $400 million so less than the $200 million.

And we're looking at the Dynamo line so that would be a drop from roughly $100 million or so.

EAF, I think, was about the same.

But on the asset revitalization portion, we obviously have an opportunity to do that pivot.

We hit all our targets on that in terms of the safety quality, delivery and cost targets.

And so we're actually pivoting to the future and focusing on the company that we want to become and doing that right now.

Yes.

And Dave, just to add to that.

If you think about revitalization, we previously announced the $200 million to $250 million reduction, the remaining spending on that program.

So we think about where we were through 2018, we were just shy of $600 million spent on asset revitalization.

And we suggested that we are looking at $300 million to $350 million in 2019, as part of our revitalization.

With the new budget, that would imply kind of a remaining revitalization spend of $375 million or so.

That is largely now directed towards the Gary hot strip mill.

We expect to spend about $100 million at the Gary hot strip mill next year.

So you're right.

The revitalization spend is obviously down, as we indicated.

And we're really aligning the remaining spend around the capability and cost differentiation that's required.

On Project -- or on the Endless Casting and Rolling line at the Mon Valley, $400 million was our initial estimate when we communicated the project previously.

But as Dave mentioned, and maybe I'll ask Christie to expand upon here in a moment, one of the things we're always looking for when we design growth projects is optionality.

So we work very hard through the engineering, the procurement and the project management process to make sure that we can be flexible.

So as Dave mentioned, if we spend just shy of $200 million this year on Endless Casting and Rolling, we do not believe we're compromising the timeline or the business case in any way.

So the EBITDA expectation remain intact, and the timeline, we don't expect to materially change as a result of the pacing of the investments.

Our goal is to get it done.

We know the value it creates for our customers and for the business, how important it is to our strategy.

So we're going to do what's needed to be flexible but ultimately, we will deliver the outcomes required.

Yes.

Kevin, I would just add, yes, we are looking at that project.

And the way engineering works on the stage gates, they really look to build flexibility in right upfront.

And so even though we're going to not spend as much in 2020, we don't expect the completion of the project to change.

And we also -- one other thing -- all of our projects, I mean we really try to build in flexibility and think about if we have to flex them as we're designing them.

Procurement also writes contracts where they try to build optionality and flexibility into those contracts.

And we also have really good relationships with our suppliers.

Our suppliers are very helpful working with us to get these projects done because we are always looking at the market and understanding what our cash looks like and flexing accordingly.

But -- so that's kind of the thought process behind the pacing of the projects.

The next question comes from Chris Terry from Deutsche Bank.

Yes.

Just to follow-up a little bit further on the CapEx angle for next year.

I think you said $550 million to $600 million for the portfolio, including the Gary hot strip mill of $100 million.

So that would imply around $450 million to $500 million of sustaining.

Just wondering if you could comment if this is the new normal for sustaining we can expect and whether this level is based on what you see as your core or key assets or your total assets that you currently have operating.

Yes.

Thanks, Chris.

This is Kevin.

So a few quarters ago, we did share a chart with you all about kind of the long-term sustaining capital requirements of the business.

That suggested about $550 million to $600 million.

The important thing to note on that chart is that's a through-cycle estimate.

And obviously, things will change each and every year.

But we are using that as a proxy for an average over a multiyear period.

So where we're coming in here for next year, initially at least, I don't think is anywhere inconsistent with that and speaks to the flexibility and the responsiveness we have to the marketplace to deploy capital within our business in the most efficient manner possible.

I think we're clearly focused on making sure that the capital we are deploying across the enterprise aligns with the strategy, dedicated towards asset that have a cost and capability advantage or reduction in revitalization spend, and our focus on the Gary hot strip mill is a great proof of that.

So that is an enterprise number, the number we talked about for sustaining CapEx and we think it's consistent with what we've said and where we'll find yourselves in the future as our strategy progresses.

Okay.

Just wondered, now that you've closed on Big River officially on the transaction, if you could comment a little bit more on the actual performance of the business, maybe on the profitability, the tonnage.

Just anything you could provide to give some color.

Yes.

Unfortunately, the closing of the transaction was really not the limiting factor in sharing financial performance.

So we're not able to give a lot of color -- additional color.

But I'll just emphasize, I think, what Dave and Rich said.

I mean this is a great team that's running state-of-the-art assets.

Their financial performance has been well diligenced by our team, by our advisers.

And I think the typical mini mill profitability that you see through this cycle, these are newer assets, a great team.

We have no reason to believe that this won't generate the same types of returns.

But maybe I'll ask Rich to add a little bit more color.

Yes.

The only other thing I'd add, Kevin, to what you said is, I mean you have to be really impressed with how fast and quickly and without a hitch that team brought the original line online, the original 1.65 million tons online.

They did it in record time, without a hitch.

I mean that's just really impressive.

And so when we look at what they're working on now in Phase 2a, getting that second line up, getting to that 3.3 million, we have high confidence they're going to hit their targets on that.

And then when you think about 3.3 million tons of steel made by roughly 600 people, the operating leverage that they're going to achieve is going to be really impressive.

So I think that's about what we can say right now on the performance of the business.

They are impressive.

Yes -- and we all have to remember, they're a startup business.

They've only been at this a short time, and that's why we're incredibly excited about this marriage we're ultimately going to have with them and get the 100% of the business because together, we will be able to leverage our commercial capabilities and our R&D and other attributes to work with them, learn from them, work together to create an incredible company.

(Operator Instructions) .

The next question comes from Timna Tanners from Bank of America Merrill Lynch.

So my first question was just to review, if we could, Kevin's comments on the fourth quarter.

So if I understood, just to go through, so conditions can worsen at least on the pricing and volume side for U.S. Flat-Rolled.

Conditions may be bottoming, it sounds like, for Europe, and then conditions may be improving sequentially in the fourth quarter on Tubular, given lower substrate costs.

Is that a fair summary?

Yes.

Timna, this is Kevin.

I -- we have made comments that we feel that we've seen bottom in North America Flat-Rolled.

But that same dynamic that we saw in Q3 with our adjustable tons, our spot, our monthlies, our quarterlies, given what's happened over the last couple of months on price, that is going to flow in and impact the fourth quarter negatively on a go-forward basis, though we're more optimistic we have the pricing environment.

Unfortunately, we can't change what's happened on the adjustable tons.

And Timna, it does feel like we're seeing a bottom here but obviously, the fourth quarter is not going to be a good quarter.

But as we move forward into next year, we should see that prices could come back.

But we're not going to really be forecasting what's going to be happening with these things.

We're going to adapt.

We're going to be flexible, and we'll make sure the spending that we have for the future of this company, making it healthy is the right amount of spend at the right time.

If business conditions worsen, we can certainly adapt to that.

And if they get better, we're going to adapt to that as well.

We're committed to this best -of both strategy.

And on the European and Tubular side, I think you summed it up correctly.

Narrowing the loss in Tubular are largely on better substrate costs in.

And then in Europe, also difficult market continues, but we do expect to see a little bit more tailwind from lower material costs.

Okay.

And just to follow up on that question.

I wanted to make sure I understood it.

If you have any further comments on how you're seeing the annual contracts, and if you could just remind us your exposure there.

But I really wanted to ask about the CapEx question earlier but in a different way.

I know you have a good relationship with your unions, but given that you're -- and you've said that you're prioritizing some of the electric arc furnaces, and of course, Big River is nonunion and deemphasizing and spending less on some of the union operations, can you characterize the dialogue you have with the union regarding that switch?

Well, we have an excellent relationship with our union.

Our union leadership, we work with them frequently, especially on areas related to safety, areas related to trade, and I think they understand the market dynamics very well.

And so we're going to continue to work with them and with our employees to position this company for a better future.

We have not had detailed discussions about Big River Steel.

We've been involved in a lot of discussions about the electric arc furnace at Fairfield.

They've been very helpful in terms of getting that up and running.

But I think it's premature to be thinking about what the impact will or won't be related to the ultimate full acquisition of Big River at this stage.

Yes.

And Timna, just to address the first question you had related to annual contracts.

We're in the middle of those discussions right now.

We respect that process and relationships with our customers.

We'll update you at the appropriate time, but no additional color to share with you right now.

The next question comes from the line of Karl Blunden from Goldman Sachs.

Just wanted to see if I can get a bit more clarity on your cash and financing needs.

I think it was in -- it was in the contract, I think last year, we had ascribed $750 million as the cash balance that was comfortable and maybe ascribe as $500 million this year as a minimum level.

So I'm wondering, does that change with a more focused portfolio?

And then I guess the second one is we haven't seen an explicit update of the financing slides that you put out with the Big River acquisition in 2Q.

Now some things have changed, right?

Steel prices have gone down, but your CapEx needs and timing has also come down.

So interested in that $700 million-plus number of financing needs.

I know you've raised $300 million convertibles now.

Should we think of the rest as $400 million-plus?

Is that what the slide would look like today?

Okay.

So Karl, thanks for the question.

Yes.

The $500 million is where we feel comfortable, today and going forward.

Through this investment period, you can kind of see us more or less solving for between our ABL and cash from operations and CapEx, about a $500 million cash balance.

That's where we feel comfortable.

And then we also said we're going to be maintaining $1 billion in availability on our new ABL.

And so we're still kind of committed to that level of liquidity.

I would say things have changed.

Our CapEx expectations right now, given market conditions as we've just gone through with Dave, that's a little bit different.

But as I said in my opening remarks, we're going to continue to watch the cash flow of the business and the capital markets, and their level of receptivity to us, and be opportunistic to go in when and where we can.

So we've got some time here.

We're going to be patient, and we're going to look for good opportunities to fund the strategy.

I'm just happy to be able to say, after numerous calls, where we're being kind of on the sidelines due to the Big River deal.

But now we've been able to get out there and execute.

I think the Treasury team under Arne Jahn's leadership has done a nice job working with our partners to get a lot of capital in a pretty efficient manner over the last couple of weeks.

That's helpful.

It does look like you have some -- built in some flexibility now, especially on that CapEx flexibility that you've discussed.

This is a smaller item, just on cash.

You had some restructuring charges in the quarter, and that was added back to EBITDA.

Do you have a sense of how that might trend going forward, both from the cost perspective and then from the cash outlay perspective?

Yes.

The restructuring charges were largely related to actions we took within a couple of our business units at USSK, East Chicago Tin, to be naming a few.

So we expect those to become isolated in the third quarter, and we'll keep you updated if that changes, but those will be largely isolated in the third quarter.

The next caller is Nick Jarmoszuk from Stifel.

With the ongoing business transformation, I was hoping you'd talk about any steel-making portfolio review and whether you view that as being a proactive exercise or a more reactionary process to adverse market conditions.

I'm sorry.

I didn't understand it.

Could you say it again?

Start over.

You got the business transformation.

You're bringing in Big River Steel, you're investing in the EAF in Mon Valley.

Obviously, trying to move down on the lower fixed cost in the business.

Some assets are not being invested in.

Obviously, higher costs, lower-margin operations.

How do you view this overall steel-making portfolio?

And is this -- the steelmaking operations, are they going to be adjusted in a proactive manner to market?

Or is the steel-making portfolio going to be adjusted when steel pricing moves against you when they start burning cash?

Well, I'd just say I'm still not sure.

I'm going to turn it to Kevin Bradley here in a minute.

Just to be clear here.

We are moving in the direction of this best of both strategy with a focus on Big River, on Mon Valley and Gary with the hot strip mill.

So we're going to have the mini mill technology with Big River.

We're going to go Endless Casting and Rolling with Mon Valley, and we get this other great capability at Gary.

That's where the primary focus is going to be.

We're moving in the direction of that strategy, and we're focused on moving down the cost curve and elevating capabilities at our other sites as well.

But that, for right now, with a heavy emphasis on our strategy, those are the top priorities.

Yes.

I think part of your question, are we being reactive or proactive?

I think it's a little bit of both, right?

I think it -- more is responsive.

We are like toggling down on our blast furnaces that we did over the summer.

Those are things that were just reflecting the reality of demand that we see in our book of business.

Those are short-term, responsive actions that we take.

In terms of long-term investments, right, in our footprint, in our capabilities, we look at that more on a through-cycle basis.

So those are proactive.

We're looking at through-cycle economics.

And as Dave has pointed out several times, with a real priority based on differentiated cost and capability across our footprint.

So it's a little bit of both.

Yes.

And just to add to what Kevin said.

I mean the strategy we are now able to talk to you about publicly was largely developed last summer, almost over a year ago.

And we've been executing on it, kind of purposefully and stage-by-stage.

So you heard us resumed at Fairfield EAF in the winter.

We launched Project Icon, which is the Endless Casting and Rolling in May.

And obviously, we are in negotiations for Big River.

We couldn't say anything about that.

But once we got a deal done, we announced that at the beginning of October.

So we've been purposefully executing on that strategy.

We have to make tactical adjustments as we go in response to market conditions.

But what Dave articulated, those 3 key facilities has been the goal, has been the strategy, and we've been rolling it out methodically over the past year.

Yes.

So the strategy should be clear to everybody, just listening on this call, best of both, world-competitive.

And then we deal with the market conditions.

We respond.

I would say we don't react because we have resilience plans, trough plans in place and also peak-to-trough and everything in between.

I'd say, more robust than we've ever had.

And so we're going to be responsive to what comes our way, but we're having a purposeful, deliberate walk to completion of this world-competitive, best of both strategy.

Does that answer your question?

Okay.

The only thing I would add to that is, we, every single month, look at the demand signal.

We routinely review where the market is.

I mean that's just normal operation.

The other we're talking about is very proactive march towards our strategy.

The next question comes from John Tumazos from John Tumazos Very Independent Research.

Your disclosures are very clear about volume, price, et cetera.

Could you review how mix changed in each of the 3 businesses, particularly Europe?

It looks like the mix got richer by $30, $35 a ton as commercial fell but the realized price rose $4.

And it looks like a big chunk of the 239,000 fewer tons were not profitable tons.

I'm very pleased that the performance wasn't worse.

It looks like you dropped hot-rolled tons that weren't doing much for you.

I think that's a fair assessment.

I think the team -- as Christie mentioned, monitoring the order book.

One of the things we always monitor, the economics of the order book as well.

And we don't hesitate to make changes to our commercial strategy and how we sell to customers and make sure we optimize the mix profile.

So when you look at Europe, I think you're absolutely right that the mix did improve, even though selling prices were down.

In North America flat-rolled, because we had blast furnaces idled when we're selective in the tons that we took, and the mix profile of the order book improved.

In Tubular, really, if you look at the mix of kind of seamless ERW, it did weaken in the third quarter relative to the second quarter.

So that drove some of the mix change in that segment.

Did the workforce fall by at least 100 in each segment?

John, I'm not sure if I have that information readily available to share with you.

But as part of any of -- as evidenced by restructuring charges and anytime we take footprint actions, there are changes to employment levels.

But I don't have specifics to share with you at this time.

Our next question comes from the line of Matt Fields from Bank of America Merrill Lynch.

Appreciate your flexibility taking down CapEx for responding to market conditions.

But at the same time, in a quarter where you burned over $300 million in free cash flow, you bought back 18 million of shares.

I know it's not a big number but what's the rationale for share buybacks at this time?

So this is Kevin.

So we had a program in place in the 10b.

Obviously, we stepped in as we got really closed on the Big River deal, and we terminated that 10b.

But we had a program going, and we let it run.

So will there be no more share buybacks going forward for the foreseeable future?

We've discontinued any purchasing right now under that approval.

This is going to be part of our long-term strategy, we need to make sure we're focused on the best of both in getting this done.

But again, this is part of the flexibility.

We intend to have this part of our strategy in moving forward.

But we need to understand what the market dynamics are.

And again, our first priority is to make sure that we complete the acquisition of Big River.

Okay.

Great.

And then next, just kind of big-picture balance sheet.

You're at $2.6 billion of debt now.

You incurred about $1.1 billion in the fourth quarter, that's $3.7 billion.

You're committing to pay another $700 million, $800 million, $900 million to buy the second 50%.

That's like $4.5 billion.

And then you're going to consolidate Big River's debt on your balance sheet.

So sort of solving for kind of the EBITDA and cash flow generation that makes it all work, what's your base case assumption on kind of the steel market volumes and pricing that kind of makes it all work?

Yes.

So we -- as I've said in the past, we tend to evaluate these kind of investments, and our looking-forward strategy is we're considering through-cycle average deal environment.

As Dave pointed out, we're always doing sensitivities around trough-and-peak and everything in between as we evaluate it.

I'm not going to speculate on expectations around EBITDA generation over the investment period.

But I think the main point we've been trying to make today is flexibility, right?

We're going to be acutely aware of the market dynamics and the realities and what we are permitted to do.

We're committed to this strategy.

We're going to execute it fully.

But that will be with a keen eye on the current markets, our cash flow capabilities and the realities of the markets we serve.

We're excited about it.

We're going to get it right.

We're not going to take any shortcuts.

And it will respect the reality of the markets we're in from a balance sheet and leverage perspective.

I will just say the only thing I think I would add is if you look at the funds that have been raised to advance our strategic projects, you have to take into consideration also where the value is coming from within each of the projects.

The Tubular is a great example.

It took on -- we're successful in our completion of Environmental Revenue Bonds, but we look at the value contribution from -- and it's largely derisked.

It's not market-driven at all.

It's the insourcing of rounds and an absolute cost reduction.

So certainly, as Kevin mentioned, we look at everything through the cycle, but we're also looking to diversify the benefit streams, and none of these projects are 100% dependent on a certain commercial outcome.

Yes.

I think the way everybody should think about this, you know what the average steel prices are through the cycle.

You also know how ugly steel prices have gotten even in the recent past, what the peaks can be.

So we actually do this resilience planning from peak-to-trough and anywhere in between.

Obviously, we're at the low end of that.

So we're doing a lot of resilience of planning.

We have black hat teams.

We do outside-in looks, and we beat up the numbers.

And there's nothing that tells us that we can't get this strategy done through a cycle.

We're investing here in what seems to be a trough, and we're able to get this strategy done.

And we've looked at it in a lot of different ways, and we couldn't be more excited about the future.

The next question comes from Charles Bradford from Bradford Research.

Does your current labor contract continue the neutrality clause that was in the previous contracts?

Does our current labor contract have the neutrality clause?

Could you explain that a little bit more, what you mean by that?

In your labor contract in the past, there was a section that required you to allow the union access on a neutral basis to employees at anything you work toward to buy.

Well, let me just say this.

The way we approach these types of situations, if our employees want to have union representation, they're certainly welcome to have union representation.

But it's certainly not something that is absolutely essential to have.

We allow them to be represented, which is what the law tells us to do.

So clearly, it's something that will be -- as we get further in the process, we'll be talking about and working through.

Okay.

The current political situation raises a lot of issues about fracking.

Can you tell us how much of your tubular products are related to fracking as far as current shipping levels and so on?

Yes.

I don't have that information readily available for you, but happy to provide that as a follow-up.

There are no further questions at this time.

I will now turn the callback to you.

Please continue with your presentation or closing remarks.

Thank you very much.

Dave, any closing remarks for today?

Yes.

Thanks, everyone, for your interest in U. S. Steel.

But before signing off, I want to reinforce a few key messages.

We are executing on our strategy purposefully, thoughtfully with a focus on cash and long-term stockholder value.

Today's market conditions are just another proof point why we are accelerating change to the company we are becoming, and that's just what we are doing.

And finally, to our employees, we have undergone unprecedented change in a short period of time.

I know change is hard, and there are a lot of uncertainties.

While we continue to have to make difficult decisions about our future, I am very, very thankful for all you've accomplished.

Now let's get back to work safely.

That does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.