Q3 2019 Earnings Call
Good morning, everyone and welcome to the United States Steel corporations third quarter 2019 earnings conference call and the webcast. As a reminder, today's call is being recorded I'll now hand, the call over to Kevin Louis 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, we'll be U.S. steel President and CEO day Bert.
<unk> Vice President CFO , Kevin Bradley.
Well its christy briefs to will transition to the CFO role beginning on November 4th.
Also on today's call is senior Vice President strategic planning, a corporate development rich for off.
After the close of business yesterday, we posted earnings release earnings presentation under the Investor section of our website.
On today's call will walk through via webcast select slides in our third quarter results.
Awake and slides 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.
Describing 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 out of today and we undertake no duty to update them as actual events unfold.
I'd now like to turn the conference call over to you as steel President CEO day Barrett.
It will begin today's presentation on slide four.
Thank you Kevin.
Good morning, everyone and thank you for your interest in Us steel.
We've been making big changes over the past few months positioning us 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.
Become the world competitive best in both.
Best of the integrated model in the best of the mini Mill models, our investment in Big River helps us to get to where we were going faster.
Still significant market headwinds remain across all three 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 three world class assets.
This includes re scoping 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.
Number one strategic priority.
Well, let's be clear, while our investment in Big River steel is our number one strategic priority, we will be flexible with our portfolio of strategic investment spending.
And we intend to get all 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 pure our today's highlights.
We reported third quarter to quarter adjusted EBITDA of $144 million. This was ahead of our guidance issued on September 18th 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 transactions.
Our flat rolled facilities operated well in the face of the 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 two months.
Lets signs of life our emerging.
The end of the UAE W. 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 five.
Safety is a core value in a pillar of our steel principles and we are delivering on these principles are days away from work metric showcases our continued improvement in safety and we are a safety leader in our industry.
You a 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 six.
On October eight we announced Kevin Bradley will transition out of the CFO role Kevin has been a critical part in setting us 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 me.
Take our investment in Big River steel at reality.
Since the Big River announcement, Kevin has been directly engage to ensure strong execution across our financing activities. Thank you Kevin for your contributions to create a stronger and more successful future for us steel.
Kevin has agreed to stay with us as executive Vice President and advisor to me through the end of the year.
Starting next week, Christy breeds will become CFO and it couldn't be more well deserved Christy is another big contributor to setting the company on today's strategic path.
Her work to establish us steel as a steel leader in cash conversion cycle and our leadership in our asset revitalization program have provided the foundation for us steels future.
I look forward you meeting her and finding out for yourself, what makes Christy. 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 seven.
We are getting into 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 inefficient 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 eight illustrates our world competitive best in 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 his 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.
Just two years, we are 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 moved down the cost curve when 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 its low 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 us and Mexico and broadens our offerings in existing end markets in 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 Eas 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 steelmaking technology, our investment in Big Rivers 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.
Portfolio, most 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 as essentially still in startup mode as they execute on phase two a of the expansion to double capacity and drive significant efficiencies.
Slide nine showcases this strategy by bringing together the best of both integrated in 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 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 outlined 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 you flexible to ensure this strategy is executed.
Ultimately acquiring 100% of Big River is our number one strategic priority because many mills make money in the trough and we need the ability to do the same.
Our tubular yes.
He is also high priority.
We have financing completed to support the project and the EBITDA benefits are largely de risk since we are insourcing the round substrates for seamless pipe production that we currently procure from a third party.
The analysts casting enrolling project at Mon Valley is the definition of best in both.
Here, we are combining our lowest cost liquids deal 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.
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 that are very hot strip mill that will expand the lines 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 dollar investment.
We have the ability to pace the remaining portion of these projects as well.
And we are evaluating the pace of the USS K Dynamo line investment due to this significant market challenges in Europe .
This remains a compelling investment to expand our capabilities in a strategic market.
And so 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 he asked in the second half of 2020, we're 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 given as my last call I, just want to take the opportunity to thank you, Dave and work for giving me the opportunity to serve this great company no. It's been a privilege for me to work with an incredible leadership team in a truly exceptional global finance team.
Last couple of years, there's been tremendous change in the global landscape for steel, but I'm going 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.
Committed team.
It gives us an absolute game changer I'm proud that played a small part in making that happen.
No doubt that this leadership team will execute the heck out of this game changing strategy. You have also want to echo your comments related to Christie.
The opportunity to work closely with Christie and.
What what people on this call will come to see in coming quarters is she is a true talent and an exceptional individual she's been quietly owning a lot of the owning an improving a lot of the plumbing that makes this place work from IP and engineering SLP.
Commercial pricing so many things Chris is that you've been able to touch and improve.
I think this company is in great hands going forward I think it's just a matter of time before everybody on this call.
Gets a chance to see you an action. So congratulations thank you Kevin.
Okay, so lets jump into.
Let's jump into slide 11.
And we'll deal with the announcement a big River, we've been able to begin financing our world competitive best of both strategy as Dave referred to earlier in the last two weeks. We've closed at approximately 2.6 billion a financing activity and added an incremental 1.1 billion of capital availability. The 1.1 billion breaks down as follows.
Definitely 350 million in senior convertible notes, approximately 275 million and environmental revenue bonds and approximately 500 million from upsizing, our us ABS deal.
350 million of senior convertible notes at a seven year maturity in a 5% coupon.
Our metal revenue bonds closed on October 20, Fiveth. They represent approximately 250 million of unsecured 30 year, new money at a coupon of five in three quarters.
And last week, we closed on our $2 billion ABL facility, we extended the term out to five years 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.
Closed out Q3 stronger than we expected delivering 144 million in adjusted EBITDA. This was above our initial expectation at the top of the preliminary range. We provided on October 10.
Our flat rolled segment adjusted EBITDA of 160, 667 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.
Is our shipments are directly impacted by short term changes in market price.
We expect a similar dynamic to occur in fourth quarter as the market declines have continued into October .
Additionally, we are anticipated anticipating a shipment decline Q4.
Weakness across our European markets continue to erode our segments 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 date.
Thank you, Kevin, let let's turn to slide 13.
We are in a difficult market environment right. Now this is not lost on any one here, but our current really reality is proof that our world competitive best of both strategy is the right when we.
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% a big River is our number one strategic priority, we will remain flexible to manage the pace of or other strategic investments.
We are focusing on what we can control re scoping, 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 lets move to Q anyway. Thank you, Dave we ask that you. Each please limit yourself to one question and a follow up so everyone has the opportunity to ask a question.
Operator can you please queue the line for questions.
Thank you if you would like to register question. Please press Star one Falabella for your telephone you will hear three Tom Tom today, I will share request.
Question has been answered any with Mike withdraw your registration. Please press the one followed by the three.
One moment for the first question.
The first question comes from Martin.
From Jefferies. Please go ahead.
Hi, good morning, everyone.
Good morning.
Congratulations on completing the big river acquisitions and financing there.
Thank you very much.
Now that its concluded Big River does pursue a greenfield project can you talk to us a little bit about after us 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 negotiation so rich.
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 Coke minerals with TPG growth with the Arkansas teachers retirement system and of course with Dave's declared as very.
Talented team I know, they're focused on completing phase two which is the the second line getting to the 3.3 million tons and so that's 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 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 Tim teams. So we're going to learn from them and work with them and make up 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 evaluated that at that time and make a decision whether you ought to go along and provide the incremental capital or stay away from it correct.
I think the way I'd say that yes, we as an investor will have the customary right you'd expect any investor to have and will use those rights as we evaluate any that projects that come along.
Okay. Thanks, 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.
Creative on 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 so confidential, but effectively in the first couple of years of the four year period.
The second 50.1%.
Can be acquired based on a fixed formula as you get into years, three and four that formula can can move based on.
The businesses performance against certain metrics can be adjusted up or down those metrics are tied to the business performance the free cash flow.
Please turn to phase two a and certain other performance metrics and so thats, how its going to be calculated.
The next question comes from David Gagliano from BMO capital markets. Please go ahead.
Hi, Thanks for taking my questions I was wondering if you 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 Dave and 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.
And the investments we have announced.
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 employee employees and stockholders. We also know that delivering the strategy requires to cut flexibility.
And thats to the 950 million that 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 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 us 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 and time so that.
That being said here's some examples of our flexibility in action in how we're currently thinking about next year. So if you think about the base capital spending.
Currently projecting to 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 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 in 2020 to complete this project.
And then the analyst casting enrolling 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 is that is so important to our future. Our engineering teams have been working hard to do.
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 within with an emphasis on permitting site developing mint and.
Early phase construction and fabrication and things like that and then on the Dynamo line at USS K. This project delivers as you know state of the our to electrical steel for our customers in Europe and as you also know we already have partnership in place for some of the volume off this line, but but.
Missions in Europe are challenging and we're working with our customers to ensure we deliver this project when they needed 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 our customers in that region to meet their needs.
Okay. That's helpful. Very helpful. Thank you now just to follow up on that.
Look at this versus prior indications it looks to me like so so for example, Mon Valley.
I think there was a 400 million dollar number previously announced less than 200 million, if I'm not mistaken and then.
Doesn't look like there is anything or at least.
I can tell from the side allocated to asset revitalization.
Whereas I think historically.
Much of 600 million at one point, we sort of the SEC as are 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 and also what they could add to the timeline saga.
You want to second another question or 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 due to the timeline of the incremental EBITDA target of 390 million by 2020 623.
Okay. The first part of that.
If you think about the asset revitalization program it affected with.
With.
The changes that where we're making here the big changes organizationally and with our desire to ultimately owned 100% of Big River and get the best in 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 to the project icon, we'd said before is around 400, so less than.
The 200, and we're looking at the Dynamo line, so that would be a drop from roughly a 100 million or so the staff I think it 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 went to become and doing that right now, yes, and Dave just add to that.
If you think about revitalization, we previously announced a 200 250 million dollar reduction the remaining spending on that program. We think about where we were through 2018. We were just shy of $600 million spent on asset revitalization and we suggested that we're looking at three to 350 in 2019 as part of Revitalise.
In addition.
With the new budget that would imply kind of 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, if the Gary Hot strip mill next year. So.
Youre right.
The revitalization spend is obviously down as we indicated.
Well really aligning the remaining spend around the capability and cost differentiation.
Thats required on project are on the enlist causing enrolling line at at the Mon Valley.
400 million was our initial estimate when we when we communicated the project a previously but as Dave mentioned, maybe I'll ask courtesy to expand upon here in a moment one other things we're always looking for when redesign growth projects is optionality. So we worked very hard through the engineering procurement.
In the project management process to make sure that we can be flexible.
So as Dave mentioned.
We spend just shy of 200 million.
This year on on endless casting enrolling we do not believe were compromising the timeline or the business case in anyway.
So the EBITDA expectations remain intact.
And the timeline, we don't expect to materially change as a result of the pacing of the investments are going to get it done we know the value creates for our customers.
And for the business how important is to our strategy. So we're going to do what needed to be flexible, but ultimately we will deliver the the outcomes required yeah, Hey, Kevin I would just said, yes, we are looking at that project and the way.
Engineering works on the stage gates, they really look to build flexibility and Brian upfront and so even though we're going to not spend as much in 2020, we don't expect the.
The completion of the project to change.
And we also one other thing all of our projects I mean, we really try to build on flexibility and think about if we have to flex them as we're designing them procurement also rights contracts, where they try to build optionality and flexibility under those contracts and we also have really good relationships with our suppliers our supply.
There's a very helpful working with us to get these projects done because we're always looking at the market and understanding what our cash looks like.
Flexing accordingly.
So that's kind of the thought process behind the pacing at the projects.
The next question comes from Chris Terry from Deutsche Bank. Please go ahead.
Good morning, everyone just to follow up a little bit further on the Capex angle for next year.
Thank you said thoughts is due to 600 for the portfolio, including the Gary Hot strip mill of 100, so that would imply around full 50 to 500 of sustaining just wondering if you could comment. If this is the new normal for sustaining we can we can expect and whether this level is based on what usage coral key assets or.
Or your total assets that you currently have operating thanks.
Yes. Thanks, Chris. This is this is Kevin so a few quarters ago, we did share a chart with with you all about the kind of the long term sustaining capital requirements of the business.
Suggested about 550 to 600 million the important thing to note on that charges that that's a through cycle estimate and obviously things will change each and every year.
But we are using 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 with that and speaks to the flexibility and the responsiveness, we have to the marketplace to deploy capital within our business in the most 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 assets that have a cost and capability advantage our reduction revitalization spends in our focus on the Gary Hot strip mill as a great proof.
Great proof of that so.
You know that as an enterprise number the number we talked about for sustaining Capex and we think it's consistent with what we've said and where would we will find ourselves in the future as our strategy progress.
Okay. Thanks, Thanks for the color there just wanted now that you've closed on on Big River officially on the on the transaction. If you could comment a little bit more on the actual performance of the business maybe on the on the profitability the tonnage to 17 could provide to give some color. Thanks.
Yes on forged unfortunately, the closing of the transaction was really not the limiting factor and sharing financial performance or were not able to give a lot of color additional color.
I'll just emphasize I think what Dave and Rich said I mean this is a great team this running state of the yard assets.
Their financial performance has been well diligenced by our team buyer advisors.
And I think the the typical mini mill profitability that you see through that through the cycle. These are newer assets a great team. We have no reason to believe that this won't generate those those save types of returns, but maybe I'll ask stretched out 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.
In quickly and without a hitch that team brought the original line on on online. The original 1.65 million tons online. They did it in record time without a hitch I mean, thats is really impressive and so when we look at what Theyre working on now in phase two a 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 as theyre going to achieve its going to be really impressive. So I think that's about what we can say right now on on the performance of the business.
They are impressive.
I'll have to all remember there were a startup business they've only been at this a short time and that's why we're incredibly excited about this marriage were ultimately going to have with them in and get to 100% of the business because together, we will be able to leverage our commercial capabilities and our and R&D and other attributes to work with them learn from.
I'm them work together to create an incredible company.
As a reminder to cure for your question. Please press Star one followed by the for the next question comes from containers from Bank of America Merrill Lynch. Please go ahead.
Hey, good morning. So my first question I was just care review, we could kevins comments on the fourth quarter. So if I understood just.
Go through.
So conditions can work at least on that pricing and volume side for us lateral.
Conditions, maybe bottoming it sounds like for Europe , and then conditions, maybe improving sequentially into the fourth quarter.
On tubular given lower substrate costs that is that a fair summary.
Yes, and this is Kevin Knight.
We have made comments that we feel that we've seen bottom north American flat roll, but that same dynamic that we still on Q3 with our adjustable tons.
Our spot or monthly or quarterly given what's happened over the last couple of months on price that is going to flow and impact the fourth quarter negatively.
On a go forward basis, though we're more optimistic about the price 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 it really before.
Casting what's going to be happened with these things were going to adapt we're going to be flexible and make sure that this spending that we have for the future. This company, making it healthy as of the right amount to spend at the right time, if if if business conditions worsen, we will certainly adapt to that and if they get better we're going to we're going to adapt to that as well we're committed.
To this best of both strategy.
Okay. So European in tubular side, I think you summed it up correctly narrowing the loss in tubular 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. Thanks, and then just to follow up on that question I wanted to make sure I understand it. If you have any further comments on how you're seeing there and your contacts and could remind us your exposure there, but I really wanted to ask about that Capex and question earlier, but in a different way.
They have a good relationship with your unions, but given that you're you've said that you're prioritizing. Some these electric arc furnaces and of course big movers non union.
And the deemphasizing in spending less on some of the Union operations. How can you characterize the dialogue you have with the union regarding that switch. Thanks.
Well, we have an excellent relationship with our.
Our Union our Union leadership we.
Work with them frequently, especially on areas related to safety areas related to trade and and I think they understand the market dynamics is 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.
A 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 it's premature to be thinking about what the impact will or won't be related to the ultimate full acquisition of of Big River.
At this stage and today just to address the first question you had.
Related to annual contracts, where in the middle of those discussions right now we respect that crosses process on relationships with our with our customers.
Well update you at the appropriate time to no additional color to share with the right now.
The next question comes from the line of Karl Blunden from Goldman Goldman Sachs. Please go ahead.
Hi, Good morning, guys. Thanks for the time.
Just wanted to see if I get a bit more clarity on your cash and financing needs.
I think it was in his contact I think last year were described 750 million of the cash balance that was comfortable and may have been described as 500 million. This year as a minimum level. So im wondering does that change at the 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 that began.
And then into Q.
Something's changed right steel prices have gone down, but our capex needs.
And timing has also come down so interested in that 700 million plus number of financing needs.
Raised 300 million convertibles now should we think of the rest is 400 million plus is that what the slide would look like today.
Okay. So Karl thanks for the question.
Yeah. The 500 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 NPL and cash from operations and Capex about a 500 million dollar cash balance, that's where we feel comfortable.
And then we also said we're going to be maintaining a billion dollars in availability on our on our new NPL 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 the business.
And the capital markets and there you know the level of receptivity to to us.
And be opportunistic to go in.
When and where we can't so.
We've got some time here, we're going to be patient and we're going to look for good opportunities to fund strategy Im just happy to be able to say after a new numerous calls where would be kind of on the sidelines due to the big River deal that now we've been able to get out there and execute I think the the treasury team under already John's leadership has been a nice.
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 on.
This is a smaller item just on cash at some restructuring charges in the quarter and.
Yes that was added back to EBITDA give a sense of how that might trend going forward.
Yes, 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 USS K near Chicago tend to be naming a few so we expect those isolated in third quarter.
And we'll keep you updated if that changes, but those fees largely isolated the third quarter.
Great. Thanks, Kevin.
Okay.
The next.
The next caller is Nick Chairman.
Most of it kind of Stifel. Please go ahead.
Hi, good morning.
With the ongoing business transformation I was hoping and talk about any steelmaking portfolio review and whether you view that as being a proactive exercise or a more reactionary process to adverse market conditions. Thanks.
I'm, sorry, I didnt understand that say it could you say it again start over.
You got the business transformation and bringing in Big River steel you're investing in that.
And Mon Valley.
Obviously trying to move down on the.
Lower fixed costs in the business.
Some assets are not being invested in.
Obviously higher costs lower margin operations.
How do you view this overall steelmaking portfolio and is this the steelmaking operations are they going to be adjusted in a proactive manner to market.
Or is the steelmaking portfolio going to be adjusted when steel pricing moves against you and they start burning cash.
Just to.
Still not sure on that turn it to Kevin Bradley here in a minute isn't just to be clear here. We are moving in the direction of this best in both strategy with the 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 analyst casting Rolling with Mountain 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.
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. Yet you part of your question or being reactive or proactive I think it's a little bit of both rate and I think it or more as responsive we are like toggling down on our blast furnaces.
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 are in our footprint in our capabilities. We look at that we're on a through cycle basis. So those are proactive we're looking at Bruce.
Cycle economics, and as David pointed out several times, where the real priority based on differentiated cost and capability across our footprint. So it's a little bit of both yen to add to what Kevin said I mean this strategy that we are now able to talk to you about publicly was largely develop 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, often in the winter, we launched project icon, which is the endless casting rolling in May and obviously, we're in negotiations for Big River, we can say anything about that but once we got a deal done we announced that at the beginning of October so.
We have been purposely executing on that strategy, we have to make tactical adjustments as we go in response to market conditions by with Dave articulated. The three 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. This listen in on this call.
All best of both World competitive and then we deal with a market conditions, we respond I would say, we don't react because we have Brazilians plans you know trough plans in place and also peak to trough and everything in between I'd say more robust than we've ever had them. 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 Yeah.
The answer your question.
Okay.
I would add that is we every single month look at the demand signal, we routinely review where the market is I mean, thats just normal operation. The other we're talking about as a very proactive march towards our strategy.
Your next question comes from John can assess from Johnson also is very independent research. Please go ahead.
Thank you very much.
Your disclosures are very clear about volume price et cetera.
Could you review how mix change to each of the three businesses, particularly Europe .
It looks like the mix Scott richer by 30 $35 a ton is commercial fell but the realized price rose $4.
And it looks like.
A big chunk of the 239000 fewer tons were not profitable tongues.
Very pleased that performance wasn't worse.
Looks like you drops hot rolled tons of weren't doing much for you.
I think Thats, 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 are we don't hesitate to to make changes to our commercial strategy and how we sold to customers make sure we optimize optimize the next profile. So when you look at Europe , I think you're absolutely right.
That's the mix. The next did improve even though selling prices were down and North American fly road, because we had blast furnaces.
Right.
One more selective in the tons that we talk in the mix profile the order book improved.
Tubular.
Really if you look at the mix was kind of seamless TRW.
It did weaken in the third quarter relative to the second quarter. So that drove some of the mix change in that segment.
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.
Import and there are changes to employment levels, but that will have specifics to share with you at this time.
Thank you for your service and the good results.
Thank you.
The next question comes from the line of Mac deals from Bank of America Merrill Lynch. Please go ahead.
Hi, everyone.
I 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 and free cash flow.
OPEC 18 million of shares I know, it's on a big number but what's the rationale for share buybacks at this time.
So it's Kevin we had a program in place on attendee, obviously, we stepped in as we got really close on the Big River Big River deal and we terminated.
Can be but we had a program going and we let it run.
So will there be no more share buybacks going forward.
Yes.
When you do any purchasing right now under that 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 moving forward, but we need to understand what the market dynamics are and again, our first priority is to make sure that we completed the acquisition of Big River.
Okay great.
And then next just kind of big picture balance sheet.
You are at 2.6 billion of debt now you incurred about 1 billion won in the.
The fourth quarter that 3.7, you're committing to pay another seven eight 900 million to by the second 50% that's like four and a half and then you're going to consolidate Big River is dead 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 will work.
Yes, so as I've said in the past we tend to evaluate these kind of investments.
And are looking forward strategy is we're considering through cycle average deal environment as Dave pointed out we're always doing sensitivities around trough in 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 May 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 short cuts and it will respect the reality of the markets were in from a balance sheet and leverage perspective.
Go ahead I'll, 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 take into consideration also where the value is coming from within each of the projects. The tubular asked a great example took on.
Were successful in our completion viral environmental revenue bonds, but we look at via the value contribution from its largely the rest.
It's not market driven at all.
San sourcing 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 benefits streams.
Not all none of these projects are 100% dependent on.
On a certain commercial outcome.
I think the way everybody should think about this you know what the average steel prices are through a 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 in anywhere in between obviously, where we're at the low end of that so we're doing a lot of resilience.
Planning, we we have black hat teams, we do outside in looks and we beat up the numbers and Theres nothing that tells us that we can't get this strategy done through cycle, we're investing here in what seems to be.
A trough and we're able to get this strategy, Don and we've looked at it a lot of different ways and we couldn't be more excited about the future.
Your next question comes from Charles Bradford from Bradford Research. Please go ahead.
Hi, good morning.
Does your current labor contract.
And do the neutrality clause that was in the previous contract.
Does our current labor contract can hand neutrality clause could you explain that a little bit more what you mean by that.
And your labor contract in the past there was a.
Second that require you to allow the union access.
On our neutral basis to employees at anything you were talking to buy.
Well, let me just say that's the way we approach these types of situations if our employees with.
Want to have Union representation, there certainly welcome to have union representation, but it's certainly not something that is absolutely essential to have we allow them to be represented doesn't which is what the lot tells us to do so clearly it's something that.
We 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.
Our related to fracking as far as current shipping level so on.
Yes, I don't have that information readily available for you, but happy to provide the follow up.
Okay.
There are no further questions at this time I will now turn the call back to you. Please continue with your presentation for closing remarks.
Thank you very much Dave any closing remarks for today.
Thanks, everyone for your interest in us steel the 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 changed as a company we are.
Our 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 changes 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.
Yes.
That does conclude the conference call for today, we thank you for your participation Murphy. Please disconnect your lines.