Q1 2020 Earnings Call
[music].
Good morning, everyone and welcome to be United States Steel Corporation's first quarter 2020 earnings conference call and webcast. As a reminder, today's call is being recorded.
I'll now hand, the call over to Kevin Louis Vice President of Investor Relations and corporate F P. acne.
Thank you and good morning.
We appreciate your continued interest in U.S. steel and welcome you to our first quarter earnings call.
On the call with me. This morning, we'll be U.S. fuel president and CEO deeper.
Senior Vice President and CFO, Christy greed and.
<unk> Senior Vice President and Chief strategy Development Officer, which grew about.
After the close of business yesterday, we posted our earnings release, an earnings presentation under the Investor section of our website.
On today's call will walk through via webcast select flights and our first quarter results.
Slides for today's call can also be found on our website.
Before we start wonder 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 a recipe filings and actual future results may vary materially.
Forward looking statements in the press release that we issued yesterday, along with <unk> marks today or made out of today and we undertake no duty to update that not actual events unfold.
I would now like to turn the conference call over to U.S. still President and CEO Day, Barrett, who will begin today's presentation on slide four.
Thank you Kevin Good morning, everyone and thank you for joining us today and for your interest in U.S. deal.
We hope everyone is safe and healthy.
We are navigating a unique situation in today's market. So we're going to structure this morning's call.
A little differently, we all the skus are better than expected first quarter earnings in a bit. However, it is more important to walk you through our comprehensive response to covert 19.
First.
I'll talk about protecting lives and likelihood.
How are we are guided by our steel principles to keep our employees and community safe and the business resilient.
Second.
Ill discuss our top financial priority fashion liquidity, a strong balance sheet insurers, we can navigate the current environment.
Third.
Our best of both integrated and mini mill technology strategy remains our future and will remain flexible to make sure we execute.
And fourth.
I will highlight the swift and meaningful short term actions, we're taking now that ensure long term strategy execution.
The cumulative effect of these actions taken to date is expected to conserve $500 million of cash in 2020.
Let's turn to slide five.
Uncertainties seems to be the only certainty in today's environment.
That is why it is so important to stay true to our core values, what we call our steel principles to.
The Guy this as we navigate this unprecedented situation.
Our top priority remains protecting the lives in livelihoods our employees.
Steel is an essential part of our country's critical infrastructure.
And our employees have answered the call to continue making the steel that society needs.
This situation has reinforced that having steel that his mind melted and made in the United States is critical to the safety and economic well being of our country and U.S. deal is foundational to our country's regional supply chain.
Thank you to our employees for your continued hard work and commitment to U.S. deal.
And for keeping each other safe.
You are making a difference not only for U.S. steel, but also for the communities, where you live and work.
Thank you.
You continue to break safety records exceeding last years record days away from worked up 0.10 with now 0.06, a clear industry leader.
Special Thanks to the U. S. W leadership, we appreciate the way we are working together.
We're taking actions to provide a safe work environment, the goes above and beyond the health and government agency recommendations for cleaning physical distancing and managing exposure.
For example, we're distributing additional cleaning supplies throughout our plant and regularly clean high traffic and frequently used spaces.
We've installed additional wash stations enough.
Added hand, sanitizers to entrances and exits and are limiting outside visitors to our facilities. We are actively managing physical distancing at our facilities and Weve implemented work from home for those who are able and have added weekly communications uncoated 19 for employees and their fee.
Families.
These are just a few examples of steps taken to ensure a safe working environment for our employees.
We also have a kobin thinking task force in place to ensure we are responding in real time to the impacts from the pandemic.
We have dedicated response teams focused on health and safety crisis management response employee impacts.
Commercial impacts.
And operational impacts.
Protecting lives in livelihoods means keeping our employees and community safe and the business resilient.
This includes a critical focus on cash and liquidity.
Slide six outlines our sufficient liquidity heading into this market downturn.
There is no doubting that difficult months lie ahead for us.
That's why on March 27th we announced plans to fortify our balance sheet. This included an 800 million dollar proactive draw on our 2 billion dollar U.S. AB out, which gives us nearly $1.4 billion of cash on our balance sheet.
In all we have over 1.8 billion of liquidity.
No doubt we are entering this downturn from a stronger position then those prior we had a similar amount of liquidity heading into the global financial crisis.
We now have a much more streamlined and efficient footprint.
Let me spend a minute on this last point on slide seven.
We as we have purposely changed this company over the past six plus years, we've reshaped our footprint to shed assets that had limited costs your capability advantages.
Most recently, we indefinitely idled and.
Steel, making assets at great lakes to move towards our best about future.
Faster.
We have also been purposeful to improve our balance sheet.
We have reduced near term maturities and extended our maturity profile.
We have no significant notes maturities until 2025.
We also recover our secured debt capacity 1.4 billion at quarter end.
And we reduced our annual interest rate and costs.
We've made significant progress over the past several years to improve our unfunded pension and OPEB position.
At the end of 2019 are funded status for pension and OPEB obligations was 93% and 110% respectively, and we have no mandatory cash contributions expected for the next several years.
We've also invested significantly in our existing facilities to improve reliability increased efficiencies and remove costs.
And thanks to the hard work of many under Christy Breeze leadership, we have significantly improved our cash conversion cycle to industry leading levels.
Sufficient liquidity not only safeguards the business, but also protects our customers suppliers workforce and investors.
Safeguarding these key stakeholders includes making decisions about the business to ensure we execute our best in both strategy.
This brings me to our third topic on slide eight.
Our best of both strategy remains the future.
Make no mistake, our best both strategy is our future.
And acquiring the remaining 50.1% stake in Big River steel remains our number one strategic priority.
A best in both U.S. deal will be world competitive and strategic high margin end markets deliver an unparalleled product platform to serve customers.
And transformed the business to drive long term cash flow through industry cycles.
We are already the industry leader in generation three advanced high strength steels, and our de centralized sales force and application engineers are focused on designing solutions for our customers. We're the first to market. The gen three grades steel straight it's great to this.
Feel and will be added two additional auto platforms later this year and in 2021.
These investments moves to the high end the value added steel solutions. So that we can deliver the performance our customers need to be successful.
And we've known all along that we have to be flexible execute this transformative strategy and we have purposefully built optionality and flexibility into our execution to ensure we deliver even as market dynamics change.
Today's market confirms our strategy and our need to change.
To make our business more resilient and to improve our through cycle performance. So that we continue to build our capabilities to serve our customers with the sustainable steel solutions, they need today and into the future.
The fourth topic on slide nine outlined how we are being flexible including actions. We're taking now to ensure long term best to both strategy execution.
As mentioned earlier, we expect actions taken to date to conserve $500 million of cash in 2020.
As the impacts from coping 19 became apparent we took quick action, we took action to fortify our balance sheet. As previously discussed we took action to align our operating footprint with the developing situation and we took action to defer strategic capital and remain flexible.
Yesterday, we announced additional operating footprint actions, we're aligning our operating footprint with our order book to meet the needs of our customers.
Slide 10 illustrates the footprint actions taken to date.
At Gary works, we are temporarily idling number six blast furnace. This is in addition to the temporary idling of number for a number eight furnaces that were previously announced number 14 furnace, our largest blast furnace in the company well continue operating.
At Mon Valley works, we are temporarily idling number one furnace, we're also extending coking times at Clarion Coke, making operations. This will better align our coke production with expected iron making across our flat rolled segment.
At granite city blast furnace, Amy remained temporarily idle and there are no further actions to announce at this time.
Hi, Great Lakes, we successfully completed a safe and structured indefinite idling of iron and steel, making as previously disclosed.
We're also indefinitely idling, our keetac iron ore mine.
This will better align our core pellet production with expected iron making from our blast furnaces.
Our tubular segment production will now be primarily consolidated to our seamless pipe mill in Fairfield, Alabama.
This is where our new electric arc furnace will be located and remains on track to be completed in the second half of 2020.
Despite our aggressive tubular operating adjustments, we believe we can still serve a majority of our customers' needs from our remaining tubular footprint.
These operating adjustments are expected to result in approximately 2700 employee layoffs.
In Europe, we continue to operate two of three blast furnaces at our Slovakian operations.
We are continually assessing the footprint required to support customers needs.
These are unprecedented market conditions that require extraordinary action to preserve cash.
That is why we've also taken a series of compensation related adjustments, including reductions to the board and executive leadership compensation.
We also delayed merit increases in our suspending for one came matching and retirement contributions.
We continue to evaluate opportunities to further accelerate our fixed cost reduction objective of $200 million by 2021 and plan to deliver these run rate savings a year earlier than previously committed.
In addition to balance sheet operating footprint and corporate actions on March 27th we also revised our 2020 capital spending for crafts from 875 million to $750 million.
To better align with expected market conditions.
Slide 11 provides an update on our strategic projects.
As part of this decision we announced on March 27, we are delaying both the Mon valley endless casting and enrolling investment and capability upgrades to the Gary Hot strip mill.
On the Mon Valley investment.
Remains a critical piece of the strategy something we need to get done.
But we're taking a pause at the moment again, we maintain flexibility on when we resume this project.
At Gary works, we have flexibility to execute the remaining investments at the hot strip mill.
We will continue to evaluate them ace and timeline of remaining investments for these projects.
$750 million remains our expected 2020 capital spending forecast and we will continue to manage capital spending and train 2021.
Before I hand, it over to Christy I'll provide an update on some select end markets and a key milestone in our best of both strategy.
First on what we're seeing in the markets. Our commercial teams are speaking daily with customers to closely monitor market conditions, and we're doing our best to distinguish between signals and noise.
We do our best as Brzeski famously said to skate where the buckets had it for now customer insights are challenged as everyone tries to find the invisible block.
But no one knows when the market will recover for now we believe the market is in search of bottom in the second quarter and when it does recover and no doubt it will we plan to be well positioned to serve customers needs.
Here's what we do now.
Automotive production shutdowns are having a significant impact on demand approximately 25% of our flat rolled shipments serve this strategic end market much depends on when the automotive Oems plan to resume production and at what pace production resumes.
Construction market activity has been supported by longer lead times into May and still healthy activity levels in the south.
Our packaging business has seen strong volumes in today's environment increased demand for 10 products is supporting 10 product demand in Europe similar market dynamics are weighing on this segment's performance government mandated shut downs across key customer bases are negatively impacted.
In steel consumption.
And in tubular Covidien Nineteens impact is amplifying already difficult oil and gas markets.
Oil prices are down significantly since the beginning of March and operating rigs in the U.S. our off over 40%.
Lastly, yesterday, we announced continue execution of our best in both strategy and deliver on our commitment to extract incremental value from our iron ore assets, we have granted stelco an option to purchase at 25% interest in our Minntac iron ore mining operations for an option pain.
$100 million under the agreement 20 million was paid to us steel upon signing the option agreement and the remaining 80 million will be paid ratably over the remainder of the 2020 calendar year.
Once delco has completed paying the remaining $80 million the option can be exercised at any time before January 30, Onest 2027 for an additional payment of $500 million.
Slide 12 has more details.
We are structurally long iron ore pellets based on our iron making capacity.
In October 2019, we outlined plans to create incremental value from these strategic and highly valuable assets.
Again, we will receive a $100 billion in 2020 from stelco is option to by 25% interest in meant that if they do exercise the option, we receive an additional $500 million.
This deal implies a 2.4 billion dollar value for the mid Pac operation validating the unique competitive advantage of our largest iron ore mine.
I'll hand, it over to Christy now for detail in the first quarter performance and our outlook going forward.
Alright. Thank you Dave Good morning, everyone I'll begin on slide 13.
We are fundamentally different company today.
Then we were heading into the global financial crisis, or the energy downturn, we've streamlined our footprint and have shifted production to lower cost facilities to continue serving our customers, while increasing utilization at our best assets to absorb fixed costs.
The results of these efforts combined with investments in our facilities and our cost reduction and efficiency improvement initiatives have resulted in higher profitability over the last three years than during the same time period for seeding the last two recessions.
Adjusted EBITDA margin over that past three years is approximately 9% compared to roughly 5% proceeding both the global financial crisis and the energy downturn.
As Dave mentioned, our cash conversion cycle is significantly improved since the global financial crisis, we've averaged a cash conversion cycle of 32 days compared to nearly 60 days in the comparable global financial crisis period.
We expect to generate incremental capital in 2020 from the core business through working capital release, primarily through inventory reduction. This will help offset some of the impacts of price and volume erosion in the markets.
We've also extended debt maturities reduced borrowing costs and increased flexibility.
We have no material notes maturities before 2025.
Prior to that pass to recessions, we had approximately half a billion coming due within 24 months of those downturns.
We have also materially improve the funded status of our pension and OPEB obligations at the end of 2019 or pension and OPEB plans are underfunded by less than 300 million compared to an under funding of more than 4.5 billion heading into the global financial crisis.
And also very noteworthy we're entering this recession with liquidity similar to what we had heading into the global financial crisis, but with a much more streamlined and efficient footprint.
So, let's now turn to slide 14.
As Dave mentioned, our mantra during this cobot 19 situation is protect lives and Likelihoods.
Which means ensuring the safety and health of our employees and focusing on cash and liquidity to ensure the resiliency of our business.
So let me provide a few details on the additional actions we've taken to preserve cash and liquidity, we have build enhance focus on cash into our business rhythm.
We have established the daily cash call to coordinate all of our actions to improve cash.
We have enhanced our plant spending controltower process and have added new spend controlled control towers that headquarters and it Transtar railroad.
We've expanded our internal cost and cash improvement programs.
The cost savings from these cumulative efforts outlined today are substantial 500 million expected cash savings during 2020 from footprint realignment and the other cost control initiatives since the cobot 19 outbreak.
Turning to slide 15.
With limited obligations on the horizon either through notes maturities are mandatory pension contributions. We believe we're well positioned for this crisis. In addition to our liquidity balance. We also have approximately 1.4 billion of secured debt capacity.
Even before the emergence of covered 19, we were prioritizing cash to ensure we ultimately executed our best above strategy.
Slide 16 lists several areas, where we've taken action in the past in the second half from 2019, we announced a reduction to our quarterly dividend canceled our share repurchase program and reduce 2020 capex.
We expect 2020 capital spending to totaled 750 million.
Which 282 million or nearly 40% of this year's expected total has already been spent in the first quarter. So this means that the remaining three quarters of capex should be meaningfully lower.
In the first quarter.
Looking ahead to 2021, we continue to have flexibility on our strategic project capital spending, particularly with our Mon Valley investment.
Before I turn it back today I want to touch on our first quarter performance on slide 17, and our current view of the second quarter.
First quarter adjusted EBITDA was 64 million or approximately 34 million above our guidance that was issued on March twentyth.
[noise] market activity in January and February was improving from the fourth quarter before the oil and gas and covert 19 impacts began to take hold in March has the potential impacts of Copel 19 emerge. We responded quickly to adjust our footprint fortify our balance sheet and aggressively cut costs.
Yes.
Strong cost management in March contributed to better than expected performance.
Our flat rolled operations performed better than expected in the quarter.
We continue to see the benefits from the investments we've made in our operations through improved reliability in operating performance.
Also achieved lower costs from postponing discretionary maintenance and outage spend the mines and from lower natural gas prices.
Our order book in Europe was also beginning to improve early in the year before the covert 19 impacts to cold we were seeing increased customer activity and European steel prices were beginning to move higher.
Our first quarter performance reflects these dynamics.
As the downturn became a parent their cushy to team was quick to cut costs in anticipation of the market downturn.
Also lower iron ore prices flowing through in the first quarter was a tailwind for the European business.
The tubular segment has been negatively impacted by both the sharp decline in oil and gas markets.
As well as from the global covert 19 pandemic.
We made the difficult decision to indefinitely idle all or most of Lorraine and Lonestar tubular operations and streamline production to Fairfield tubular this decision better aligns our tubular operating footprint with the needs of our customers.
As Dave described earlier, we have limited for your visibility based on uncertain market conditions, our full year shipment guidance issued as part of the January 2020 earnings call should no longer be relied upon.
We expect a favorable working capital impact in the second quarter as we draw down inventory across the footprint.
Regarding our operating segments with specs laterals EBITDA to be negatively impacted by fewer shipments lower prices and reduce pellet shipments to third parties.
We expect this will only partially be offset by raw material and energy tailwinds that spectrum from lower scrap and natural gas inputs.
In Europe.
Commercial headwinds are expected to be the primary driver for reduced EBITDA compared to the first quarter.
Our tubular segment faces severe headwinds.
Facts of lower demand caused by cope with 19 are being amplified by oversupply in the global oil and gas markets. As a result, both oil prices and the domestic rig count are down significantly since the beginning of March.
Based on what we know today, we expect second quarter results to market truck trough for the year and be meaningfully lower than the first quarter.
Now I'll turn it back over to Dave.
Thank you Christine, let's turn to slide 18, before we begin the Q in a let me summarize the key takeaways from today's call.
We're protecting lives and livelihoods, which means safety and environmental stewardship, and cash and liquidity to ensure the resilience of the business our top priorities.
Our best of both strategy remains the future, including our top strategic priority to acquire the remaining 50.1% of Big River steel.
And we are taking swift and meaningful action today to better position us to invest in the recovery and execute our strategy, Kevin lets move to QNX.
Thank you, Dave we ask that you eat please limit yourself to one question in a follow up so everybody had the opportunity to ask a question. Operator can you. Please if you want to questions.
Thank you to register your questions. Please press one for our first question comes from the line Seth Rosenfeld of Exane BNP. Please proceed with your question.
Good morning, Thank you for taking my questions.
If I may I'd like to better understand the announcement regarding.
The stelco Minntac deal amongst the pellet supply agreement, obviously, congrats and beginning to execute your goal of monetizing these assets, but it's the understand better can you. Please explain what impact the revised agreement the supply agreement Stelco will have on profitability of your mining operations.
The releases that we got from you in telco overnight base, let me emphasize that there was an improvement in their cost structure potentially is this trend has been something of a cost plus model and if so what impact on EBITDA would we expect for yourselves. Thank you.
Thanks for the question Seth. This is this as a day I really appreciate that because you'll recall back in October when we announced the Big River Steel deal. We we also highlighted that this was something that we're really focused on making sure that we would.
Monetize these iron ore assets and this is a starts so the idea that we get a $100 million and and it validates. The 2.4 billion dollar valuation of this asset I think it was a was helpful to us at this time and a very difficult market environment rich fruehauf with the leader of that transaction size.
Rich maybe provide a little more color.
Sure Dave. Thank you well, we don't typically comment and we won't here on the pricing of the contract with a with a customer but.
We're very pleased with how the pellet agreement worked out we think it.
As a win win for everyone. There will be some uplift for our EBITDA as a result and.
We see this is a beneficial.
Contracts, both with respect to keeping minntac fully running and also in terms of or the EBITDA improvements will see over the life of the contract.
Thank you just one follow up with regards to your comment for EBITDA uplift over like the contract is that more tied to an improvement in volumes or change in pricing versus the prior agreement.
Well as we said you know in materials. It does have a 4 million tonne offtake.
So we look at that does not really a significant change in terms of the volumes, but overall, it's going to be beneficial across the terms of the contract.
Great. Thank you very much.
And our next question comes from the line of Chris Perry of Deutsche Bank. Please proceed.
But even.
Even christy thanks, Thanks for taking my question I, just wondered if you could just dig into the deal we still grow a little bit more just in terms of what did that youve structured it and the likelihood I guess it all comes down to getting that additional 500 million into just wondered if you could comment on that and then just in the context.
So getting.
Additional cash flow just wondering if you could also as part of that talk about other non core asset opportunities within the portfolio. Thank you.
Okay. So so first Chris.
Rich will handle the question about the deal and then Chris steel talk a little bit more about cash flow.
So that's a as I think you know.
The contract that we signed with Docomo gives them the option to acquire 25% equity position in the Minntac mine, we certainly hope they do exercise the option the way the contract is structured though the option itself is worth $100 million, which will be creditable, if they do exercise.
Option towards a 600 million dollar aggregate purchase price for that 25% position in the mine. So we're optimistic we'd love to welcome stelco as our partner and a JV for the mine and hope that they do exercise that option for the additional incremental 500 million.
Christie Okay.
Thank you were asking also about girls state cash flow.
We do have.
Even prior to cope with 19, we've already working to monetize our real estate assets and had started processes on several of our assets. So we are expecting.
That to come to fruition in 2020 end to benefit the cash flow from that probably a couple hundred million.
Okay. Thank you and then just all the noncore asset opportunities Keetac.
Anything else you want a whole lot within within the portfolio, where you must be able to get some cash during during the next 12 months. Thanks.
No I think those are the areas of our primary focus right now we do have opportunities with working capital were being.
Flexible with Optionality related Capex and other types of spend in the fixed cost takeout continues that.
We're obviously looking at as we've said many times before how we're looking for opportunities to create value for our stockholders and if we can monetize an asset that is of interest to someone that adds value. We're certainly going to take a look at it.
You want me to add on cash flow <unk> sure Okay.
You know we are working together.
Only doing scenario planning.
Modeling so that we are identifying what we need and what our cash flow looks like we're working to remove costs and preserve cash all as we mentioned in the opening comments.
We've put together.
Sure.
500 million expected cash improvement, we and some of that will come from cat Capex reduction working capital we have a lot of footprint adjustment. There are some headquarters cost improvement thats coming from that so a bunch of different sources, we fill.
I'm confident in that cash improvement number.
Our organization has responded very quickly to develop a cash mindset and we're continuing to build on that cost and cash improvement pipeline.
Thank you. Our next question comes from the line of Karl Blunden of Goldman Sachs. Please proceed with your question.
Thanks, very much taking the time.
No I could question on the options that you have yourself in other words to expand your stake in Big River steel.
And I know, it's a couple of years that you have that option for but when you think about market conditions now and the price of those bigger bonds that are well below par.
It seems to imply that show to persist.
Proceed with the strategy you'd need to pay a change of control premium for bundled into they decide to exercise that option that they have could you talk a little bit more about the different financing lever that you'd have overtime that just and get us comfortable with the continued pursuit of strategy.
Yes, Karl Thanks for that question.
How big River steel is absolutely critical to the success here, it's our number one strategic priority here and we we are ensuring that where we're moving ahead purposely deliberately with that investment.
It really good news the operations are running an incredibly well and they have an excellent operating team there and they are performing extraordinarily high level, providing EBITDA is that are comparable even though they're relatively new.
Providing EBITDA levels comparable to the mini mills that around for a very long time. So that's clearly something that we want to have in our portfolio thing to remember is we don't have to do it tomorrow I'd like to do it tomorrow, but we don't have to do it tomorrow, we have four years or more like three and a half years to execute execute denison.
Well aware what the requirements are in order to get that done, but we fully intend to find the right opportunity at the right time to be able to.
Create the value for our stockholders and consolidate.
100% of Big River steel.
That's right.
Add set up that we were very purposeful and negotiating the for your life of that option agreement because we're mindful of us as we all see now the cyclicality of our industry. So we wanted to how you know at least a full cycle, if not more to be able to pick the optimal time to exercise that option. So we've built out in.
Yeah, I guess good thing we did.
And I appreciate that you disclose those are the secured capacity, which is now a lot more then and many in the industry I have to things that at some flexibility.
Just a follow up on cash and cash positioning I didnt see a lot of detailing on what you expected timing or that cash cost of the idling and.
Reduction in employee count to be there any color you can you can add to that in terms of what might be added back to EBITDA.
So this is this is Kevin thanks for that question Carl So obviously I think as we progressed and in the second quarter and we expect to as Christie alluded to there how the market reach a trough. So we do expect to have demand and price headwinds in the second corner.
But we won't we are seeing in the marketplace right. Now if you look more broadly is that the spread between scrap and agency selling prices is significantly narrowed.
Which supports our thesis that though in the market you're trying to find a bottom here in the second quarter, but we're not panic still we're taking quipped meaningful action and we expect that to start to materialize itself and the second quarter, specifically around working capital.
If you'll recall the seasonality of mining typically results in a use of cash and working capital I'm asking walks or close finished a winter. In addition, we had slab inventory build underway to prepare for implant 48 day blast furnace outage at Gary works. So we had a significant inventory build in the first quarter purposeful, but significant.
As we entered the second quarter, we expect to ship out of inventory drawdown inventory and quickly turn not a use of cash into a source of cash looking through the rest of the year, but that should start in the second corner.
The the actions around the footprint, where swift and meaningful and we do our best increase utilization the assets that we will run obviously in totality, we have three blast furnaces running but we expect those three furnaces to run at a over 80% utilization there there will indeed be frictional cost some inefficiencies of having only three uptime.
Blast furnaces running.
But we're doing our best to mitigate as much of that as we can.
So we expect the cost savings to to build and with the number 2700, so les Austin, we unfortunately have to make as a result, I'm, we'll see that we'll see that impact the cost structure as well so.
Well underway, we expect to I really gained momentum in the second corner, especially on working capital and we will stay vigilant to monitor the cost structure and continue to find opportunities to reduce costs and increased cash.
Thank you and our next question comes from the line of Andreas Bokkenheuser.
Have you B.S. Please proceed with your question.
Thank you very much.
Everybody and well just two quick question for me effectively number one how should we think about production. This year and maybe next year. Obviously, you know some capacity is being idled, but I'm also thinking does that give you the opportunity to increase utilization amongst one because obviously that's not being idle.
Like you're saying was Fairfield you my consolidate some volume so could we see that in other parts of the business as well received like utilization that Gary lost one is 40 normal plus what is being granted received that basically going up. So so basically how should we think about production shipments maybe this year versus last year.
I'm, assuming a question on costs.
Again, I would imagine that may be.
So a fixed cost dilution could be a little bit of a headwind on the unit cost side, but then of course, we're in an environment with very low energy costs. So just wondering whether that could be an offset.
Maybe on your final business.
For the benefit of lower costs, though so just how do we think about production.
Costs, given what's being idled and given what's what continues to operate.
Alright. Thank you very much about this is Kevin a lot there. So when we try to the Taco a few individual items here, so first and foremost aren't going to full year production in 2021 production expectations.
No just given the uncertainty I don't think we're going to opine on what we think is going to happen for the full year, but what I will say is that we have the ability to respond to recovery very quickly the way, we've idled the furnaces and the the.
The way we've managed the footprint, we can respond very quickly to the extent that orders accelerate in the market recovers.
And we will run the assets that we need to serve our customers and our goal is always to run the assets that are online at the highest level of utilization possible.
So that will continue to be our guiding principle on cost I think you've touched on a few key one's own energy to the extent remains depressed will be a tailwind for us it wasn't the first quarter, a and could be going forward as well, especially on the on the natural gas side. So.
That's how we're looking at things right now we continue to be agile and flexible I think those award you've heard from US frequently today and we'll continue to reinforce and we'll make sure that we had the footprint in the operating configuration that needed to serve our customers and respond quickly and efficiently to an increase in demand, but maybe I'll ask Chris you to comment a little bit further on that yeah. I would just said you know we.
Have reduced the number of blast furnaces that are running so that definitely increases the efficiency of the ones that are running much more cost effective and also the way we have reduced blast furnace capacity. We have several furnaces that are banked, which means they could be restarted quickly enough customer demand recovers and and.
Indicates that we need that capacity, we're just being very prudent on our cost management to act quickly bentek those furnaces can be restarted fairly quickly and you've seen in the tubular business. The consolidation of all that production out down to a fair fell Alabama.
Alright. Thank you very much appreciate you taking my question.
Yes, maybe just one one last comment on that.
If you think about our strategy and what we're trying to do with the best of both are what we are doing with the best way. It's Big River is Endos caster, it's the hot strip mill at Gary.
And making sure that we're getting to this best best of the integrated best of the mini mill and with the electric arc furnace that will come on.
With the tubular business later this year that fits nicely into the.
Future that we have so we're very focused on the steps that we take now fitting into the longer term type strategy in and what we're doing is I think most people are doing this we see a bought him a bottom emerging here in the and the second quarter. We've modeled a V shaped recovery you an extended you and even in <unk>.
Well and it's anybody's guess as to how this is going to come back and does seem like people will be cautious at first but like we saw back in 2008 2009 with the recovery there we've got to be ready for the bullwhip effect and that's why the way we've bank. These furnaces, we can be nimble, we can be responsive and we can make sure that we continue to.
Make purposeful steps to getting best of both done with our number one strategic priority being Big River.
Thank you. Our next question comes from the line of Nick Your mostly of Steve Stifel. Please proceed with your question.
Hi, Good morning question on the Stelco contract if they exercise the option does that cancel the current purchase agreement and or they've been able to start buying pellets at cost.
Or do they still need to maintain a farms.
Arm's length contract, even after there are 25% partner.
Yeah. This is rich so effectively the option allows them to become a 25% equity owner and stuff excuse me in Minntac and at that point, we would form a cost sharing JV to become a cost sharing.
Creation for them to acquire there are 4 million tons per annum, rather than the pellet agreement.
Okay.
And then a question on liquidity, what's the minimum cash that.
The company's comfortable with and at what point would you consider coming to the secured bond market.
Yes.
Well I think we've said before is around $500 million as you adjust your footprint, obviously, you could even get by with a little bit.
Yes, I'll turn this to Chris but you know what we have to be is ready and able to go when the markets are ready able to go and we've said before cash cash is just not king its queen Prince Princess the whole oil port. So we're taking this very since seriously and making sure that we have adequate cash when we need.
Did you get the transactions done that we need to get done as well as making sure we get through this difficult cycle.
Yeah, and what I would add today's comments.
We're constantly doing scenario planning, we were doing business resiliency planning even before the cobot 19 started so we're constantly.
Looking at.
Different scenarios assessing the financial performance of our business around various demand and pricing scenarios and we also are continuously monitoring the market since and prioritizing cash and liquidity. So we believe we have sufficient cash to guidance through this market you know we.
I've taken very Swift action, but I can tell you. We do continue to consider all options and our monitoring the capital markets and if we didnt raise additional capital it would be to bolster liquidity to further strengthen our business and then to position our company to invest in the eventual recovery.
So it is something that we are constantly monitoring.
But we feel pretty.
Well with where you know what our scenarios are telling us about our cash.
Thank you and our next question comes from the line of Timna Tanners of Bank of America. Please proceed with your question.
Yeah, Hey, good morning, everyone Im happy and healthy wanted to ask if I could for a little bit more color on some of the costs you talked about her time tipping point, a little bit better how to think about and the cost to furlough or to my people go the cost to keep furnaces that you've taken offline offline.
Turning to start and we start and how to think about also what prompts you to restart the auto industry. For example is coming back online in the Middle of me, what Latin like might we expect for some of your furnaces that service intensity.
So Tim that answer on the cost Oh, you know when restarted thats not not significant from an actual cost perspective, you obviously have.
Inefficiencies throughout the footprint as as you reduce utilization rates, but I'd be mentioned for the assets. We do run our goal is to run there was a high levels utilization.
I will be some additional details in our Q related to frictional costs on the employee impacts you should be able to see and if there was only answer your questions. Please follow up let us know but.
The to that I mentioned earlier in <unk> and one of the responses were getting after their cost now taking costs out of the business. The biggest near term lever as the release of working capital, which we'll see to start to manifest itself in the second quarter and then you know where we're after all the other levers available to US. It's Chris you described around you know fixed costs.
Reduction plant cost reduction material usage in our furnaces, so overtime reduction et cetera. So were every lever is being pulled and everything's on the table and just because this is the opportunity. We've started thus far it doesnt mean this is the and we will continue to extract every cost savings and dollar out of the business, we can to make sure the business.
Remain resilient through this out there.
Okay, and then the timing question.
Can you repeat your timing question Timna.
Okay, and yeah that the I've a follow up at all and I'll repeat that kinda questions. I was just really tender stand how we think about the succession of when you would expect to restart once we know when the auto industry, it's gonna be coming back and I appreciate that yeah, it'll depend on how much high utilization the auto industry runs out, but just trying to think about you know inventory on the.
Ground, if that's relevant or if you can start up quickly, but my follow up was to understand you know we listen to the other I see producers that are many mouse. They characterized the current market as you know short term it sounded like a short term pet and an opportunity to take market share. Your they don't take capacity offline because they can.
Just run at lower utilization more flexibly, but it contrast, with U.S. feels really sharp <unk> cut production. So I'm just wondering why that very sharp pet care production. When your auto in transport exposure is 25% or so last I saw on why did they got less and do you.
And your sounds like them to claiming to take market share.
So on the timing of restart I'll start there and apologies for missing a first time through the customer tells US right. When we when we have the order book and we have the volume and we feel comfortable at the level inventories. We have we will restart production to support our customers that is.
Not as our goal is to be here for our customers in the event when the market recovers.
I think we have exposure to some markets that are being negatively impacted the autos the energy markets constructions and you know we're doing what's required to position this business to match production with the order book.
And when the auto and these other industries ultimately recover which they will you know we will be here for our customers, but I think about you know we did have some inventory known as I mentioned in the first in the first quarter than we have to make sure that we work through working capital release extremely valuable in today's environment I'm. So that did certainly play role or play.
Factor in the decisions, we made due to a temporarily idle some production as Christie mentioned, we've done it in a way we can quickly resumed to the extent the order book justifies it in the inventory levels are appropriate, but your point about the mini mills I guess, the one hour makers and this goes back to Dave's comments. If you look at what we said about Big rivers performance the mini mill margin pro.
Fall through the cycle, it's highly attractive their ability to produce cash through the cycle highly attractive we need that in the U.S. steel portfolio. That's why they rivers are number one strategic priority and that's why we're going to get it done over the time period, we have to do it so what you're recognizing the market is what is it the cornerstone of our strategy and as a catalyst.
For the things that we're doing and Thats why we think that we know that when you combine the best of integrated with the best of many mills you do have a winning strategy and where we have to do is proved that we can afford it and when we show you that we can get the money to invest and finalize the transaction with Big River finished the endless caster we.
We'll have with analysts gas or the best mill in North America, and the mini mill that Big River runs the only LEED certified its loaded with artificial intelligence and already it's running that very good low level. So when we combined these two together it does.
Start to fix the problems that we've had and certainly we're going to have a footprint that will be more nimble and we're going to be more responsive fact that we bank furnaces gives us an opportunity to come back faster than that we have in the past and the balance sheet is better than we have in the past.
Frankly, where we're pretty optimistic about our ability to give the strategy done just.
And we're working hard on every day and we'll have to see how long. This cobot 19 last but but we're on it and we got it and we're optimistic about the future of us steel.
Thank you and I'll now turn the call back to U.S. steel President and CEO, Dave Barrett for any closing remarks.
Thanks, everyone and thanks for your interest in U.S. deal to our employees. Thank you for being on our frontline continuing to serve our customers and support the communities, where we live and work.
You have shown unwavering commitment to the company and have demonstrated significant generosity for those impacted by cobot 19.
I'm pleased to be on your team now, let's get back to work safely knowing U.S. steel strategy is sound as we take deliberate steps with actions now that get us to the future faster.
And that does conclude today's presentation. We thank you for your participation and ask that you. Please disconnect your lines have a great rest of today everyone.
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