Q2 2020 United States Steel Corp Earnings Call
[music].
<unk>.
Good morning, everyone and welcome to the United States Steel Corporation's second quarter, 2020, <unk> earnings conference call and webcast I.
As a reminder, today's call is being recorded.
I'll now hand, the call over to Kevin Louis Vice President of Investor Relations corporate at PNM.
Thank you and good morning, we appreciate your continued interest in U.S. steel and welcome you to our second quarter earnings call on the call with me. This morning will be U.S. steel President and CEO day, Barrett Senior Vice President CFO, Christy briefs, and senior Vice President and Chief strategy and development Officer Rich Fruehauf.
After the close of business yesterday, we posted our earnings release and earnings presentation under the Investor section of our website.
On today's call will walk through via webcast select slides and our second quarter results.
The link and slides for today's call can also be found on our website.
Before we begin let me remind you that some information provided during this call may include forward looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results may vary materially.
Forward looking statements in the press release that we issued yesterday along with our remarks today are made as of today and we undertake no duty to update them as actual events unfold.
I'd now like to turn the conference call over to you guys still president and CEO day, Bert who will begin today's presentation on slide four.
Thank you Kevin Good morning, everyone and thank you for joining this morning's call and for your interest in US steel I Hope you and your families are staying healthy and safe.
The past few months have certainly been trying but I am thankful for the U.S. steel team and the collective response of the organization to keep each other safe and healthy so that we can be well positioned to support our customers in the recovery.
We don't take for granted the critical role we play in customers regional supply chain and the important steel place, especially U.S. deal in all of our lives.
I hope you hear today, the optimism I have about the future the encouraging signs we're seeing in our order book.
And our longer term future as the only best of both steel company.
Our results in the second quarter, while not surprising given the impacts of coping 19 are a reminder of why we need to change.
Our industry as volatile and our best in both strategy will ultimately position us to make money in the trough.
Without giving up the upside we have always benefited from in recovery and strengthening markets.
The second quarter was clearly the trough.
And we have to get better it making money when the market hits Bob.
All the more reason for us to move faster to the future with their best in both strategy.
We are responding to the recovery that is underway to support our customers and deliver for our stockholders.
To get to our best of both future faster, we're focused on what we control which means delivering on the commitments we have made.
Of course, we've always committed to safety and we continue to make record improvements on safety.
We made a commitment to reduce fixed costs and we're delivering a year ahead of schedule run rate fixed cost reductions of $200 million.
We made a commitment to extract incremental value from our iron ore assets and we delivered $100 million. This year entered into a new pellet supply agreement with EBITDA uplift and have the potential for an additional $500 million from stelco.
And we delivered a multi year contract with a new long term customer in Algoma.
We made a commitment to add in electric arc furnace this year to our footprint and we are delivering with the completion of our tubular eas in the fourth quarter.
We made a commitment to extract value from step one of our Big River steel transaction.
With acquiring the remaining 50.1% as our top strategic priority.
And we are delivering on joint product development with Big River, and we're delivering on sharing technical and talent resources with Big River.
We made a commitment to continue to grow our customer leadership position in advanced high strength steel and we are delivering with improved when rates outsized exposure to winning truck and sq platforms, and strengthening relationships with new and existing customers through significant technical engage.
Excellent.
And finally, we made a commitment to make cash and liquidity top financial priorities and we delivered by adding approximately $1.4 billion of incremental capital of the balance sheet in the second quarter.
Let's get into today's presentation with a business update.
First on our top priority safety, we will update you on how we're enhancing our safety initiatives by protecting lives and livelihoods and living within our steel principles.
Next we'll reinforce our top financial priority liquidity.
We took additional action in the second quarter to fortify the balance sheet to ensure a strong liquidity in an unprecedented market.
We'll also update you on our strategy.
Executing our best of both strategy is critical to us feels future, including our number one strategic priority acquiring the remaining stake in Big River steel.
We'll also update you on our operations and the commercial landscape.
We are taking action to support increasing customer demand and are encouraged by the trajectory of improvement.
And before we take your questions Christy, we'll share our financial outlook for the third quarter and our progress on key liquidity drivers.
Let's turn to slide five with an update on safety.
We are focused on what we considered control and there is no better proof of our performance than our year to date safety results safety is our number one priority and we continue to vigilantly enforce our cobot 19 protocols promote physical distancing limit visitors to our site and country.
When you are enhanced cleaning activities.
Thank you to all of US steel employees for continuing to work safely by practicing our cobot 19 protocols you are keeping your families coworkers communities and yourselves safe.
At US steel safety also includes environmental stewardship, and a commitment to protecting our shared environment.
In May we published our 2019 sustainability report, which builds on our 2017 report that introduced many of the company's sustainability initiatives and priorities.
Our 2019 report provided additional details on our goals and achievements to date in a variety of E. F. G topic areas, including our 2030 greenhouse gas emissions intensity reduction target of 20%.
Our report also includes a materiality assessment in line with best practices and global reporting initiative standards. This assessment identify the areas that matter most to our stakeholders and formed the basis for where we will devote the majority of our efforts and investments.
If you haven't already please review our 2019 sustainability report and our best of both strategy will transform the company into a sustainable competitive business that will contribute to the future wellbeing of our employees customers suppliers partners stockholders and the communities.
Where we operate.
Slide six highlights how we are building an industry, leading safety program to emphasize psychological safety, what we call 360 safety, we must continue to promote and inclusive environment. We're all employees feel that they belong no matter their background experiences.
Gender race ethnicity, or national origin, and are encouraged to contribute their unique ideas and perspectives.
This is particularly important given current events in the larger conversations happening around the country regarding diversity and race.
We are having similar conversations throughout the company to provide support and opportunities for more learning and understanding bye everyone.
We are proud to be partnering with the National Safety Council on our 360 safety initiatives to incorporate all aspects of a safe working environment.
Let's turn to slide seven to discuss our top financial priority cash and liquidity.
The capital we raised in the second quarter bolstered liquidity and strengthened our balance sheet positioning us to invest in the recovery and continue to execute our best of both strategy.
In the second quarter, we raised approximately $1.4 billion in cash to safeguard our business enhance downside protection and of course for general corporate purposes to position us to opportunistically benefit from the upside we expect to see as the overall market recur.
Lovers.
We ended the quarter with $2.7 billion of liquidity, including $2.3 billion of cash.
Slide eight has the details.
Strong liquidity has always been a cornerstone of our financial strategy and especially during these uncertain times caused by cobot 19 pandemic, our second quarter ending liquidity of $2.7 billion is in line with historical levels, while liquidity has been bolstered and the balance sheet strength.
And we also continue to actively market noncore assets, including our highly attractive portfolio of real estate assets. Additionally, we are evaluating strategic options for our yuchai, finishing business and related properties. We are optimistic that we will be.
Able to extract value from these assets in support of this strategy.
While we have taken significant steps to fortify the balance sheet preserving cash in today's uncertain market environment remains a top priority.
Current market events and dynamics do not deterred our continued focus on executing our best in both strategy and we believe we will emerge from the market downturn well positioned.
Today's uncertain market confirms our need to change in our best of both strategy is our path to creating a stronger and more profitable us steel in any market environment.
According to the best of both strategy remains acquiring the remainder of Big River highlighted on slide nine this continues to be our number one strategic priority and we have over three years to exercise the call option.
Big River operated profitably from an EBITDA perspective during the second quarter and ran at full capacity Big River is ahead of schedule in completing its phase two a expansion where it will double capacity, while only adding approximately 100 new employees.
Upon completion, we continue to expect Big River to unlock significant operating efficiencies and additional margin expansion.
The us steel and Big River teams continue to pursue areas of collaboration particularly around joint product development efforts.
Turning to the market on slide 10.
Where we are seeing positive developments in demand across key end markets.
We have seen a noticeable improvement in our automotive customer business since June as shelter in place orders were lifted and Oems restarted. The restart was initially slower than anticipated, but Oems quickly ramped as the month progressed.
Improving production levels are expected to continue in order to restock vehicle inventories, especially on trucks and as you be platforms that tied to our strength in platform participation.
The appliances end market has also rebounded nicely while the appliance business did briefly pause at the onset of Cobot 19 their unit production rebounded quickly almost to pre covert 19 levels before the end of the second quarter and remains on a similar pace into the third quarter.
Construction has remained resilient through it throughout the cobot 19 environment.
Our third quarter construction order book has so far exceeded expectations.
Packaging is another end market that has performed well through the crisis, we're supplying packaging customers with the high quality steel we are uniquely positioned to produce during the pandemic to ensure food and other essential supplies remain available for consumers. The steel made by our employees helps.
Feed families.
Clean surfaces and protect people the typical seasonal activity in the second quarter came a bit earlier. This year in response to the pandemic, we expect demand for this differentiated value add product to remain robust.
For context, let me provide some additional details on order entry rates.
We took blast furnace capacity offline in April due to the rapid decrease in demand seen across several industries at the onset of Cobot 19, Lockdowns yet we did sell went away to remain nimble when those industries rebounded.
The rebound is currently underway in these four key industries automotive.
Appliance.
Construction and packaging.
Our new order intake in the months of June and July our 174% of the levels in April and May. Furthermore, 59% of new orders on our mills in the month of July are tied to demand signals from our customers in September and October.
In other words, we have line of sight to these end user volumes continuing at least into the fourth quarter.
This increase demand supported our restart of two blast furnaces at Gary works in a blast furnace at Mon Valley in the beginning of June as I said previously we remain nimble to ensure we continue to serve our customers as demand increases.
As we see positive signs of improvements in these markets. We continue to believe that the second quarter was the trough for the year.
In Europe demand is also improving but at a more gradual pace like in the us green shoots our emerging as automotive activity is accelerating and construction and packaging remain relatively strong compared with the broader economy. We continue to operate two three blast furnaces at our Slovakia.
Mill and remain flexible to support future demand from customers.
In tubular we believe the market is nearing the bottom, but expect difficult market conditions to persist.
Our production operations remaining consolidated to our Fairfield seamless operations as Fairfield is our most modern tubular production facility in is able to serve the majority of our markets based on its product capabilities. While conditions remain challenged we continue to emphasize our suite of for pro.
Terry connections year to date bookings have already match, our premium shipments from 2019, and we expect a set a new record for premium shipments in 2020.
I'll now hand, it over to Christie.
Alright, Thank you Dave.
Good morning, everyone. Thank you for joining us I'll begin on slide 11 as expected our second quarter performance was significantly impacted by the nonrecurring costs associated with idling iron ore and steelmaking assets in the quarter to control inventory and manage costs in response to the impacts.
Opened 19 days nonrecurring operating inefficiencies in our flat rolled segment, coupled with reduced shipments distorted our earnings in the second quarter in Europe market activity was weak throughout much of the quarter. We took advantage of reduced demand environment by pulling forward a 10 day.
But strip mill outage into late May originally scheduled for the third quarter.
Nonrecurring opened 19 related government really helped offset some of the commercial headwinds in the quarter market conditions have just recently begun to improve but off a very low base.
In tubular our decision to consolidate production to our Fairfield facility helped mitigate a portion of the commercial headwinds compared to the first quarter.
Based on today's rig count and oil and natural gas prices, we would expect production to remain consolidated Fairfield tubular.
Despite the difficult quarter second quarter performance was better than the guidance provided on June 17.
Slide 12 provides more details of what Dave mentioned earlier regarding June shipments.
And the second half of June the pace of shipments increased by approximately 50% and our flat rolled segment.
While much of the economic restart was delayed throughout the second quarter. We believe the second half of June was a tipping point for our order book as shipments have accelerated and have continued to improve into the third quarter.
As demand increases we currently expect our flat rolled third quarter results to improve versus the second quarter, but still expect third quarter EBITDA to be negative.
While market conditions are improving headwinds remain.
We currently expect to us blast furnaces that were idled in response to cope with 19 to remain temporary idle for the remainder of the year.
As a result, we also expect our Keetac iron ore mine to remain indefinitely idle and we continue to extend our coking times at Clarington to better manage inventory.
While these actions makes sense to balance production with demand inherently result, and operational inefficiencies that will continue to impact our results in the third quarter. Additionally impact of lower still selling prices will begin to flow through our third quarter results.
Approximately 40% of our flat rolled shipments are fixed price contracts.
The remaining portion will have varying degrees of exposure to index prices.
In Europe activity is improving but it remains gradual we currently expect third quarter results for USS K to be similar to the second quarter.
While the tubular market remains challenging we believe the actions we've taken to consolidate our operations limits any further downside risk. We currently expect third quarter tubular results to be flat to slightly better than the second quarter.
Before I hand, it back today, let me spend a moment reinforcing our commitment to cash and liquidity.
In the second quarter, we proactively fortified our balance sheet by adding an additional $1.4 billion of cash to our balance sheet slide 13 details our expectations for key liquidity drivers for the second half of the year, which are progressing as expected.
As we said earlier, we currently believe the second quarter marks the trough for the year as we expect EBITDA improved throughout the second half of the year.
We continue to evaluate next few cost improvement actions and are evaluating new opportunities like integrating work from home into our work plans. For example, we are analyzing opportunities to reduce our lease costs across our footprint, including consolidating lease space at our headquarters location in Pittsburgh.
Last quarter, we stated working capital would be a source of cash for the year as we work down slab working process and finished goods inventories in the second quarter. We saw 120 million release from working capital and expect down an additional 250 main release in the second half.
We are on track to meet our reduced capital spending target of 750 million for the year. We spent 173 main and capex in the second quarter and expect the second half of the year to total approximately 300 million.
We will continue to be prudent and how we execute our strategic capital spending into 2021 as weve for our prioritize cash and liquidity.
Cash interest in the second quarter totaled approximately $50 million, we expect the second half to total approximately 175 million, including approximately $65 million associated with the senior secured notes issued in May.
Additionally, we expect to receive the fifth remaining 60 million of cash from stelco for their option payment by year end.
Dave Thank you thanks Christine.
Let's turn to slide 14.
Before we begin Q in a let me summarize the key takeaways from today's call.
Our priorities remain unchanged, we are protecting lives in livelihoods, which means our top priorities, our safety and environmental stewardship.
And cash and liquidity to ensure the resilience of the business.
We are focused on maintaining ample liquidity in today's environment, while continuing to advance our best of both strategy, including our top strategic priority to acquire the remaining 50.1% of Big River steel.
Best of both remains our future of future that will deliver for all of our stakeholders.
We are doing everything we can to get to the future faster.
Kevin lets move to QNX.
Thank you, Dave we ask that you each please limit yourself to one question a follow up so that everyone has the opportunity to ask the question.
Operator can you please queue the line for questions.
Thank you very much and if you like to register a question. Once again it is still one provider for our new towers hockey pad.
One moncrieff our first question.
And we'll get to our first question on the line from the line of David Gagliano from BMO capital markets I would have.
Hi, Thanks for taking my questions.
I was wondering if you could just give us.
A little more insight obviously into you gave us insight obviously, so the demand side.
On the recovery that we're seeing.
And the justification for restarting the blast furnaces on your side. There is obviously in a number of blast furnaces restarting.
And you fly be river ramping up as well.
There was a $40 per ton of tempted price increase about two weeks ago. I'm wondering just gives a sense as to.
Your view on on pricing in the near term given all the supply that's coming on and how has that receptivity been for that attempted price increase.
Well. Thanks, it's good to hear your voice and hope you are doing well.
As far as the price increase goes I think it was July 21st when we put the price increase in place and while it's probably too early to determine the full acceptance. We do see some early successes based on some of the recent order status as far as the marketing.
Conditions and the demand.
Certainly north American flat rolled segments is returning the second quarter is below the third quarter book looks good we expect things to improve but we don't expect to this.
A quick recovery in the third quarter, it will be a bit episodic following probably the cobot 19.
Pandemic once we have a vaccine in place we feel really good about the future and and pivoting quickly to the future. We think it's incredibly bright.
Longer term as we see in infrastructure Bill we see a.
The the election being over a lot of the divisiveness going away and and we think.
Theres a lot of money that's sitting on the sidelines one team to go to work and it's largely dependent on the success of how.
The world deals with a pandemic, but longer term got to say with our.
Our best of both strategy, we're cautiously bullish about the longer term and and feel really good about.
Finding our way through the short term.
Into into the future and we'll turn on blast furnaces when the orders.
Demand us to do that and in fact, we.
We are scheduled tomorrow to have.
Blast furnace number eight it at Gary turned on.
Kevin you've got some more color, yes, I think the one thing that I want to build upon Dave on the point you made is that our decision to restart blast furnaces is not speculative on the demand we're seeing our order book supports these restarts, they're coming from fixed contracts that we have in place with our customers and many of the end markets day that you described so.
I wanted to make sure we emphasize that orders are in hand, the order book supports the melt that's coming back online and there's really nothing speculative about how our company has reacted to the return and demand from our customers.
Okay. That's helpful.
My follow up then I'll just switch gears just in terms of.
The liquidity the improvement in liquidity.
Obviously it did come.
With increased leverage and I'm wondering if you just give us a sense as to what the view as regards to optimal leverage metrics over time and how you are still plans to to accomplish those metrics. Thanks, but first and foremost Justin let me reiterate it we want to make sure that were highly liquid during this and.
This difficult time and be willing and able to respond quickly.
When things do recover we do think it ultimately will happen. So this extra cash this extra liquidity is certainly.
We believe a smart move to find our way through however, long this last though Christy maybe maybe a little more color. Yes, I would you say, we did take on incremental debt to ensure that we can whether the coven 19 downturn.
We are regularly pressure test and the business under various scenarios.
To make sure that we can handle the levers that we have and we're very comfortable with our current cash position. We very intentionally took on this additional liquidity. So that we could navigate downturn will be ready to invest in the recovery.
So we feel very comfortable we currently at the end of quarter, We had 2.7 billion of liquidity, which compares very favorably to our.
Historical average of about 2.6 billion.
And we even have small footprint now so we feel pretty comfortable about liquidity that we have.
Thank you very much I will proceed with our next question on the line some of the line of Seth Rosenfeld from Exane BNP correct have.
Good morning, Thank you for taking my questions today.
If I can start out pleased with Big River steel. Please can you please give us a little bit more color on recent earnings performance at Big rubber.
We did two dot, earning from Investees reported in Q2 came a bit below recent trend to what extent, we've got vrs versus other investments and what's your view for profitability from that investment going into the second half the year I'll start there. Please.
Well I'll start and then I'll ask rich fruehauf to provide some additional information on this and just to be clear to everybody. We can't say this off enough and loud enough. This is our top strategic priority, we want the bead EBIT EBITDA, we want their entrepreneurial spirit, we want to build to best.
With them and we think this strategically as a really good thing for our company. They got a great team they got autonomous or teams and and we're very impressed with what we've seen so far.
As far as.
Our EBITDA margins and the way they are running the business. We're pleased with where they are so far and I think together, we can create something special rich can you more specifically answer his question on maybe some more of the the information the more current information yeah sure. So I mean, I think they've performed pretty well they've run more or less that.
Full capacity through the quarter, even in the downturn and.
I would think a one with.
To be able to continue that I think as we've said before their EBITDA margins were comparable in Q1 to and Sci or Nucor and there's no reason, especially as phase two acres wrapped up and you get that operating leverage as Dave mentioned earlier next year of 3.3 million tons with a little over 600 employees.
Its a.
This is going to had amazing business as they really start bringing us second line on.
Again, we're very excited about the possibilities with them as we move forward and we do have time, we have over three years to get this thing done and.
We're going to continue to work together and make sure that we leverage each other's capabilities for a better future.
Thank you.
And if I can shift cared separate question on the European business. Please.
Can you just touch on your effort to control cost during the second quarter Genie use of state back a short time worker furloughed schemes for your operation how significant were those cost saving measures and the government support.
And on the over what time Horizon would you expect to potentially roll off.
Looking into the second half of the year.
Yes. This is Kevin I would draw your attention to our first quarter over second quarter earnings bridge for the European segment.
The other bar are included in that analysis is largely reflective of the coven 19 relief that we received so that should help you put into context kind of the size of that.
Of that benefit in the quarter, we're optimistic that that support will continue as we look forward, but we're certainly more focused on what we can control within our European business and that business has performed exceptionally well it I'm getting after cost.
Driving labor efficiencies and offsetting any volume efficiencies that business has experienced so I would say the coven 19 relief you should see that in the numbers, but I think more importantly, the way that business has been Ron throughout this downturn as has been remarkable and we'll continue our focus on on controlling costs. I mean is really good point, Kevin the leadership team over there.
As well as the employees is are tough times and.
As Lee this is business.
The European markets, it entered a recession and yet they continue to get the job done working with each other were in with the customers and working with the local governments in the European government to make sure that we have a successful business that gets back to our top priorities protecting lives and livelihoods. These are tough times, all the way around but.
They they understand cost control and they understand how to run a mill and frankly, we strongly believe that this is the best mill in Eastern Europe.
Thank you very much.
I'll now proceed to our next question on the lines from a line of Chris Terry with Deutsche Bank.
However, the question.
Hi, Doug been Christa just wanted to talk a little bit more about Big River. Appreciate you Cook with three use to exercise an option just wanted to cope with screen a little bit more on the timing is that though on the on I know you've got the option, but it's markets changing.
New change your liquidity during the quarter, what's your thought process there heading into August 2021, with the hard production on a big River.
Hello. Thanks, Thanks for the question I'm sure that questions on a lot of People's minds in terms of what's going to happen in one we're going to pull the trigger it's certainly something that we discussed very frequently and and.
Look at various scenarios in order to do that than just Mitt let me restate we have.
Like 3.25 years left to exercise that call option were in the midst of of a pandemic. We're also trying to understand more deeply the business have learned with big River steel and so at an appropriate time going it makes sense, we'll we'll pull the trigger we have our hands full today and that.
Could change tomorrow, all depends on how well, we find our way into the future with Covance 19, the pandemic and what's happening with our customers, we want to be incredibly responsive to our customers and make sure that again, our first priority is lives and livelihoods and stain liquid.
Thanks. Thanks.
Just as a follow up going through your other operations, how do we think about granite city. It obviously was restarted around the Tong of section to 32 being implemented as I think the key end markets that construction containers predominantly I think you forgot that wrought is it.
Really around is that the location or is it the end markets specifically around that sort of meant that that one has started started on lawn while some of your other services came off lawn during the last quarter also.
Well of course, where we're this is they were focused on the customer so when the customer markets are down that's when you end up having does turn down now.
Blast furnace as far as granite city goes thats.
Responsive to the energy market, which is largely dried up but the packaging market is very robust and going very well so.
Granite city as long as it has customers to serve and continues to performance at good levels will will continue to.
Keep that opened its going to be customer driven customer focused as it always is.
Thank you very much what kept our next question on the line from Matthew fields with Bank of America, Alright habit.
Hey, everyone.
I just wanted to ask about about cash and then and then another one about capital structure. So in the.
Offering mimo, and then sort of bond process for the secured.
You mentioned that your cash needs for the last three quarters of the year, we're going to be 700 million.
On 400 in the second quarter, so that does that kind of implicitly guide to in a negative 300 cash flow for the back office.
And Thats still the case.
[noise], our cash usage forecast, we did put out 700 main as our cash.
Forecast cash usage for the Q2 through Q4, and we are still on track for that so working capital was sources.
Second quarter, and it'll be a source of about 250 million in the second half of the year and we are looking for opportunities to generate incremental related working capital, but right now we're pretty sure achieved 50.
As far as Capex.
Our SEC Capex was 450 man, which is 60% of annual budget settlement.
And.
We do not expect that to continue that same right. So we expect the quarterly Capex. Furthermore, ranger the year to trend lower and to meet that annual budget of 750, Maine.
As far as interest.
We expect cash interest until about 275 million.
Million in 2020.
Hundred 75 main event will be spent in the second half and that does include $65 million associated with the senior secured notes, which was not part of that 700 forecasts. We did exclude that from that 704 fast.
As far as EBITDA, we know of adjusted EBITDA in the second quarter was the trough.
And so adjusted EBITDA should improve the second half. So most of those are the primary components of that 700 million cash usage forecast as I said, we're on track to to meet that.
Couple of other factors that will figure into our cash.
We have the stelco deal, which is a hybrid man.
Cash can change or.
We also have repaid 100 million on our.
Second quarter.
So it's not part of this.
[noise] [noise]. So so the three 300 million of of free cash flow previously, adding another 65 cast funds on the new secured notes that 365, and then working backwards with all those discrete items you got to EBITDA of about negative two hundreds of the backup give or take right.
What we won't comment on our EBITDA projections for the full year, but hopefully the clarity we've given around some of the moving pieces that influence a cash usage should help you directionally size a expectations for the remainder of the or.
Totaling we're looking at cash every day here and I know you're asking a modeling.
Come on.
Yes, that's all but we look at cash in daily fixed costs the way to.
Managed working capital. We're also monetizing online audience. We also have real estate assets that we're monetizing or have some for comp processes on those so we feel comfortable with where we are on cash.
[noise] Okay, great. Thank you and then my follow a halt the Dave's question earlier in the call about sort of optimal capital structure.
Posted robust so you're in the high fives.
Hi, 5 billion dollar debt now you're gonna have to fund an equity purchase a big rubber for southern RV Mone, plus and then consolidate big rubbers debt onto your balance sheet. So thats gets you on the note 7 billion.
Total debt I mean, what's.
If you are number one strategic priority how do you think about the capital structure to accommodate that strategic priority.
Well I think the the key issue here as well as our top strategic priority. We have time to address this and we're going to address it at the appropriate time, obviously in the midst of a pandemic. It's a it's a big challenge, but you've seen our balance sheet, you've seen our liquidity on depended upon the pandemic and how all things play out.
You know, we could go sooner or we can wait till Q.
3.25 years from now to get it done so thats one of the things that will work through overtime and certainly we will have enough cash to get this done as our top priority that's not the only and the only thing out on today's comments there as you know you've talked about consolidating the debt and you know the financing to ultimately purchased the remaining 50.1, but I think the one.
One thing, we always need to be mindful of is the EBITDA contribution in the cash flow generation. We expect this business to have I mean that is why it is our number one strategic priority. The EBITDA margin profile the free cash flow generation. The mini mill is something we must have in our business. So while we're going to take on some incremental leverage to make that happen we believe.
Of our business will be much better positioned with big River as a part of us steel to have the right capital structure in place and generate value for shareholders and you know how the credit rating kind of accretive business model to to work from so we understand the the capital requirements to get this done, but we're really excited.
EBITDA performance in the cash flow generation that is to comp.
Thank you very much and we'll get to our next question on the line and then from the line of Andrea bucket Houser from you'd be yes go ahead. However, the question.
Thank you very much just one question for me Slide 13.
I always have great slide we kind of show a loss operational and whats idled and some capacity and indefinitely idled.
Just just operationally how we should think about this you always do have lost one is for Darien Lasagna day of granite city.
Just idled and that looks to be something that you guys could kind of pulled the trigger on and bring bring back online when demand dictates it.
How should we think about great lakes. So that's definitely be idled operationally is that does that affect some of being cold idled now.
This at this point in time or you still keeping I'd warm so to speak.
Okay go ahead, Kevin Yes, your Andres I'm happy to provide some color on the kind of the operating footprint. So let me let me touch on a few things first our decision to return blast furnaces to service as we mentioned earlier in today's call you know very much a reflection of the strength of the order book and bringing the melt back online at the Mon Valley and Gary to support.
The strength of the automotive order book as well as the appliance and construction order book, So demand driven order book driven.
And not speculative in any way I think if we look forward or we would need we would like to see continued strength in the order book around some of our key end markets as we make decisions about the future operating footprint, but I would think for now the order book, we have in hand on the continuing strength, we're seeing a we're comfortable with kind of the other three blocks.
Turning to configuration at Gary one at granite city and two at the Mon Valley within the flower what segment as it relates the great Lakes. We made that decision you know pre Cove at night team, we talked about some of the strategic logic behind making that decision around focusing on mills that are costing capability driven.
And you know at this point in time, the visibility we have into the great Lakes steelmaking assets, just don't necessarily meet that criteria, so taking a bit more of a longer term view on on great Lakes. Other remain very flexible to return idled furnaces in the U.S. at granite city, and Gary as well as in Europe back online.
Line.
To support customer demand I will say the great Lakes works, finishing lines are extremely important to how we serve the automotive market and continue to run to support customers a and that's that's how we leased in the near term what we envision from from that facility I.
I think a key point there is its customer base customer will decide where where we take this business. The the stronger the the customer need the more we're going to be responding to them and that means we will be turned things on if things go badly than we have to turn them up and its customer focused all with.
Yeah, that's very clear on the demand side I guess, just one follow up because I remember back when when when you kind of took down you know granite city.
On the on 2015 are there were obviously some cost associated with that and then there was some costs associated with kind of keeping it down and then restarting. It again is that kind of similar to how we should think about great lakes that effectively there'll be some you know some cost associated with you know bringing them down as they are now and then keeping him donlin so to bring them back office that.
That's somewhat similar to how we just think about it.
Yes.
Lets maybe compare contrast kind of what we call you know bank blast furnace versus more of an indefinitely idled blast furnace you know a bank blast furnace like we had in response to covert 19, you should think about that in a couple million dollars a month and in order to keep that furnished in a flexible state in order to respond to increase customer demand and we saw a lot of that you know.
Packed our second quarter results given the furnaces, we had offline in the second quarter. If more indefinite you can remove some of those frictional costs. You know obviously take out some of the fixed cost that are that are associated with that part of the steel production production process you have some from some frictional costs like a great lakes that we identified earlier on in previous quarters.
But the recurring costs associated with an indefinite idling are far less than it would be an up more of an indefinite bank state.
Thank you very much how we're going to our next question on the line from Timna Tanners from Bank of America Red hat.
Hey, good morning, Happy Friday, I'm glad to ask a little bit if you take a step back and we're talking about strategic priorities and Big River and also on in the past the classic talked a lot about absolutely vital and thanks and the need to invest in your existing assets covering the cost of debt down.
So just looking at slide that came to actually go one before that you have to slide 12, where you talk about kind of year projects and your existing portfolio can you remind us like how important those are and how long they can be delayed for and what's the total amount that we should be contemplating omniab requirement here for these.
Indefinitely.
Yes, so to novick. If you look on that page you will see you know the four strategic investments capital investments that we believe our cornerstones of the best to both strategy related to the yeah. We plan on that project completed here in the in the fourth quarter 2020.
A little bit of Capex, probably remaining on our project, we anticipate about 150 million in the full year 2020, we've caught we probably spent about.
Half of that so far throughout the first top of the year. So another have to go I will remind you that that was prefunded with environmental revenue bonds. So you will see out of a pool from restricted cash as we spend on the a asked to offset that that capex. When it comes through the project at the Mon Valley enlist, causing enrolling extremely important project to our best of both.
Future, especially when you think about in the context of being invested at them on valley, which is our low cost liquid steel producer, we think that will ultimately give the a them on valley, a a differentiated cost position as well as differentiated capabilities to serve highly attractive you know strategic markets.
Like automotive.
That's going to be at least 1.5 billion dollar investment at temporarily kind of paused a construction on that but still remain extremely optimistic about the value that project will deliver a longer term. Yeah. There are permitting delays associated with Covance 19 for analyst asking enrolling which is driven some of the timing around executing that project.
He thinks about the Gary Hot strip mill another facility, that's extremely important to our future odd differentiated capabilities to serve margins that quite frankly, the mini mills can't US can't currently serve given their technical capabilities.
So we continue to invest and not hot strip mill to build upon the strategic advantage, we have we're being prudent and how we allocate capital that asset right now given the coven 19 environment, but over the next few years, we'll certainly look to make or you know a the additional investments to build on the competitive advantage we have a gary.
And then a dynamo lining U.S.S.K. it has been pause and we'll get back to that.
As market conditions improve but hopefully that provides you with some some context as well as that reemphasizes. The strategic importance of all of these projects to our best of both.
Okay cool. Thanks, and then just my follow up I May have Christie mentioned in her discussion I'm back to slide 13 that on the two furnaces carrying that Tony I believe and would expect to be the main offline for the rest of year. So just kind of wondering if you could elaborate on what conditions would need to be met north.
To me start then it's I know Gary's generally more automotive I don't know if every single finances, automotive and granite city, Scotland and construction in container as we just heard so do you need to see those markets improve a bit from here or have better better visibility or and could you just give us some 90 towns right.
Yeah sure I thought you know I would just emphasize a few points that I made earlier, which is the order book tells us and our customers tell us when we should return a production to back online and so we would need to see continued strengthening of the order book and a lot of the strategic markets you talked about and since we don't just speculate bring sir.
So these back online without having the order book in hand, we would really we would need to see the customer orders to bring those the bring those furnaces back online. So we remain flexible open for business and we're ready to respond very quickly to continued strengthening the order book, but for now. These this is the configuration, we need to support the order book, Yes, Kevin one thing.
I'd add to that is one of those firms as banks. So we can be brought back quickly as needed.
So it will be in response to the word but.
Thanks, very much like our next question on the line from the liner Karl Blunden with Goldman Sachs grew at a however, the question.
Hi, Thanks, Thanks, very much the time instead of one on the current asset base and then one on a non core asset sale.
Just with the current asset base and taking some offline for awhile and now ramping back of course with orders to support your customers. We've heard some noise I'd say most on the mini mills about accelerated share gains kind of accelerating that longer term trend.
And your thoughts on that maybe it's in some ways in line with.
The types of.
Markets you want to target that are better margin longer terms, what you're moving as lower margins, but like on the Bennett.
There are indications here for your longer term and its potential.
That's a really good question, thanks for before highlighting that because that's.
That highlights kind of the best of both strategy in terms of were taken this business and yes, we are winning and strategic markets, where we have the capability differentiation, especially in advanced high strength steel.
So our strategy is focused on differentiation is as the basis of capability and costs. Those two things. If we can build up the best capability. Obviously, we have the best business in certainly in the advanced high strength Steel X gene three the work that we're doing to serve not just the automotive.
But expanding into other areas, where our steel has a competitive advantage is where we want to play at the low end of the markets no doubt about it the mini mills and ER and the trough of the business if they make it they're going to take it which tells US we can't get to the future fast enough because with Big River steel low will make more.
Any in the trough and of course with integrated Mills, we outperform into peak. So together, we should be able to construct a model here in the next couple of years that puts us in a physician to outperform.
We believe that our best of both strategy will ultimately create a power <unk> powerful combination of highly capable low cost differentiated steel solutions. When frankly, we're excited about it.
Thank you very much.
I'll now turn the call back over to U.S. steel CEO for any closing remarks.
Thanks, everyone for your interest in us steel and especial. Thank you to our employees. Thank you for staying safe and staying focused on delivering for our customers. These are uncertain times, but I am excited and confident about our future.
Now, let's get back to work safely.
Thank you very much on that does conclude the conference call for today. We thank you for your participation disconnect killer and having to bear in mind.
[music].
[music].
[music].
[music].