Q3 2020 United States Steel Corp Earnings Call

And welcome to United States Steel Corporation third quarter, 2020 earnings conference call and webcast at.

As a reminder, today's call is being recorded I'll now hand, the call over to Kevin Lewis <unk>, Vice President of Investor Relations and corporate F. Peony. Please go ahead.

Great. Thank you and good morning, we appreciate your continued interest in U.S. steel and welcome you to our third quarter earnings call.

On the call with me. This morning, we'll be U.S. steel President and CEO, Dave Barry.

Senior Vice President and CFO Christi, 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 investors section of our website.

On today's call, we will walk through via webcast select slides and our third quarter results.

The link and slides for today's call can also be found on our web site.

But before we start let me remind you that some information provided during this call may include forward looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results may vary materially.

Forward looking statements in the press release that we issued yesterday along with our remarks today are made as of today and we undertake no duty to update them as actual events unfold.

I would now like to turn the conference call over to U.S. steel, President and CEO, Dave birth, and he'll begin todays presentation on slide four.

Thank you Kevin Good morning, everyone. Thank you for being a part of today's call and for your interest in Us steel.

The third quarter hasn't proved to be a quarter of continued optimism.

We have a lot to update you on about our optimism and progress before we open the line to your questions. Today also marks the one year anniversary of our initial investment in Big River steel with tremendous progress to report.

We'll get into more detail about that tremendous progress we've made together, but I want to take a moment now to thank you a steel and big River teams for their collaboration for making the first generation three advanced high strength steel at a mini mill and four creating an unmatched customer value proposition.

The best of both teams have been through an unpredictable in an unprecedented year, making their accomplishments that much more impressive.

So thank you to the U.S. steel and Big River steel teams of innovators for making the first Gen. Three advanced high strength steel at a mini mill and four creating an unmatched customer value proposition, we can't get to the future fast enough to deliver them.

The value our best of both customers demand and our stockholders deserve.

There are three main messages I'd like you to take away from our prepared remarks.

Let's get started with number one.

First we are optimistic as the market recovery has continued into the fourth quarter.

We believe market strength will continue through the first quarter of 2021 based on our stronger order book and customer collaborations.

We believe market conditions can laugh and are confident about our performance for the rest of the year.

Second.

We are seeing the significant improvements from the rapid response to cope in 19 in flat rolled and us steel Europe as we generated free cash flow in the third quarter.

We are optimistic we will generate further improvements in the fourth quarter.

Which Christie will talk about later.

And third we are optimistic about the continued execution of our world competitive best of both strategy.

Throughout 2020.

We have been not only able to complete significant milestones of our best in both strategy, but also reaffirm our optimism about the future by delivering unmatched process and product innovation for our customers.

Let's start with more about our best of both strategy execution on slide five.

We continue to operate at industry, leading days away from work safety performance and are on track to improve on last year's record setting performance. We remain vigilant in our COVID-19 protocol, including emphasizing faced coverings physical distancing and good personal hygiene to stop the spread of the virus.

Next in addition to the actions we took earlier this year to fortify the balance sheet, we have delivered significant cash improvement in the third quarter.

We generated cash from operations of $210 million, primarily from the release of working capital, we generated free cash flow of $76 million and Weve increased liquidity by over $200 million in the third quarter and ended the quarter with nearly $1.7 billion of cash.

After reducing our ABL borrowing by about $900 million.

While navigating 2020, we also executed critical agreements related to the monetization of our iron ore of about $100 million before year end.

We also remain focused on delivering on our $200 million fixed cost reduction goal, which is ahead of schedule.

I want to spend the last few minutes on this slide celebrating our most recent best of both accomplishments.

Earlier this month, we completed a major milestone of our best of both strategy. The successful startup of our electric arc furnace at Fairfield, Alabama.

As part of the startup process the us steel Eas team at our Fairfield operations spent time with the Big River steel team to learn Eas best practices to ensure a safe and efficient startup.

The new Eas and collaboration with Big River Steel are two proof points of our best of both strategy and ways, we can provide value to our customers.

The completion of our Eas delivers on our commitment to add sustainable steelmaking capability to our footprint, while driving significant cost reductions.

For our customers, we will be more agile and nimble to deliver the steel they require to meet their specific needs. When you combine the app with our proprietary grades of premium connections. We are confident that us deal offers a unique value proposition to our customers.

Congratulations to the Fairfield team on this important achievement and thank you for completing the projects safely in a truly extraordinary environment and thank you to the Big River team for your support with Eos number one.

This month also marks another major milestone the one year anniversary of our initial investment in Big River steel, which we will discuss starting on slide six.

We couldn't be more excited about the progress made to date.

But this shouldn't surprise anyone.

We are combining big River steel, which has the most advanced mini mill technology in the country with us field outstanding R&D team.

And the results have been remarkable we have successfully trials and are beginning the qualification process on 11 us steel proprietary steel grades made at Big River.

Take for instance for instance, our proprietary grades at generation three advanced high strength steels.

Not only have we successfully trials these grades of steel, but we are in the qualification stage with Oems to produce the gen. Three substrate for some of our most demanding applications.

We are producing grades of steel many didnt think possible at all through a mini mill, let alone in the first year of a partnership.

This makes for a winning solution for our customers. We can provide grades of steel once thought possible only from the integrated process.

Now Big River is doing it with us steel through any staff. This.

This will create unmatched value in differentiation for our customers, while ultimately providing the greens deals our customers demand to achieve through their low carbon goals.

Let me repeat this in case I wasn't clear enough generation three grades of steel substrate made it a mini mill.

Possible today.

That's right a mini mill and working with an integrated mill has gen. Three steel capability. This isn't a hypothetical or a long term goal. This is a fact and were moving ahead with qualification. So that are highly value auto Oems can use X gene three source at Big River in their next generation of.

Goals.

As slide seven shows we are delivering on the big river value proposition, including collaborating on 11 different steel grades that are going through the qualification process.

Not bad for one year of working together.

At the completion of Big Rivers Phase two expansion Big River will produce over 3 million tons of sustainable steel at the only LEED gold certified steel making facility. This.

This offering of Green steels will meet the growing customer demand for sustainable steel in pursuit of climate change and de carbonization targets.

The phase two expansion is also two months ahead of schedule. Thanks to superior project management from the Big River team.

Slide eight list just a few of the benefits of the expansion underway.

Big River is near completion of the phase two expansion and will unlock significant value as they reach full production.

This will drive substantial operating leverage and efficiency that should go straight to the bottom line.

We are confident that that.

Exceptional management and operating team at Big River steel will ramp production efficiently and safely. So that we can continue to leverage significant progress we are making to gather.

This brings me to my second point I mentioned earlier, we are optimistic about the recovery that has been underway for the past several months.

Slide nine summarizes why we are confident.

We believe todays market demand is sustainable and will continue into next year.

As vacations movies concerts, and dining out have been replaced by vehicle and appliance sales and home improvement projects. We have continued to see a noticeable increase in steel demand.

This is supported by the September durable goods report released on Tuesday, which increased by 1.9% compared with August report, while exceeding expectations of up to 0.5%.

Steel customers across our end markets are reporting both strong demand and low inventories.

Take automotive Oems for example.

Low interest rates and the covance to induce change in spending patterns has led to more vehicle purchases and improved forecast in demand in 2021.

Meanwhile, strong demand today will limit restocking opportunities, which will support future steel production.

We are seeing this across other U.S steel end markets, such as appliance and packaging.

Additionally service center industry data suggests today's inventories are unsustainably low service centers are unlikely to prioritize restocking inventories, while they balance increased customer demand.

Improved demand is also supported by current steel industry statistics utilization rates and it's in the industry are back to 70% in the us after bottoming near 50% in the spring.

Flat rolled utilization is likely even higher near 80% as demand for these products has exceeded long products and plate demand.

These stats are further reinforced in current industry lead times for hot rolled coil now extended past eight weeks.

These industry statistics, plus our current order book and customer collaborations give us confidence that today's customer activity should continue into next year.

To be sure. We are prepared for the continued strong demand expected. This winter we are analyzing timing around restarting our keetac iron ore pellet facility the incremental iron ore production will de risk our current blast furnace configuration. So we have the right inventory to meet customer.

Demand, while the locks are closed on the great Lakes.

Before I pass it to Christie to talk about how the actions we've taken this year generated better than expected results.

Let me provide an update on our capital spending and strategic projects on slide 10.

First our Capex budget for 2020 remains unchanged at about $750 million for 2021, we currently expect capital spending to be approximately $675 million. We believe this is the right portfolio of projects for 2021, as we continue to execute our best in.

Both strategy the growing confidence in the sustainability of customer activity gives us the confidence to resume key strategic investments in our best of both strategy and a cash smart way.

Now I'll hand, it over to Christie to discuss our third quarter performance and additional color for the rest of the year.

Thanks, Dave good.

Good morning, everyone. Thank you for joining us I'll begin on slide 11.

Our quarter over quarter performance highlights the improvement we are seeing across the business as we significantly improved our flat rolled EBITDA and turned EBITDA positive and us steel in Europe.

Our ability to respond quickly and cost effectively to customer demand created significant operating leverage.

Adjusted EBITDA for the third quarter was a loss of $49 million compared to the second quarter loss of $264 million we.

We outperformed our third quarter guidance of adjusted EBITDA loss of 100 million as a result of better than expected flat rolled segment performance.

Strong operational performance cost management, and higher shipments or tailwinds in our flat rolled segment, yes.

This helped to offset the lower prices flowing through our flat rolled results, primarily from quarterly and monthly contracts that still reflected lower index prices price.

Prices that has since increased nearly $250 per ton from August lows.

In Europe, we returned to positive EBITDA and generated 8% EBITDA margin.

Lower costs across all major spend categories drove positive EBITDA in the third quarter.

Tubular results continue to be impacted by a difficult commercial environment, we have streamlined operations to our Fairfield facility as we set our operations around our recently completed Eas at Fairfield.

Looking at cash we delivered on our commitment to keep the business resilient by releasing over $250 million of working capital. We are also executing on our 2020 capex.

For the quarter, we generated 76 million of free cash flow a dramatic improvement and clear result of our continued enterprise focus on cash and cost management.

We ended the quarter with nearly 2.9 billion of liquidity, including approximately $1.7 billion of cash.

Looking ahead.

We expect higher still selling prices to flow through our monthly and quarterly flat rolled contracts and expect volumes to be similar to the third quarter.

As a reminder, historically approximately 40% of our flat rolled order book is on annual contracts and is not subject to fluctuations spot selling prices.

We are pleased with the continued focus on cost and cash management and our European operations and the ramp of our tubular AA, Jeff will provide further opportunities for cost reduction in that segment.

To summarize we reported better than expected third quarter results and are optimistic about our future performance.

As we look to 2021, we will maintain a clear focus on liquidity as we resolve key investments in our best of both strategy.

Dates back view, Thank you Christy, let's turn to slide 12 before.

Before we moved to Q in a let me summarize the key takeaways from today's call. We are optimistic about the recovery that has continued into the fourth quarter.

We are optimistic that the actions we've taken are translating into improved results.

And we are optimistic about the continued execution of our world competitive best of both strategy.

Kevin lets move the Q and a.

Thank you, Dave we ask that each please limit yourself to one question and a follow up so everyone has the opportunity to ask a question.

Operator can you please queue the line for questions.

Thank you.

Like to register a question. Please press the one followed by the four on your telephone.

You will hear athree tone prompt to acknowledge that request.

If your question has been answered and I would like to withdraw your registration. Please press the one followed by the three.

Our first question is from the line of Karl Blunden with Goldman Sachs. Please proceed with your question.

Good morning, and thanks for the time.

Just wanted to speak first about the Capex control that bank 21 lumber was significantly lower than what many had expected an including ourselves.

Is there a way to quantify how much.

Incremental earnings power is being pushed back a bit but with that capex coming down.

How much of that is apparel versus efficiencies that you found.

Thank you and thanks Carlin and.

Im sure that that question or type of question like that is on everybody's mind I'm I'm going to make a few comments and then Christine will ask you to further further the dialogue here and just want to make sure everybody understands what we're doing with this capex were Apple allocating capital to our best assets and Bill.

Building in the Optionality and the flexibility so that we can deliver the most value on that Capex spend and I think you all know this but its safety and the environment first and then the second thing is transitioning to the best of both strategy and we'll pull the trigger on.

That up when we can I'd like to say, what I'd like to do that yesterday on Big River, but we'll have to see how things unfold, we have quite a bit of time before we actually have to make that decision, but we feel good about the relationship with Big River and then lastly, it's about managing the cash and liquidity and making sure that we stay.

Page eight this capital for optimum value creation now obviously in this last pandemic year, we did a lot of raising cash and we had some indeterminant delays and other priorities like the endless Castor on the hot strip mill and things like that but as we get this upturn we should be able to start.

Pulling those things into 2021.

And stage that gate that appropriately and we built some of that into the the 675 million that we talked about so christi, maybe a little bit more okay. Dave I'll make a few more comments on our 2021 Capex plan as we said earlier, our 2021 Capex forecast is approximately 670.

5 million in total and it does include some assumed spending on our strategic projects for the base business were currently expecting to allocate 415 million of capital and the rest will be on our strategic projects.

So in those strategic projects, let me give you a few details on that the analysts casting and Rolling project, we plan to resume equipment purchases and expect to draw on our export credit agency agreement for that so this will allow us to continue building the equipment as we monitor the right time to fully resumed the price.

Correct, yes.

Endless casting and Rolling project delivers differentiated steel solutions for our customers, including advanced high strength substrate and so it's really important that we continue to progress, but at a cash smart pace.

And for this project, we're looking to spend approximately $150 million of capital next year on this project.

At Gary works, we plan to leverage the flexibility that we built into our execution plan to invest about 80 million on the hot strip mill capability upgrades in conjunction with some of the planned outages that we have for next year. So these investments will further differentiate this highly capable asset.

And we will ensure that we meet our customer demands for high quality steels and that includes heavy gauge line pipe and the substrate for advanced high strength steels.

The remaining stringent strategic spend is carryover from 2020.

So looking at next year, we believe that 2021 capital budgets supports our customers today with both safe and reliable operations and it supports the continued execution of our best both strategy, yes. Thanks, Christy so cost Karl in nutshell here, what what we're doing is we are allocating towards the back.

Yes to both transitioning in that process as we get into next year and we talk with you next time at the end of January we'll have more color on that as we transition to the future, but we are building in a lot of op optionality and flexibility.

I think thats very helpful I think it.

Sounds like it aligns with bigger being the number one priority for the business.

Just the probably more granular item on the 150 of Mon Valley Capex.

You do indicate that will complement the export credit agreement to some extent is there a way to kind.

Kind of give us.

And how much can be funded that way versus coming from cash I think thats important for the liquidity picture.

Sure. Carl This is Kevin I would expect us to be able to leverage the export credit agency financing we have in place for immaterial amounts of the 150 million that we we just described as Christy just walked through so I think order of magnitude call it somewhere between a little bit of more than $100 million to $115 million of availability on that.

On our facility.

Okay. Thanks very much.

Thank you.

Our next question is from the line of Seth Rosenfeld with Exane BNP. Please proceed with your question.

Good morning, Thank you for taking our questions today.

If I can ask a question on the on balance sheet and cash generation space. Obviously, the very strong cash generation in Q3 was driven principally by working capital.

Remember at the time of Q2 results you'd guided to a second half relates to 50, you have achieved all of that in the third quarter.

What we expect for the fourth quarter in terms of working capital performance.

Their need for potentially some reinvestment going forward as volumes continue to recover.

Thanks.

Yeah. Thanks for that and I think you all know that we spend a lot of time on this cash management in fact rewards structures are based upon the cash conversion cycle time, so Christy and her team actually look at cash each and every day and again as I said, the the incentives for our in it.

Employees short term incentive pay across the whole company is focused on this portion and we will continue to make sure that we keep pushing on cash, but I think Kevin you had some more on that sure Dave a really great point.

Since that's your question I think we are going to continue to be hyper vigilant when it comes to managing all things related to cash, but especially working capital and inventory levels at our respective facilities. The first goal was obviously always to be able to support our customers and increasing demand environment.

Just like that is that is ever more importance. So we'll continue to look at the order book see how orders are coming in I Wouldnt expect us to have to be built a material amount of inventory that flows through working capital. So I think for purposes of the fourth quarter, we're going to make sure we're well positioned to support what we believe will be a strong year in to 2020.

One, but don't expect any significant need for cash in the fourth quarter to to build inventory to support that expected increased demand.

Okay. Thank you very much I'm, sorry, I spoke of discarding something more neutral on a quarterly basis correct.

I think that is a good approximation.

Okay and a separate question. Please on Europe, obviously.

Obviously in Q3 benefited from it looks like an FX translation, a benefit and also electricity compensation rebates can you quantify those and comment on the recurrence of Bose.

Thank you very much yeah sure Seth on the electricity rebate.

Something that came in specifically for the third quarter, So you're absolutely correct in calling that out as a nonrecurring event moving forward. That's about a 10 million dollar impact in the third quarter that we wouldn't expect to occur into the fourth quarter.

And then if you look at the Bridge chart QQ over Threeq you too we provided in our summary earnings materials. The other category is largely reflective of the FX benefits that we had in.

In the third quarter. So that should help you think about the size of the of the onetime impacts or FX driven impacts in the quarter, but I would say looking forward for Europe as Christa described in his remarks, we continue to be extremely impressed with the cost and cash management of that business. So we'll look to continue to build.

The positive momentum and expect that segment to continue to perform well in near future.

Thank you.

Our next question is from the line of Chris Terry with Deutsche Bank. Please proceed with your question.

Hi, good diving Christy I just wanted to ask.

We're going to more about Keetac I'm sure you're restarting just wanted to be clear, but that's.

Thats really to do with managing your raw material inventory through the winter period as as I understand it I'm just wanted to check that that's not that's not related to hi, Jesse now at 700 and anything that might restart on the blood center saw thank you.

Thanks, and thanks for the question Chris.

What we're doing is making sure we have the inventory levels through the.

The winter months Avelox close up. So this is clearly an inventory related you know we've had some good success with with the seaborne market in terms of selling to the pellets and things like this that this decision that if we make it will be to make sure that we get through the winter months, that's it's clearly inventory.

Related.

So tied with our customers.

Okay.

And then my second question on on Big River I wanted if you could.

Give an update on how long you think ramp up of phase to monetize like and what the product qualification of the of the substrates. The auto sector, how long that might take as well and then just any latest thoughts on how youre thinking about the potential.

Reminding reminder of that asset that you dine on thank you.

Yeah. Thanks, Thanks for that question as well enough risk rich I'll turn to units in a moment here, but but as I said before big River steel they clearly exceeded our expectations and you know when we talk with that Dave's stickler and his team one of the things. They say about this phase to ramp up you know it and will and their favorite words or.

Well on on budget and ahead of schedule and they are certainly demonstrating that go in a couple of months faster than I think even they expected they could do it. So we're we're very pleased with the progress that they are having there and as I said in my opening remarks that the work on Gen. Three is clearly in place.

Passive and answering an earlier question you know, it's as far as the timing of getting to the future faster.

I said I'd like to have done that yesterday, and I think I said that on the last call, but we have to see how things go and and.

As long as we're making progress we feel very very optimistic that we're going to be able to exercise.

Exercise that option at the appropriate time in the future rich maybe something else there sure sure Dave Thanks, and I think you, Chris how long it will take for them to ramp up.

As to.

You know my ex but our expectation would be that they are very experienced in start up as they did on phase. One. So we would expect phase two as well to be ramped up relatively quickly.

Honestly they are finishing ahead of schedule.

Completion of the construction. So I think everything is excuse me pointing to a positive direction as far as phase two a coming online as soon as possible and as this is a very experienced team. This is our core competency building and starting and running mini mills. So we have a lot of faith that they'll get that done as quickly as possible.

As far as the qualifications are those are processes that can vary from customer to customer from OEM to OEM, but we're very optimistic that we should hopefully have some results in 2021 for 2021 platforms yes.

There really extraordinary of course.

Building mini Mills, and then all as well as operating that mini mills, and we saw that first hand, with our Eas number one in Alabama, where they were generous with their time.

Training and.

Help as we large launched first arc here recently, so we had their folks come in and provide some coaching and guidance and our folks went to visit them. So it's really been a great collaborative effort. So we expect them to stay at their word and as the way they work, which is you know.

On on budget and ahead of schedule and expect that to be the same.

Ramping up safely and making sure that we get the volumes necessary to run that facility extraordinary well they've demonstrated that can do it so far I don't know why that would change.

Thank you.

Our next question is from the line of David Gagliano with BMO capital markets. Please proceed with your question.

Great. Thanks for taking my questions just one quick follow up from the previous commentary on the.

The Mon Valley project after that 150 million spend in 2021, how much is left how much capex is left to complete that project.

Beyond 2021, and what's the what's the timing on that incremental capex.

So David I will address your first question around remaining capital and then maybe we can let rich talk a little bit about how we think about we proceed from here given some of the other considerations would project but.

First and foremost we think about what's been spent so far including the 152, we plan to spec spend next year I would think order of magnitude to remain spend will be somewhere between a billion and $1.2 billion for the remainder of the project.

But as Dave and Christy both talked about in the remarks, we feel comfortable and confident that if we can proceed with the equipment purchases, especially given we have financing to support the vast majority of that in 2021 that that'll that'll put us in a good position to have the equipment in hand, and give us some optionality and flexibility, but maybe I'll, let rich talk about.

The optionality and flexibility in how we think about proceeding from there.

Yeah sure. Thanks, Kevin So with respect to Mon Valley at project icon. There are a number of permits that are required to proceed we're pursuing those as fast as we can obviously there have been some impacts from coated on some of the critical path of permits. So we continue to try to work and get those in place with us.

It's obviously a stage gating item as we think about the capex spend for lawn Valeo and why we need to be.

Nimble and maintain optionality.

Okay that is it.

Even from a modeling perspective should we.

I assume the majority of that incremental spend is in 2022 are spread evenly between 22 and 23.

I think what what else they'll add David is that you know for 2021 150 is the right number we're going to leverage the C eight or so.

Financing that we have and we will choose the appropriate time when market conditions support it when the cash flow generation of the business support it when cash and liquidity support it to move forward with the with the resumed groundbreaking and construction of the facility, but for now we're focusing our attention on the equipment getting it continue to be build out and.

Leveraging the EPA to make us a cash smart approach to proceeding with them with passing along I think thats well said, Kevin you know the keyword and all of this is really the optionality. So weak and we can decide to put it in Mon valley. We can decide to put it somewhere else. You know we have a lot of flexibility to decide where this goes and when we pull the trigger.

On all these things so we'll have to see how COVID-19.

Moves forward and we have to see how the permitting process works that we're going to make sure that we take care of our customers and we have put the.

The equipment in place to make sure we deliver the most value while keeping making sure. The employees are taken care of as well as a stockholder. So again the key word here is optionality, we're going to keep the flexibility and we're going to make sure that we have.

This ends caster enroller put in place at the appropriate time.

Okay, Great and then just just switching gears my other follow up question on on the.

40% of annual contract for 2021.

I was wondering if you could provide an update on the negotiations they ought to producers for 2021 and also.

If you can speak about your 2020 on met coal contracts on costs, there as well and then the third part of that question.

The 51 million dollar improvement in overall maintenance and outage costs in this quarter obviously.

Yeah, Im guessing im a big chunk of those with the ramp up.

Production rates, but should we expect outage costs to hold that lower level moving forward. Given these restarts or is there anything upcoming on the maintenance side that we need to be thinking about that would move that quarterly bridge in one direction or the other over the next few quarters and my last question, Yes, sure. David Let me, let me work backwards on your questions here and I'll, let Dave speak a little bit about negotiations with customers here.

I'd add but related to maintenance and outage I think that you know from a maintenance and sustaining capex perspective, we continue to be extremely diligent I'm to understand the maintenance that outages that are requiring a given year to support our customers. So as you heard from from Dave Our focus remains on safety environmental unreliability related projects. So.

Well put those are the top of the list from a priority perspective, and we'll be we'll be disappointed for it and how we proceed and other types of investments, but nothing relevant material you know in the fourth quarter or for next year, we think about big big maintenance outage costs on the on the coal side of things what we'll have some more information for you probably on our next call probably little.

Materially together, it's out now.

But maybe I'll, let Dave and conclude with where we are with customers. Yeah. Thanks today the annual.

Contract negotiations in this market environment, frankly, they're going very well I think the most important thing that we need to keep in mind is that we can when it comes to discussions with our customers. We we make sure that we present them with the U.S. steel value proposition and we're actually actively engage with those customers on that.

Optical issues that are most important to them and of course, there's always the price, but theres the quality and and for US now it's the innovation with certainly our best of both strategy and and the successes that we're having early on with Big River steel and the core service really matters a lot just to name a few of those things it for us.

We're we're moving up the food chain and so while we're having we're showing very good.

When rates with the new platforms and in the strategic markets, where we want to commit to compete and compete well, where we're able to show that we have a differentiated value proposition and of course I think everybody knows this when you're dealing with customers. The most important thing is to listen to them you know have the.

The dialogues with them understand their goals and their targets and how you fit into their future and the closer you get to the customer and the better you understand where they're headed I think it's.

It's better for everybody and I think you you probably saw our announcement, we we have now clear.

Irrefutable focus within a chief commercial officer that we got from outside the steel industry and we will feel great. He can j. Cox is off to a great start and understanding the customer base and we're expecting to bring some.

A greater customer in USMI, intimacy and focus making us more customer centric organization moving forward.

Thank you.

Our next question is from the line of milk Camus with Stifel. Please proceed with your question Hi, Good morning question on the.

Fairfield F.

The earnings presentation, so savings on seamless or $90 per ton can you give us a sense for what the gross cost savings are from that.

Yeah, Nick So I mean, that's that's obviously going to have some volume dependency to it but let me unpack the $90 per ton a bit for you. So had some context and then when we saw the opportunity to reduce a you know in sourced rounds cost compared to externally sourced rounds, and we were one of the big drivers was kind of just the transportation and logistics.

Fixed components of the cost structure of having externally sourced rounds. So our belief is that obviously the energy market is challenged which may lead to lower levels of utilization at that Yap initially, but we think we can be cost competitive on a per unit rounds costs, which would be much lower than our externally sourced palate, especially taken a consideration.

In the freight savings we would have.

You know getting what was once a third party supplier onto our facility versus you know having that goes on on campus at Fairfield, So I'm, probably more to come we'll see how the brand so the tubular business moves forward.

But we're pretty confident that $90 per ton is achievable across the pretty pretty wide range of utilization levels at the electric arc furnace. So a good opportunity for our tubular business to to achieve some significant structural cost savings.

So in terms of the the savings is going to be flowing through the tubular segment.

That's correct.

And of the shipments can you give us a sense for how much of.

That business is seamless.

Sure. So as we have discussed on previous calls we had indefinitely idled our lone star operation was our sole welded pipe facility. So as we look at the third quarter shipment volumes were at about 92% mix of seamless in the third quarter and we would expect that to continue to to increase to a higher percentage of seamless mix as.

We focus and consolidate our operations at Fairfield.

Thank you.

Our next question is from the line of Timna Tanners with Bank of America. Please proceed with your question.

Yeah, he can mining and happy Friday, one of key last first off congratulations on starting up the new yes, and asking about that second fact, my first question was on regarding the flat roll market into the fourth quarter and if we think about the mix given that hot rolled September almost $700 a ton it's had a big move but with automotive family care.

So sharply I am I would I'd heard that you're really busy with automotive contacts which aren't as tied to the spot market. So just trying to get a sense of your mix in a short time keeping in mind of course, your long term you've laid out and along the same lines can you just tell us why configuration remains as it is given the very strong demand and Gary.

Gary works without that last turn to stay with you would think that that might be a target to restart since I just wanted to ask about that again. Thanks.

Okay. Thanks, Timna I think as we look forward into the fourth quarter, we would certainly expect average proceeds to increase.

We continue to believe the automotive book of business will remain strong and certainly seeing that so we'll look to ought to really optimize on on mix and pricing outcomes as we balance our contractual obligations and fixed price contracts with up in participating in the spot market.

When it comes to the blast furnace at Gary I mean, I think we've said it many times before we continue to evaluate the order book, we continue to configure the operations to best meet the order book and the needs of our customers at that point in time, we we don't we Havent made a decision on on Gary number four that's currently not in our restart plans bogot.

We need to evaluate a moving forward, but first and foremost we're going to take care of our customers and we'll keep a close eye on the order book and make sure we have the melt we need to support their their demand moving forward.

Okay, and then back to <unk> again on that and then email. So I'm great started out but I have heard that utilization is pretty low again pointing to that weakness in the energy markets. You played out so what is the utilization across two but if you could just remind us of that and you had to eat like you said the nice attend depends on your utilization so okay.

And that you have to be profitable at these levels and are there. Other uses of those rounds that you produce perhaps to optimize the facility.

Sure and a third order we shipped about 60000 tons of seamless pipe out of the tubular segment and as I mentioned I'd expect that to continue to be an increasingly higher percentage of our total mix in tubular since affair code will be our CIO operation. So looking forward, we won't comment specifically on where we expect tubular volumes to go but I would expect.

Just to be able to more fully leverage that that you have given that the you know we'll be moving towards pretty much 100% mix of seamless pipe and the tubular business and when it comes to utilization I mean, I think your question Timna. It really validates why having an electric arc furnace in your footprint is so important we know that you can run in electric arc furnace at.

Lower levels utilization, you don't have the inherent inefficiencies or frictional costs of operating some of the integrated assets. So we're confident that we can operate the electric arc furnace at a level of utilization its cost effective and expect to see it all other cost savings related to the in sourcing of rounds like transportation, which should provide a tailwind for that segment.

Moving forward. So so that's where we are currently keep you keep you update if our views change, but the current business cases, the leverage that furnace for four rounds production for internal consumption.

Thank you.

Our next question is from the line of John Tumazos with John Tumazos. Please proceed with your question.

Thank you.

With the lower Capex target for next year.

Do you have a specific target in mind for debt reduction next year.

Improving steel prices in markets or are you taking off to buy the remaining half of Big River steel next year and that's why the Capex so restraint.

Well thanks, Thanks for that.

That question, obviously, we have a lot to think about here and as we think about.

Our balance sheet, what we tried to do and we look in terms of liquidity the fixed charge ratio.

In making sure that we have one and half times.

That amount so we think liquidity about one and a half million is the way we think about.

Managing our cash through this next year and depending upon what we.

See in terms of customer demand, what we see in terms of cash flows and what.

What we see about the future we can they can make the determination to but how much will.

Hey off in terms of debt or in effect.

Exercise the option on Big River steel as a possibility or or pursue other capital expenditures typically we don't spend a lot of time talking about 2021, but I know in this time is it is a.

Very uncertain about what happens with Cove and 19 in while it does seem like uncertainties the word of the day.

We go back to the the Optionality that we have with all this cash that we're hearing so we can decide what are the best moves that we can make with with again, our top priority of course being big River steel than the endless caster than the Gary Hot strip Mill and then the the frankly the Dynamo line in.

USS case, so those are the priorities in terms of our Capex and I think Christie is going to add something to say you know our top financial priority remains cash and liquidity and we think strong liquidity and cash flow our are extremely important as we continue.

Not just to make sure we're going to make it through her with but also to execute the strategy as Dave said, we have 2.9 billion of liquidity 1.7 billion of cash. So we're increasingly optimistic about improving market conditions as you know our debt maturity profile has been.

Extended we continue to work on our Biz business resiliency planning so that were prepared.

And you know do scenario analysis around.

The future and what it might hold so you.

You know as we moved into 2021, we're trying to take a cash smart approach to capital as we already talked about so that we are well positioned to continue to execute our strategy as our strategy is all about delivering more resilient, earning long term cash flow through cycle and differentiation on the basis of.

Both cost and capability and as you know we have several of these strategic projects that are coming online our protax JV coating line is started.

We have a new area. It's all of this is a line of sight to improved profitability and cash flow, which will help us de leverage in the future.

Thanks, I'm still wondering if you have a debt reduction target or you're going to buy big rivers or you just want to have a big cash balance on hand as a precaution.

Well I'm going to continue to let you wonder [laughter] out we've got a lot of work to do here, we get through this year and we're going to make sure. We make those of important strategic chart choices at the appropriate time.

Thank you.

Thank you.

Our next question is from the line of Matthew Fields with Bank of America. Please proceed with your question.

Hey, everyone.

Just going back to some earlier comments about your big River starting to roll some of your proprietary grades are the big River substrate starting to run time essentially on your rolling lines and some of your your JV or rolling facilities, and finishing facility, but protocol or anything else.

Yeah, we're not going to get into a lot of the details related to that but if you think about what we're doing with Big River steel is actually a proprietary process that has a a few elements to it. It's the you know the research and development that we have here at U.S. steel, which frankly I think it's a second to none we got in credit.

We'll team here that's been doing some great work with our customers and then you marry that up with Big River Steel's technologically advanced LEED certified Flex Mill, you know and then also marry that up with our proprietary.

Finishing processes. So it's it's basically R&D plus big River.

Technology lead server that certified with our finishing process you know we with our.

Our pro Tec operation, where we're just actually going through the finishing up on the CGM three the combination of all those things position us very well for them.

And continued development of this generation three and as we said we had you know the the 11 grades of steel that are well underway and frankly I discussed I can't believe that the team has been able to move this fast in such a short period of time. So we're not going to tell you what the prior.

Our proprietary process is for for all these things, but there's a whole lot of technical elements that our team has been working very closely together to make to make possible.

Yes, rich I just had one thing to what Dave said, which I think.

Is it going to be important as we move forward not only can they make those proprietary grades of advanced high strength steel gentry steel at Big River, that's a low carbon footprint facility. So not only that LEED certified but when you think about the world and we're in today and moving into where carbon emissions.

Greenhouse gas emissions are increasingly important to our customers the ability to make those deals at a low carbon footprint facility is going to be.

An additional of value that we can offer to our customer base. So we're really excited about the achievements so far.

Okay.

And then as a follow up to that earlier in the call I think Mr., Robert you mentioned that you'd like to pull the trigger on book Big River yesterday.

If you had pulled the trigger yesterday, how would you fund that.

Uh huh.

That's that's great I also said I pulled the trigger yesterday on the last quarterly call as a recall, but but you've seen our balance sheet. We've got cash in our balance sheet. So we could certainly do it with that cash.

Okay, Thanks, very much and good luck.

Thank you.

Our next question is from the line of interest back in House here with <unk>. Please proceed with your question.

Thank you very much just a follow up question on Keetac, you, obviously mentioned supply reliability over the winter.

It makes a lot of sense, how should we think about that kind of going into the spring based later into next year I mean, she will do nothing to shut it back down again, so how do we think about that what's the strategy. There are you going to just buy less from outside third parties.

Then you read throughs at granite City, Boston to say that's basically the question. Thank you very much.

Okay. That's that's another really good question and we already said that as you know its inventory related here, but the key piece of course is who are the customers and what the customers want and I think we've been able to demonstrate in a short period of time that the pellets that we make on the range are in high demand.

We have been.

Been selling on the seaborne market and we've actually picked up a couple of green agreements here in North America. So we feel pretty good about.

That business and the opportunity to actually grow it but for right. Now we have we have to figure out does it make sense to to go through the the how long will keep keetac open or not but we have to figure out does it make sense to do it right now and obviously.

There is some decisions to be made but it's going to be customer driven yes.

Yeah, Dave the only thing I would add to that for some additional context is around the financial implications of the potential decision you know the restart cost in and of themselves are not material.

Less than $10 million, if we choose to move forward with the restart of the Keetac facility, and then idling costs and on the flip side aren't aren't significant either so well continue to be flexible as we evaluate the potential to restart a key back and will it if it's if we decide to go ahead and restart that will also be flexible in how we proceed running that asset into the few.

Sure. So as Dave mentioned, it's all about the internal demand, it's about satisfying a third party customers and we'll make sure we have the the footprint as we always do to support the business.

Got it thank you very much.

Thank you.

And that concludes the Kennel session I will now turn the presentation back over to our presenters.

Thank you Dave would you like to wrap up with some final remarks.

Hi, Thanks, Thanks, everyone for your interest in U.S. steel and before I sign off I do want to thank our employees and our customers for their continued support to our employees. Thank you for your continued commitment to safety and delivering for our customer I know, it's been a tough year, but you've you've rose to the challenge. Thank you.

So much our future is bright to our customers. Thank you for your partnership as we collaborate to develop winning solutions together.

Now, let's get back to work safely.

That does conclude the conference call for today, we thank you all see your participation and we ask that you disconnect. Your lines. Thank you and have a great day.

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