Q3 2021 United States Steel Corp Earnings Call
Okay.
Good morning, everyone.
And welcome to United States Steel Corporation third quarter, 2021 earnings conference call and webcast.
Today's call is being recorded.
I'll now hand, the call over to Kevin Lewis, Vice President of Investor Relations and corporate SG&A. Please go right ahead.
Yeah.
Thank you.
And thank you for joining our third quarter call. We are looking forward to discussing our record third quarter performance and the enhancements to our capital allocation priorities announced yesterday as well as providing an update on our strategy execution.
Joining me on today's call is U S steel president and CEO, Dave Burritt.
Senior Vice President and CFO, Christie briefs, and senior Vice President and Chief strategy, and sustainability Officer Rich Fruehauf.
This morning, we posted slides to accompany today's prepared remarks, the link and slides for today's call can be found on the USD investor page under the events and presentations section.
Before we start let me remind you that some information provided during this call may include forward looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results may vary materially.
Forward looking statements in the press release that we issued yesterday along with our remarks today are made as of today and we undertake no duty to update them as actual events unfold.
I would now like to turn the conference call over to U S steel President and CEO, Dave Burritt, who will begin on slide four.
Thank you Kevin Thanks.
Thank you everyone on the line for joining us this morning.
As Kevin just mentioned, we delivered record performance in the third quarter record net earnings record EBITDA record.
Record EBITDA margin and record quality and reliability.
You to the U S steel team for this quarter's record setting performance in for your unwavering commitment to not only our customers but of <unk>.
Of course, our steel principles, including our number one core value of safety.
Our record setting performance in the third quarter and throughout 2021 has truly transformed our business and demonstrates the progress we are making in pursuit of best.
By yearend, we will have transformed the balance sheet by repaying over $3 billion of debt achieving our deleveraging target ahead of schedule.
We expect to have total liquidity of approximately $5 billion.
Creating the foundation to confidently execute our strategy and invest in our competitive advantages and we will have put the business in a position to deliver another strong year in 2022.
Our transformed our balance sheet.
The ability to pre fund critical strategic investments and continued optimism for our business gives us confidence to return capital to stockholders, while executing the next phase of our best for all strategy.
We believe the market is significantly undervaluing the progress we've made and the value our strategy is creating and now is the time to be more balanced in our capital allocation priorities.
Our strategy is truly best for all of course, including our stockholders.
Let's get into today's presentation on slide five.
We are delivering strong performance year to date.
Continued bullish outlook for 2022 and beyond and expectations for a super cycle, continuing put us in a position to move faster on the next phase of our strategy execution, while beginning to reward stockholders with direct returns.
Our biggest challenges remain lowering our capital and carbon intensity.
Investments in many know steelmaking like the construction of the second mini mill, while investing in our competitive advantages can deliver on these objectives and reposition the company for the future.
The solution is to continue moving toward a more balanced capital allocation strategy by successfully executing on our best for all strategy with many November two and in electrical steel line and coating line at Big River steel.
We are moving quickly on our path.
Forward by expanding our competitive advantages through strategic investments that help us achieve our strategic objectives aligned with long term value creation.
Improved through cycle earnings and cash flow.
And reduced capital and carbon intensity.
Whether youre looking only at next year, our ability to build long term value. We believe that investors are undervalued in our progress and potential.
But not our customers. They are noticing the transformation, that's taking place at USD and the importance of a regional supply chain.
Our industry, leading finishing line capabilities are increasing our value proposition and customers are excited about the opportunities we're creating together.
Whether it is advanced high strength steels differentiated electrical steels are green and sustainable steel discussions with customers continue to shift from transactional to strategic and Thats important.
We continue to create longer term value with customers by prioritizing innovation differentiation and strategic goals and look forward to building deeper relationships that unlock the value of USD for our customers and provide them the certainty of a regional supply chain.
Slide six further emphasizes our progress and performance.
We were encouraged by our record setting performance performance that is outpacing even those records being achieved by direct competitors.
But there is more we can do.
As we said our goal is to be the best deal competitor and while there is certainly much more opportunity ahead, we've clearly come a long way quickly.
As we always say at USD safety first and I'm. So pleased with the U S steel team for continuing to prioritize safety and foreign body, our steel principles each day.
Moving to our margin performance, our enterprise EBITDA margin reflects the disciplined value focused approach we've taken to our footprint.
With revenues of nearly $6 billion in the quarter the quality of our earnings demonstrates a business model that is increasingly built upon capability and cost differentiation.
From our iron ore advantage to our integrated assets and from the newest many nowhere in the country to the most efficient and eastern Europe, our diversified footprint is extracting significant value from today's stronger for longer market.
While the competition isn't standing still the actions we've taken over the past several years to invest in our assets streamline our footprint and add capabilities have created significant value leading to outperformance versus peers this quarter.
Our mini mill performance also continues to be the industry leader further widening its performance versus other minimill producers.
Our position as a mini mill leader creates the perfect platform for high return investments and capabilities that expand our margins reduces our carbon in capital intensity and furthers our customer value proposition for sustainable Green steel solutions.
Those investments continued to be supported by strong liquidity and we are moving forward with investments that create enduring value while rewarding stockholders for the progress we've made so far.
Slide seven expands on what makes USDA unique and why best floor will continue to grow the competitive advantages of U S steel.
We are investing to get better not bigger and expanding our three competitive advantages that differentiate us versus the competitors first.
Low cost iron ore second.
Lower greenhouse gas emission mini mill steel, making and third best in class, finishing capabilities.
<unk> competitive advantages are built on a foundation of research and innovation and deep customer relationships.
Let's turn to slide eight where I will first provide an update on how we are expanding our iron ore advantage. We're pleased to report the first step in our metallic strategy, which pivots, our iron ore advantage in Minnesota towards our growing fleet of Eas.
We are finalizing an agreement with a strategic partner to produce up to 500000 tons annually of pig iron at Gary works.
Under the contemplated deal our potential partner would fund install and operate pig iron production assets, which we would supply with excess liquid iron production.
This potential partnership would further enhance the cost structure of Big River steel by in sourcing high value metallics, while driving blast furnace efficiency at Gary works.
The permitting process has begun and we expect pig iron production at Gary to begin in early 2023.
This is an efficient and quick way to expand our iron ore advantage to our mini mills and we continue to evaluate other opportunities to extract additional value from iron ore.
Slide nine provides some additional context on our mini mill number two investment last month, we commenced the site selection process to build a new state of the art Mini mill. This new minimill will provide differentiated steelmaking supported by a comprehensive suite of finishing assets, including advanced high strength steel galvanizing.
Hot rolled galvanizing painting and slitting.
We are expanding our mini mill steel, making capability as we continue to transition towards sustainable lower greenhouse gas emissions steelmaking. This investment as a platform to provide our customers with more of the Greens deal. They expect from like minded partners like U S steel.
We are in the process of filing permits in multiple states and are on track to begin construction as early as the first half of 2022.
Many mineral number two will be built by the same experience construction team, who built phase Iia Ah Big River steel ahead of schedule under budget and fully ramped in record time.
As we said in our press release last month, and we'll reiterate now we do not expect many new and number two to add to the overall production volumes of U S. Steel, we expect value added capabilities of many know remember too to drive an approximately.
$650 million of incremental EBITDA contribution from this investment once fully ramped.
Also yesterday, we announced plans to build a new coating line at Big River Steel Slide 10, as the details. This line will have 325000 tonnes of annual capability and will sustainably produce both gasoline and galvanized product, we expect the investment to contribute another.
$60 million of annual run rate EBITDA to big river's already industry leading results.
We expect the line to produce a mix of 75% Galvin room, and 25% Hot dip galvanizing Gallagher.
<unk> capabilities create opportunities to target the higher value construction market, including exposed building panels.
Dip galvanizing capabilities create additional opportunity to serve the appliance automotive and construction markets.
The investments we are making a big river are natural extensions of the Big River campus and further utilize the state of the art capabilities of the facility as we provide customers with sustainable steels to help meet their own decarbonization objectives as.
As we continue to demonstrate our industry leading position at Big River, we're excited to expand the mini mill footprint invest in downstream capabilities and further enhance the commercial mix of our business model.
Let's turn to slide 11.
The progress we have made in 2021 is undeniable.
Over the past several quarters, we've transformed our balance sheet. When we closed on the Big River steel acquisition at the start of the year, we carried $7 billion of debt and expect to end the year with $3 9 billion.
We've extended the maturity profile and expect next year's run rate cash interest expense to be approximately $225 million.
Our pension plan is overfunded and enviable position that others in our industry are not close to achieving.
We are in a clear position of strength.
So while we'll continue to look at the ability to Delever further as that becomes callable. We are very confident that this level of debt puts us in a sustainable and manageable position to support investments in our business.
Next we continue to believe the highest source of long term value creation is from investing and expanding competitive advantages that reshape our earnings profile and reduce our capital and carbon intensity, our cash and liquidity position more than supports these high return projects.
And allows us to execute with confidence.
And today, given the undeniable progress we've seen over the past several quarters, we are announcing enhancements to our capital allocation priorities that will begin to directly reward stockholders with the improvements we've made to the business.
We believe the market is not rewarding us for the strong performance. We expect in 2022 and is not yet recognizing the long term value creation potential of our best for all strategy.
Our strong financial performance and the significant returns we believe we can generate by buying our own stock is the reason, we're accelerating direct turns to stockholders.
Reinstating, a <unk> <unk> per share quarterly dividend and moving quickly on a $300 million stock buyback demonstrates our commitment to ensuring our strategy is indeed best for all.
Our goal is to ensure direct returns become an enduring part of our capital allocation strategy and we believe there are catalysts that could drive additional buybacks in the future.
Aside from additional free cash flow generation. We believe there are near term opportunities to divest noncore assets, primarily real estate, which could further accelerate or increase further authorizations. In addition, the option for stelco to acquire 25% of <unk> remains in place through January of 2000.
<unk> 2007, and presents an opportunity to return up to $500 million of incremental capital to stockholders.
Christie will now provide details into our quarterly performance before I provide some thoughts on 2020 to Christie.
Thank you Dave I'll begin on slide 12, as Dave mentioned earlier, the third quarter was a quarter of records, we delivered adjusted EBITDA and EBITDA margin of over $2 billion and 34% respectively. This represents a nearly $750 million or <unk>, 58% increase.
Over the second quarter.
Adjusted earnings per share in the quarter was $5 36 per diluted share. We also generated approximately one 3 billion of free cash flow in the quarter, including a $400 million investment in working capital.
Expect another quarter of strong free cash flow generation in the fourth quarter.
Next let me expand on some key points related to the balance sheet.
Year to date, we have repaid approximately $2 $7 billion of debt and expect to end the year with $3 9 billion of debt on the balance sheet and amount. We're confident is sustainable and supports investments, we're making in our business.
We ended the quarter with net debt to last 12 months EBITDA of <unk> six times and expect to end the year at 0.2 times.
With the balance sheet strengthen 80% of our remaining debt due in 2029 and beyond.
Fully funded pension plan, we are well positioned for our future value creation.
Let me now transition into the individual segments, including expectations for the fourth quarter.
Our flat rolled segment delivered record EBITDA and EBITDA margin of over $1 1 billion and 32% respectively. This represents approximately 60% improvement versus the second quarter.
Our selling prices flowing through our contract structure in the third quarter will likely continue to be a tailwind in the fourth quarter.
We expect lower volumes from our planned blast furnace outage at Gary works and higher energy costs.
And offset.
We currently expect fourth quarter flat rolled EBITDA to be near our record third quarter performance.
Our mini mill segment also delivered record EBITDA and EBITDA margin.
Third quarter, EBITDA was $464 million or an industry, leading 42% EBITDA margin.
Higher prices continues to be reflected in the segment results, partially offset by higher scrap and other metallics costs.
In the fourth quarter, we expect higher prices to continue to flow through the segments, primarily monthly contracts.
Currently expect the fourth quarter to be another record for our mini mill segment potentially exceeding 500 million of EBITDA in the fourth quarter.
U S. S. K also posted record EBITDA and EBITDA margin in the third quarter EBITDA was $418 million in the quarter or 33% EBITDA margin.
A 60 day outage planned on number one blast furnace will begin in November through the remainder of the year. This will remove approximately 250000 tons of raw steel equivalent capacity from the market in the fourth quarter.
Operational headwinds as a result of the planned outage.
Slightly lower shipments and changes to the pricing dynamic in Europe.
<unk> to result in reduced fourth quarter EBITDA versus the third quarter.
I also want to take a moment to recognize and congratulate the U S. S. K team for completing Slovakian first revolving credit facility containing sustainability related performance targets.
The new 300 million euro unsecured sustainability linked credit agreement.
Fourth is our commitment to creating profitable solutions for sustainable steelmaking and replaced the previous 460 million Euro credit facility.
Our tubular segment reported similar quarter over quarter results improved commercial performance was largely offset by higher scrap and energy costs and continued high levels of imports imports continued to capture roughly half of the U S tubular market and earlier this month.
We and the USW filed new OS CTG trade cases.
We expect fourth quarter performance to be similar versus the third quarter as higher selling prices are offset by elevated scrap costs for the Fayetteville, AAF and continued high import levels.
We expect enterprise earnings in the fourth quarter to continue to reflect the strong market conditions. We are seeing as we exit the year and we currently believe that our fourth quarter results will be near our record third quarter performance.
Dave I'll turn it back to you. Thank you Christie before we move to Q&A, let's turn to slide 13 to provide an update on 2022 and the excellent work we are doing commercially to lock in incremental EBITDA next year on our fixed price contracts.
We're entering 2022 in a great position to both create value for our stockholders and deliver value to our customers.
We are executing a robust contract process with customers in most instances, having begun discussions 90 days sooner than we have historically.
Our strategy is paying dividends.
Assuming the forward curve.
Which we believe to be a pessimistic view of spot prices, we fully expect average selling prices to be higher in 2022, then 2021 for our flat rolled segment.
We've also listened to our customers and in some instances have signed agreements beyond 12 months this creates longer uplifts and supply continuity, while fostering collaborative product development opportunities to solve their most difficult challenges.
Finally, we continue discussions on commercial terms for more than just price leveraging continued strong interest in advanced high strength steels.
Our planned NGL electrical steel aligned and other future sustainable steel offerings from U S steel.
Customers value domestic supply chain and we value. The partnership we are delighted to hear from multiple auto customers, who are foreshadowing that the trough of the chip shortage could be behind us.
They are beginning to add to the fourth quarter and first quarter build schedules and indicating to us increasing usage rates starting as early as next week.
Kevin let's move to Q&A.
Thank you, Dave we ask that you each please limit yourself to one question to follow up so everyone has the opportunity to ask the question. Operator can you. Please queue the line for questions.
Certainly thank you once again on the phones as you'd like to register for a question compressed one by the four on your telephone keypad.
Three point prompt technology request.
If a question has been answered to draw your reservations personal one.
By different using a speaker phone.
Enter in your request.
One moment please for our first question here.
I hope we will.
Proceed with our first question on the line from surface Kathy Nathan with Deutsche Bank go right ahead.
Yes, hi, good morning, everyone.
And a great quarter. My first question is on the.
On the.
EBITDA for the newly new minimal dissection of Dominion.
Would you. Please provide further color on the underlying assumptions and.
The $600 million appears to be slightly higher than what.
Some of your peers.
Loans based on similar capacity could you. Please explain why like this.
Thank you.
Hi, This is Dave.
I'll start and then I'll pass it to Kevin on this and I just wanted to give an update here, we're making really good progress on the site selection we've got it.
Number of possibilities that we can make a decision on fairly quickly and then get on with building. The construction most likely in the first half of 2022, but just.
In brief to specifically your question is no.
Any mill Big River steel is kind of a second <unk> same as the first with enhancements related to the analyst caster. So if you look at our performance the mini mill at Big River steel not only was on budget on time, but the 1000 basis points or so better performance than the next closest minimill.
We feel really comfortable that the numbers that we suggest in here, it's something like $650 million of run rate EBITDA by 2026 is up.
Good opportunity and certainly in line with what our expectations would be I don't know Kevin you have anything else to add yes, David Let me just add to the point around differentiation of the mini mill talk a little bit about the attributes again with casting enrolling facility will deliver how that translates to value for not.
Only financially, but also for our customers and then I will touch upon some of the assumptions that drive the $650 million of run rate EBITDA. So first and foremost as Dave mentioned this is.
Very much building on the success, we've had with Big River steel.
There'll be some continued enhancements to the technology.
Number two the first being the inclusion of the endless casting and rolling facility.
This really allows us to produce differentiated gauge and width combinations that will allow us to earn a premium in the marketplace.
That contributes to the incremental EBITDA that you've seen versus other other announcements in the market.
Secondly, as Dave.
Dave touched upon in his opening remarks, the value added mix of the downstream, finishing assets certainly helps drive EBIT EBITDA and EBITDA margins of the second mini mill.
Contribute to the $650 million of run rate EBITDA. When do you think about being able to serve advanced die shrinks the automotive markets.
Value added construction and appliance markets the underlying mix of the facility is going to be quite quite rich.
And as always cities, we evaluate these projects on kind of a through cycle basis.
This is more of a normalized pricing environment looking back historically call. It in the six 600 to $615 HRC range with more normalized metallic spreads through the cycle. So it's not necessarily driven by any.
Pricing assumptions that are dislocated from historical through cycle average, it's the incremental EBITDA is driven.
<unk> by the technology suite and the value added mix of downstream facilities.
Okay. Thank.
Thank you for the color.
A follow up to that can.
Can you talk about your <unk> for the new minimum.
You mentioned that you will have a new desktop or fall.
Audio button.
Many months.
Any color on the vomited instead the depot the pneumonia.
Yes. Thanks.
Thanks for that as well.
We are capitalizing on our iron ore advantage that we have in Minnesota.
Our low cash cost mine sites in North America.
And we know that many mills crave.
Pig iron and this is just a logical and necessary next step to make sure that our mini mill.
Is getting the pig iron it needs, we have regional supply capabilities that many others don't have and this is a way to enhance that rich anything to add yeah. Thanks, Dave. So I think as you hit on we did announced the pig machine opportunity at Gary and as you said.
That's the first step and an enhanced metallics strategy, it's going to free up.
Some efficiencies at Gary.
And it will allow us to start really pivoting, our iron ore advantages in Minnesota, where we have about 22 million tons of iron ore capacity right now increasingly to our fleet.
And so when you think about that.
That gives us the opportunity to.
Two to do some arbitrage in the scrap buy that we need whether it's for big River or mini mill to it's the same situation here, we're going to be able to use our own vertically integrated iron ore to give additional advantages to the mini mills.
Already done some of that over the past year, we've been taking home scrap made at some of the blast furnaces and sending it down to Big River.
To help it.
And Thats really helped it avoid having to buy more expensive prime scrap in the market. So we see a lot of opportunity there youre looking at about a 500000 tons per year coming out of this pig machine and we will continue to evaluate other opportunities to extract value from our iron ore assets as we grow the mini mill segment.
Thank you very much.
Perfect. Our next question on the line from the line of Alex Hacking from Citi, Colorado head.
Yes, good morning, Dave and team and congratulations on all the success just following up on the pig iron announcements.
I guess why why go with a third party there and not do it yourself is that just Capex and then obviously pig iron is adding more carbon into the.
The steel there the Eas steel how are you thinking about the timing of it.
Potentially adding some lower carbon metallics HP ICI product. Thank you.
Yes.
That's a.
A lot of background noise there Alex.
That's a really good question and I think it really plays to what we're doing with our strategy and I think people know that we have combined strategy and sustainable development. So rich fruehauf of course this year working on that to make sure that we do move toward not only less capital intensive but also less carbon.
So this is a step on the way to Green 2050 may seem like a long way away, but we have to do these pivots. So we have targets for 2030 in terms of reducing carbon intensity and then we've signed up for the the net zero for 2015, so more specific to alexs question Rich could you could you help out.
Yes, So I think first of all Alex you asked about why use a third party.
First of all we're trying to reduce the capital intensity of the business. So there is no upfront capital needed for us to move forward with this.
Pig Iron project at Gary So that's one of the factors there in terms of the carbon intensity.
I think it's fair to say that as Dave kind of alluded to when we think about it from a sustainability perspective pig iron is more of an interim solution longer term as we've said when we announced our 2050 goal we're going to be looking for partners.
And certainly <unk> would be one of the opportunities in the future to get to a green DRA facility, but that's that's up a little bit longer term right in the immediate term we wanted to move quickly and get that pig iron down to Big River and then also feeding mini mill too.
Okay, Thanks, and I apologize if the quality of my phone line is poor.
And then on the second question on the capital intensity.
As you sort of switch almost 6 million tons of capacity from <unk>.
Blast furnace two brand new minimill, what does that do to your through cycle annualized sustaining capital requirements. Thank you.
Well I think our through cycle as we've talked about it before pretty much stays about the same in the $450 million range, but it will ebb and flow from year to year, and maybe Kevin you talked a little bit about next year, what the expectations are yes, sure Dave happy too.
So Alex in the near term, we provided some incremental guidance in 2022 on the capital spending front about $2 $3 billion in total primarily made up of the strategic investments that we've just discussed here. This morning, maybe no number two the non grain oriented electrical steel line add big River as well.
As the new coating line and Big River and these are the necessary investments we need to continue our transition to many of our steelmaking.
And as you well know when you look at sustaining capex per ton of steel produced by many now youre looking at something in the 15 to $20 a ton range.
So while that is not immediate.
Here in our business model Thats, certainly guiding where we want to take this business longer term and as we increasingly become more more of a mini mill steel producer, we would expect our sustaining capex to follow that same trajectory. So that frees up capital to to continue to invest in growth and it puts the business model in a position where.
Direct returns to stockholders can become more enduring so we're very much focused on creating incremental future free cash flow generation and when we can do that.
Like we are this year, we can we can be successful across the board. So that is the plan reduced the capital in carbon intensity the business longer term.
Thank you very much we will now proceed Rod next question on the line from the line of Gordon Johnson with <unk> Research go right ahead.
Good morning, guys. This is James Gordon first of all thanks for taking my questions.
Great quarter.
Nice job on the debt reduction.
First question is can you just talk a little more about your contract prices and Theyre built and lags.
In your view why there might be upside to consensus estimates this quarter.
So that's an add on.
We repaid nearly $3 billion year to date and expect.
I think you said eight two times ratio debt to EBITDA at year end do you plan to go further with any debt reduction or is the correct level for you.
Yes.
Well Theres a couple of questions there.
J.
See if I can.
Set the stage basically the current landscape on contracts, we've got great relationships with the customers and it clearly where we're moving from more of a transactional approach to a strategic approach, where we're getting notifications more quickly from the customers that are our best customers and those that are the enduring customers and those are the customers that that like.
To have contracts not just short term contracts, but.
Two year contracts or so so we're very pleased with the commercial relationships that we have and frankly, what we've done is we've revamped the whole commercial process, making it more robust brought in talent from outside the company to look differently at steel neither <unk>, nor handicapped I'd say with steel industry experience and Thats been a.
A big difference for us as well, but when you when you combine big River steel and U S. Steel teams together, it's allowed us to elevate our product offerings and so that makes it.
Where possible for our customers to engage in the products that they need for their future and that alignment is really important with us so to your point and to your question. Your first part of the question is that.
There is no question that in next year's prices will be higher you have to remember about when the prices were set the time before and where the prices are being set right now and the negotiations that are going on I mean people want a stable supply base they want to make sure that.
They've got a regional supply that they can actually count on and that means there won't be locked down with.
Environment that we have now four at.
At least 12 months into the future, especially the best customers and find a way to make sure that we can make money and they can make money and we can give them the sustainable advanced high strength steel that the.
They expect to end and we will give our stockholders.
Profitability that they deserve so there is the lag in the fixed contracts, it's about I'd say.
Over 30% that's.
In the fixed range and then we have some index contracts and of course, the spot business, but I would say the big differentiator for US is the customer relationships and then moving more towards strategic relationships that we both want to have and that's really.
Very good plus so so.
Second point related.
Related to.
What was it related to that I will turn that to Christie, yes.
Asking about.
Should we think where we are by the end of the year is the right level of debt it'll be below $4 billion. We think that's a very sustainable level.
<unk> been evaluating which that made sense to take out and we think thats. The $3 1 billion that we will take out by year end, we will continue to monitor it but we think where we're at year end, that's very sustainable yes, you look at the <unk>.
Maturity levels that we have right now we really don't have significant debt until.
2029, we've got some convertibles in 2026, and so that limits our ability to take some of this debt out but there is some some small amounts in between that if we get the right <unk>.
Environment to take those out we certainly would do that but we think most of the deleveraging has occurred and we will be opportunistic as we as we move forward, it's really important to us that that when we say best for all everybody understands that's just not for our employees.
Not for our customers, but it's for our stockholders and now's the right time for that capital allocation priority to change because we do believe it's stronger for longer not just because of the customer pricing, but also because of the deleveraging has been completed and we've identified what the major <unk>.
Estimates are but we want to grow this business as capabilities being very clear about that we're not growing capacity, we're growing capabilities and we want to make sure. We're differentiated we're going to be low on the cost curve and also have the differentiation that our customers desire does that help.
It helps very much I appreciate the clarity.
And then just.
A quick follow up don't need to squeeze too many in there.
So let me sure I'm understanding this correctly the expected strategic capital that you outlined.
Is that is that the consolidated level or is that going to be your share. Even though obviously you don't know what your share level, it's going to be yet.
That represents the total contribution.
The three strategic projects that we are executing.
And our share is 100% of the strategic projects. So we will we very much look forward to 2024 and beyond when these projects begin to hit run rate EBIT contribution. There are significant there is a significant opportunity to generate incremental earnings incremental free cash flow and further expand our our through cycle margin profiles and army.
And those are all key financial outcomes that lead to higher valuations.
Sure those investments.
Thank you very much.
Our next question on the line from Andrew I've broken Hauser from UBS go right ahead.
Well, thank you very much.
Just one question on the capacity expansion I know you guys have been talking about what you want to do is to build better not bigger.
So how should we think about that in terms of capacity at risk you've already obviously shut down great lakes and one of the major furnaces at granite city is that is that how to think about it I mean, the capacity that wasn't going to shutdown. So they can make room for the new mills has been shut down or should we think about potentially more capacity being shut.
Down to kind of make room for the new for the new Minimill, how should we think about that that's the first question. Please thank you.
First off we are informed by what our customers want and if our customers want the additional capacity at great Lakes and Theyre willing to pay for that capacity. We're hold we're happy to open that up and have them pay to decarbonize. It does not look like that will happen. So.
That's been idled indefinitely the same thing.
At granite City works.
But.
The thing that we.
We need.
Need to remember hearing you alluded to it.
We are not building capacity capability means that you are better than others.
And we want to be low on the cost curve in many respects lowest on the cost curve and so we want to take share from others and with what we're constructing we will certainly do that.
We have the opportunity to take share from others and frankly, if we're not low on the cost curve versus others those business, who all will be downsized as well, it's basically the survival of the fittest right and so we like the competition, we like the direction of our strategy.
And some people are.
Downstream some people are gone upstream, we're making our steel facilities. The very best in an integrated model, taking the best of our integrated mills and the best of the mini mills in creating this best for all so we feel very confident very confident that our capabilities well.
Will enable us to take share for those from those that aren't as capable because frankly, they are not spending time on their finishing mills, they're not spending time on their steel assets remember a few years ago. We spent some one $5 billion revitalizing our assets.
Other companies didn't do that so we have assets that are running incredibly well and of course, everybody knows that when you. When you look at safety and you see days away at zero point zero integrated mills or the largest part of that that tells you that that's where those numbers are coming from so make no mistake about it we're building.
We're very confident that we're going to be low on the cost curve and have the differently and creation that our customers want low carbon footprint less capital intensity and we will take share.
Okay. Thank you and then maybe just a follow up on that in terms of taking share. So how are you guys thinking about kind of the ultimate market in the years to come I mean, obviously some of your <unk> as.
As I've been talking about.
Leasing that she had the wholesale market one of your integrated peers are talking about potentially reducing share of your ultra them off.
Where do you guys kind of fit in that strategy do you want to you have been a bigger part of the ultra market or smaller.
Awesome.
That's a really interesting question because.
The answer is always well it depends.
When we create the kinds of relationships that we must create it's a win win situation. So we like to play in the differentiated market and we are clearly the leader in advanced high strength steel with our non oxidize wet flash cooling what wed say arguably the best finishing lines in the world.
Certainly the largest that we share with cobian protects so where we're really excited about what that capability is so we feel extraordinarily good about continued.
Develop that capability.
Thank you very much.
We'll now proceed to our next question on the line from the line of Emily Chang from Goldman Sachs.
Okay.
Good morning, Kristine congratulations on a great quarter.
My first question. My first question is around the pig machine at <unk>, you mentioned that was their capital upfront capital associated with this but Bob how should we think about what the licensing all processing cost associated with that on a go forward basis could look like.
So Emily this is this is Kevin. So appreciate the question I think as we've highlighted a few times. This is a really important.
Our first step in expanding the metallic strategy here at U S steel and continuing to to leverage our iron ore advantage.
For our growing fleet of electric arc furnaces.
I think that we will provide some incremental detail on kind of how the structure will work.
The unique thing because I think it's probably a little bit of context for everybody. So you. Appreciate the opportunity here is that at our Gary works facility, where we have we have four blast furnaces.
Steel shop in many ways are constrained asset, which means that the furnaces can out produce the steel shop. So when we evaluated this opportunity and why Gary makes sense is because that we can increase our iron production at Gary works, which in turn increases the efficiency and utilization of our blast furnaces and allows us to produce incremental.
That then can feed.
<unk> take machine that will be installed.
It also make all of the other products produced at Gary more cost effective because you are starting with a lower cost iron.
Iron costs at the facilities, so strategically the footprint and Gary made a lot of sense to to extract incremental value from there.
Iron position and.
And it'll be a really really nice fit and as rich and Dave alluded to to produce about 500000 tons annually of.
Pig iron to serve obviously, primarily big opportunity I think as we finalized the deal with our partner we can get some more specifics around how the structure and the pricing will work, but obviously I mean, we were investing here because this is a.
A lower cost solution for Big River steel and it gives us certainly certainty within the supply chain and generate efficiencies at Gary works and it continues to transition of iron ore a competitive advantage to our <unk> mill footprint. So it's a it's a win win whether at the mines at Gary.
Big River, it's quite comprehensive value added.
Strategy.
That's really helpful color, Kevin and so just to be clear the new pig iron machine that does not necessarily impact the steelmaking capacity at <unk>.
And then just a quick follow up just around Big River steel is current raw material strategy.
Until this new Pea machine, Scott can you just remind us.
How youre seeing that or is that the.
The strategy that evolve.
Sure. So your comment around Gary Steele production, Emily is accurate wouldnt impact the.
Overall steel production capability at Gary works.
Given the we're using incremental iron production.
And then if you look at big river's metallics metallic sourcing strategies are rich touched upon some of the internal synergies we've been able to generate as a result of the transaction by optimizing the flow of prime scrap.
At home scrap generation within our within our overall footprint.
Theyre also buying outside.
Outside scrap needs and metallics needs on the open market and that's something that we want to continue to in source over time.
One of the things that often.
<unk> over.
Over underappreciated.
Is that U S steel really is uniquely positioned with high quality low cost iron ore and highly capable electric arc furnace mini mill production. So we have a really unique we have a really unique opportunity to bring those two things together and we will continue to do that as rich mentioned to explore other alternatives in the future about how to continue that.
Ambition.
So more to come but the goal is certainly to make big River more more fully integrated on a raw materials perspective, and then let me just punctuate that we believe we can provide a significant significant portion of our metallics needs by translating our iron ore advantage in our flat rolled segment to our EA footprint.
The pig iron machine that we've talked about here at Gary alone can supply nearly 50% of our.
Other or base metallics needs.
At Big River steel, so I'll say theyre accuse you little bit theres more to come.
Thank you very much.
With our next question on the line from the line of Tristan <unk> from Exane BNP Paribas go right ahead.
Yes, hi, Thank you for taking my questions.
First one on natural gas is if you could please remind us what your exposure.
Etfs hedges with contracts in place.
And you flagged it.
The outlook in Q4, so what.
What kind of energy inflation are you seeing in Q3 and moving forward.
Yes, I do think you're interested.
Interesting you are talking about something that's it's important that we manage well because there is pressure on natural gas and we we do have.
A close watch on that and all the materials frankly, we've got extraordinarily tally.
Talented procurement team that does hedging, yes, we did see some increases.
And the third quarter about $20 million was the increase in the third quarter on natural gas.
We are here.
Both in Europe, and in the U S and for next year. It's a significant portion of the bi has already been executed. So we're in good shape I think for.
Where we are on our hedges on natural gas.
Alright, Thank you for the color and my second question a bit more on the steel price in the U S. You mentioned that UTD.
See forward curve as pessimistic.
What do you see the supply and demand dynamics that makes you.
More optimistic that other market participant that probably see.
Higher inventory, the imports and new capacity coming online in coming quarters.
Tristan I think.
Maybe there was a couple of pieces there is.
The macro drivers, what we view as a super cycle here for the steel industry have been talking about this for over a year now I guess and then also there is steel specific drivers. So let me just kind of run through a bunch of things that from a macro perspective, and then we'll get into some of the more detail. So bear with me here a bit is just catch up.
Lay out some high level things that informed the way, we think about the future, okay, well first and foremost a fed expansion policy is going to last well into 2023 right.
Are they just buying back $120 billion a month they are talking about tapering of like $15 billion, maybe rates come up at the end of next year, maybe not I mean, there is a lot of uncertainties, there, but it's pretty clear that the fed expansionary policy is going to continue for the foreseeable future.
Also seeing the fiscal policy expansions in the U S as well as in the other countries.
Theres lots of supply chain concerns and its not uncommon we see this all the time when you see robust upturns you have ports that have troubles trucks have trouble Andy any type of logistics. They struggle with this and so what that means is another stronger for longer and then you layer on top of that there's all kinds.
Cash is sitting on the sidelines I think I read somewhere that the savings rate for <unk>.
Folks.
In the U S. As you add it all up it's like three trillion dollars in Egypt.
Lot of money, just sitting on the sidelines and that doesn't count the investments that were sitting on the sidelines before.
The pandemic has hit so theres a lot of pent up.
A motion for getting on with things and once the pandemic.
<unk> is clearly behind us and we've had a lot of starts and stops it does seem like it's getting better, but it's going to be episodic for a while and that probably extend these things for a while when you think about the climate change.
Change thing a year ago hardly anybody was talking about climate change right now and world steel being on their executive Committee, it's likely that the lead discussion people really care about the environment here and we know how this works countries countries, they're going to pay our customer.
Consumers are going to pay we bring that capability right and of course, yes.
Sure.
More specific to home here, we're waiting for and I think it might be December the infrastructure Bill money is not going to come in 2022 and will come in 2023, and so there's another opportunity and and governments around but wherever there given grants whether it be in Canada, we heard about the grants to the steel industry there.
And then you have Belgium, and Spain, and Germany, and Slovakian others that are really interested in decarbonising, we see that around the world to through to think about 232.
That continues on and I'll say this.
Sure.
U S trade representative tie and Commerce Secretary remember to tune in.
Incredible job they understand how important do you see the United States of America, They get it and so yes 232, there may be some tweaks around the edges of being maybe maybe some kind of.
Quota system, but there's going to be 25% tax or something like that for the foreseeable future because youre not going to build back better with biden.
Youre going to bring back better with buying youre, not going to build back better with China steel youre not going to build back better with.
Steel that goes into Europe into United States, if they get this they understand the importance of enforcement and I think I think they are doing an incredible job holding the line with a lot of bad actors and so you.
You take that then you got the pent up customer demand.
Million.
There's going to be a big uplift on that maybe not 2022, but 2023 people want to buy cars, we saw what happened.
Transitioning.
Domestic steel industry to sustainable deal I think everybody is onboard with that some of them do a better job than others, but there is a lot of money coming into.
Right now that wants to go to work. This is an incredible time to be working we went through awful times with currently but it's one of these things that you just don't find something you like about it you find something you love about it and get on with moving to the future faster and that's exactly what we're doing treat this thing is a blessing and we will see them.
<unk> flow that we haven't seen in a very long.
A long time, so if you can tell from the passion by both not just bullish I am over the top super cycle on this because I am I am still.
Strong believer this is stronger for longer and it's.
You always got the existential threats, the unknown unknowns geopolitical stupidity or whatever pops up but the bottom line is this this the economic circumstance from a macro environment and from a steel industry environment, and then of course with USD.
Our strategy has positioned just right to make the progress.
Did that help.
Okay.
I presume that was a yes.
Yeah.
Yeah.
Thank you very much.
And that does conclude the Q&A for today I will now turn the call back to the U S. Steel's CEO D Burke for closing comments.
Asked the entire business and I have to say thank you to the employees you are laser focus on safety and the customer.
Proving out to be a spectacular year to date, our strong culture and workforce, where most recently recognized it believe it or not here.
So this week.
One of the Newsweek, most loved workplaces and our employees certainly are pleased with that and we are to our industry, leading safety performance diverse and collaborative workplaces and inclusive employee benefits are examples of how we create an environment where employees can thrive.
It's all about relationships with your employees with your customers and now and how you can tell with our stockholders as well with the capital allocation uplift that we're providing and will endure we're pleased by the recognition of this from Newsweek and look forward to building on the future and then finally here. Thanks.
Thanks to our customers for your continued business, we are investing today to meet Tomorrow's needs. We want to continue being a trusted partner in more success and know together, we can create a better future for our businesses and for the planet.
Now, let's get back to work safely.
Thank you very much and thank you everyone that does conclude the call for today. We thank you for your participation disconnect your lines.
Have a good day everyone.
Right.
[music].
Sure.
Okay.
So.
Sure.
Okay.
Sure.
Yeah.