Q3 2022 United States Steel Corp Earnings Call
Yeah.
Good morning, everyone and welcome to United States Steel Corporation third quarter 2022 earnings conference call and webcast. As a reminder, today's call is being recorded I'll now hand, the call over to Ken Lewis, Vice President of Investor Relations and corporate.
Got it.
Thank you Tommy good morning, and thank you for joining our third quarter 2022 earnings call.
Joining me on today's call is U S steel President and CEO , Dave Burritt, Senior Vice President and Chief strategy, and sustainability Officer Rich Fruehauf.
Also a special welcome to our senior Vice President and CFO , Jessica Graziano joining us. This morning for her first earnings call at USD.
This morning, we posted slides to accompany today's prepared remarks.
These can be found on the USDA investor page under the advanced 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 USD, President and CEO , Dave Burritt, who will begin on slide four.
Thank you, Kevin and good morning to everyone. Joining us today. We appreciate your continued support of USD.
We delivered another strong performance in the third quarter. Most importantly, we did it safely we had one of the safest summers in our history and are on track for a third consecutive year of record safety performance. While we certainly don't focus on safety for awards, we are pleased that our industry leading safety.
Performance was recently recognized not once but twice.
Both the National Safety Council have world Steel awarded U S steel safety programs with safety Excellence Awards further validating our leadership role in placing safety first.
At <unk>, we have a culture of caring that extends through our facilities.
<unk> safety means exceptional operations.
Thank you to my U S steel colleagues for doing your job safely or yourself.
For your co workers and.
And for your families.
We will spend the next 15 minutes or so providing you with a business and strategy update.
There's a lot of noise out there, but one thing is clear we are confident in our ability to execute our best for all future.
I remain bullish on U S. Steel's future, we are better positioned now more than ever to confront market uncertainty and to prove the foundational strength of our business.
The challenges we face today remained transitioning to a less carbon and less capital intensive business model, while becoming the best steal competitor out.
Our strategy creates a path to achieve these goals and reach our best for all future.
To become the best you have to outperform the best that's why we're expanding our competitive advantages and expanding our low capex low GHT ambition, EIF steelmaking and value added capabilities to meet customer demand.
For example, we are leveraging our unique raw materials advantage to support our growing electric arc furnace fleet.
Earlier. This month, we were joined by Governor Walz in Minnesota at the groundbreaking ceremony for our Dr grade pellet upgrades at key Tac.
Exciting from the team and from the community was invigorating and everyone involved appreciates the importance of this investment as an integral part of our best all strategy.
We are another quarter closer to the earnings and free cash flow growth, our strategic projects will generate each project remains on time and on budget. This means we'll be we can.
<unk> to have a balanced approach to capital allocation focused on driving long term stockholder value. We're also pleased to see the recent reinforcement of trade policies by the U S government. These.
These policies are critical to ensuring national and economic security and ensuring a level playing field for American steelmakers.
We are also optimistic that the chips and Science Act inflation reduction Act and infrastructure Bill will positively impact steel demand in 2023 and beyond.
Our country is a leader in sustainable steelmaking and we are encouraged the administration continues to support the roll American manufacturing plays in the global economy.
This gives us the confidence to deliver our best for all strategy for our employees.
Our customers and most importantly, our stockholders.
Let's get into this morning's materials on slide five.
I'll focus on three key areas that are helping to advance our best for all future first we are operating from a position of strength.
While we are facing the same economic and geopolitical uncertainties as everyone else. The steps, we've already taken have us well positioned to execute our strategy with confidence.
We are closer to our customers and continue to add the capabilities to expand our offerings of steel solutions.
<unk>.
We're safely navigating current headwinds, we've taken steps to optimize our footprint and remain disciplined on cost.
We also remain on track to generate higher and more stable through cycle earnings and free cash flow as we execute our strategy.
Our future is extremely bright.
Finally.
Returning capital stockholders as we've demonstrated through our progress against our stock repurchase program. We continue to invest in strategic projects that will grow earnings and free cash flow.
And reward stockholders with direct returns.
Our balance sheet is strong which allows us to sustain the actions that drive long term stockholder value.
Even as markets are volatile.
Slide six details how our improved business model has is operating from a position of strength.
We have redefined steelmaking for U S steel since the last cycle strengthening our business model and the process and we will only get stronger as we complete our strategic projects.
We are a more innovative company and continue to add differentiated capabilities.
Since the last cycle, we've invested to revitalize and strengthen our north American flat rolled assets, enabling record safety record quality and record reliability.
We also continue to build our position in flexible sustainable mini mill steel, making.
Our customers are less than a year away from benefiting from the 200000 ton per year state of the art electrical steel line nearing completion at Big River we.
We will be uniquely positioned with products ranging from 0.25 millimeter to 0.5 millimeter gauge to serve high end electric vehicle grades of steel.
Consumers want electric vehicles that are more efficient and effective and USDA is helping to unlock that potential.
With the completion of Big River to including a differentiated portfolio of downstream, finishing lines to serve the automotive and paint markets. Our mini Mills segment is expected to deliver $1 $3 billion of annual through cycle EBITDA supported by only $100 million of annual.
Sustaining capex.
That will be a new source of significant cash flow generation for our business cash flow that earns a premium for our investors.
We expect to improve the financial performance of the business by lowering our capital intensity. We're also lowering our carbon intensity to achieve our bold 2030 and 2050 goals.
These factors encourage us to move faster on our transformative strategy.
On slide seven.
You can see our balance sheet has already been transformed we have record cash and record liquidity, we have no meaningful near term debt maturities, 80% of our total debt is due in 2029 and beyond and we have over funded pension and <unk> plans.
On slide eight our transformed our balance sheet pre funds, our strategic investments with a record cash and liquidity our strategic investments remain on time and on budget by year end, we will be nearly 40% completed on our pre funded strategic projects.
Looking forward to 2023, we expect total capex spending of approximately $2 5 billion.
Jeff will provide more details on next year's Capex plan shortly.
Turning now to slide nine.
We are safely navigating current headwinds with decisive management actions across North American flat roll. We responded quickly to soften demand and cautious buying we accelerated planned outages and temporarily idled integrated assets to better align supply with demand across our diverse end market.
<unk>.
And our mini mill segment, we foreshadowed the negative impact higher raw material prices would have on big River in the third quarter.
We were prudent and moved quickly to secure additional raw materials as the Ukraine war intensified to protect our customers and our operations.
These types of supply shocks reinforce the rationale for the metallic strategy, we have underway, our low cost iron ore advantage in Minnesota will protect our electric arc furnaces for market price fluctuations as our Gary Pig operation begins production in early 2023.
Temporary headwinds aside we remain confident in the strategic and financial impact of the Big River Steel operating model and we look forward to demonstrating the through cycle value of the segment in 2023 and beyond.
Moving next to our European segment, the prolonged and tragic conflict in Ukraine has continued to pressure our European business on costs for both raw materials and energy.
The uncertain outlook.
For the global economy, and Europes manufacturing sector is also contributing to softer demand and lower prices, which compounds the impact of normal seasonal buying patterns.
While we don't believe these are permanent impact we do expect these pressures to persist.
In response, we are executing management actions in September .
We pulled forward our planned 60 day outage on blast furnace number two at <unk> to better align supply with customer demand. We have also reduced our overhead costs in response to lower production. We're focused on the things we can control to balance supply with customer demand and improve our cost position head.
Into 2023.
Our tubular segment remains an outperformer benefiting not only from solid energy market fundamentals, but the strategic investment we made in electric arc furnace rounds production, we continue to run at high levels of utilization to support robust customer demand for seamless OS CTG.
Alex we're further benefiting from the $100 million of annual savings from the in sourced rounds substrate.
Recent trade actions also provide important positive impacts on the segment.
Turning to slide 10.
I want to reinforce the importance of returning capital to stockholders as part of our previously shared capital allocation framework. Our balance sheet is strong our investments are on track and most importantly, we continue to see significant value in direct returns to stockholders USDA is uniquely positioned to.
To deliver higher earnings and expand our multiple which means we expect to continue repurchases under our existing authorization as we enter 2023.
With that I'd like to welcome our new CFO .
Jessica Graziano too.
First earnings call with USDA I'll turn it over to Jeff now to cover the financials Jess.
Thanks, Dave and good morning, everyone. Thanks for joining us today.
I'm. So pleased to have joined U S steel at this point in its history and to be a part of the transformation that's underway.
Our compelling best for our strategy and the opportunity it creates to generate significant value are two key factors that attracted me to this role.
I'd like to start by saying, Thank you to Christy briefs as she passes the baton not.
Not only am I grateful for Christy support in transition, but I am thrilled to inherit the pristine balance sheet. She was instrumental in building.
Our record record level of cash on the balance sheet is a highlight for the third quarter, where we've seen some demand softness and some expected transient cost headwinds.
On that in a moment.
I'll also provide some color on our guidance to finish the year, but let's start on slide 11, with the third quarter's results.
We delivered adjusted EBITDA of $848 million in the third quarter from revenues of over $5 2 billion. This represents an adjusted EBITDA margin of 16%.
Our adjusted EPS in the quarter was $1 95 per share which was at the high end of the guidance range. We provided in our September 15th press release.
We generated nearly $600 million in free cash flow in the third quarter and that's after investing close to $500 million to support execution of our strategy.
Taking a closer look at the balance sheet total liquidity on September 30 was a record $5 8 billion.
Including just under $3 4 billion in cash <unk>.
Leverage at the end of the quarter was <unk> seven times significantly below our target range of three to three five times adjusted debt to trailing 12 month EBITDA.
In Treasury, we issued $290 million of low coupon 30 year environmental revenue bonds in support of our Big River to investment.
Green bond commitment underscores our effort to use a high value of recycled scrap in our mini mill operations and a strong investor turnout demonstrates the market's conviction for our best for our strategy.
We also successfully repurchased approximately $300 million of shorter dated higher coupon debt in the quarter and together these actions extended our maturity profile and reduced our run rate cash interest expense by $5 million per year and have maintained our strong leverage position and further enhance the balance sheet.
<unk>.
Let's take a closer look at each of our operating segments.
North American flat rolled EBITDA was $631 million, which reflects a healthy EBITDA margin of 19%.
The segment continues to deliver solid earnings due in part to fixed contracts that make up a significant portion of its order book as well as quarterly market based contracts.
Fixed and longer term contracts take some of the noise out of market price fluctuations as a result, our average selling price remained resilient through the quarter declining about 8% versus the spot market that declined 36%.
Shipment volumes declined 8% off their two year high watermark in the third quarter as broader economic concerns have some customers limiting their order exposure.
We were quick to respond with footprint decisions as we started to see demand soften.
In the quarter, we idle the blast furnace at each Gary and Mon Valley works.
Both blast furnaces remain temporarily idled today and will be brought back online when customer demand warrants it.
Moving to our <unk> segment, which experienced headwinds in the quarter that weighed on both EBITDA and margins.
Notably, we foreshadowed the headwind Big River was facing to absorb higher priced metallics costs, particularly pig iron when we provided guidance in mid September .
The impact of those higher cost is temporary and we expect to work through them by yearend.
In the third quarter that impact was an eight point drag on EBITDA margins for the segment.
Not unlike what we experienced in north American flat rolled demand softening through the quarter was an additional challenge for Big River.
This was especially the case in service centers and with distributors, where a big River has more exposure as a percentage of their total order book and the flat rolled segment.
River also has more exposure to spot business, which felt the impact of lower steel prices on its margins in the third quarter.
Similarly, higher raw material costs and commercial headwinds were at play in our European segment. This was compounded by the spike in energy costs across Europe , which pressured results for the third quarter and resulted in the significant EBITDA decline in the segment.
Like we did in North American flat rolled we took action in Europe to respond to these headwinds which included overhead cost reductions.
We also pulled forward a planned 60 day outage on blast furnace number two from October into September .
Furnace will stay offline until customer order activity improves.
Looking forward a week manufacturing outlook in Europe , and persistent raw material and energy cost headwinds create a challenging backdrop for us for the remainder of 2022 and the start of 2023.
Our tubular segment remains a bright spot EBITDA and margins in this segment are meaningfully increased sequentially behind strong customer demand and higher pricing.
Now, let's move to the fourth quarter and I'll share some thoughts on each of our operating segments.
In our North American flat rolled segment, we expect volume to remain stable throughout the fourth quarter.
However September volumes represented a low in the third quarter, so sequential shipments will be lower.
We expect the pace of steel prices to decline similarly to what we experienced in the third quarter and unmet first quarter EBITDA for the flat rolled segment will be down sequentially.
And our mini mill segment, we expect EBITDA to decline in the fourth quarter as we continue to work through the higher cost metallics inventory lower.
Lower steel prices will continue to impact margins for the fourth quarter, reducing our average selling price sequentially.
In Europe , we expect lower sequential EBITDA from lower average selling prices a big headwind given half of Europe's volumes are at spot rates.
We also expect reduced shipment volumes and elevated raw material costs will continue to drag on segment EBITDA in the fourth quarter.
And lastly in our tubular segment, we expect this business will continue to generate robust results in response to strong demand prices will.
<unk> to be healthy across steady volumes, our Fairfield AAF will operate at near maximum capacity for seamless pipe in the fourth quarter.
And when you tally it up we expect fourth quarter adjusted EBITDA for the company to be approximately $400 million.
Delivering a full year of over $4 $2 billion in adjusted EBITDA, The second best ever for U S steel.
As Dave mentioned, we continue to see tremendous opportunity to create value through capital returns and are pleased with the progress. We've made so far in our share repurchase program, which is covered on slide 12.
Share repurchases in the third quarter totaled $177 million, bringing our total buyback activity to $850 million since the fourth quarter of 2021, and reducing our share count by 38 million shares or about 13% of our outstanding base.
We expect to continue repurchases under our current $500 million program through year end.
Before I.
I hand, the call back to Dave Let me take a few moments to provide some additional detail on our 2022 and 2023 capital spending on slide 13.
We expect our 2022 total capex spending to be under $2 billion.
Which is about $300 million less than we originally forecasted our projects remain on time and on budget with an unchanged scope and will be approximately 40% done by the end of the year at $300 million spending update is all timing as we expect some of our construction payables will be paid in Q1 next year.
Looking forward to 2023, we expect capital spending to be in the neighborhood of $2 5 billion.
As planned we will invest a significant portion or about $1 7 billion for inflight strategic projects.
Notably Big River to makes up about $1 4 billion of the total.
While the level of strategic capital spend is material in 2023 for Big River too and our low cost iron ore mini mill steel, making and best in class, finishing projects, we expect spending will ramp down in 2024, as we move towards commissioning and full operations of these projects.
As a matter of fact two of these projects will achieve significant strategic milestones in 2023.
First our Gary works Pig machine is expected to commence operations in the first quarter supplying Big River steel with low cost metallics. This will accelerate our competitive cost advantage gained by our using internally produced pig iron and.
In addition, we expect to begin operating our state of the art non grain oriented electrical steel line in the third quarter trials have been successful and we expect to be well prepared to meet robust customer demand for electrical steels later next year.
Lastly, we are carefully managing investments across our existing operating footprint and we expect capital spending in those facilities to total about $650 million in 2023.
And with that dates back to you. Thank you Jess.
Before we open the line for questions. Let me summarize today's prepared remarks on slide 14.
Our solid performance amid challenging conditions in the third quarter as a result of our continued focus on safe and reliable execution.
It's the product of some heavy lifting over the past few years and I am pleased but not satisfied with where we are today.
We are operating from position of strength with our historically strong balance sheet.
Put us in a position to execute.
With confidence.
We are safely navigating the current headwinds.
We are operating our footprint to match demand and remain disciplined on cost.
We're on our way to come in a more capable more agile and increasingly differentiated producer of innovative and sustainable steel solutions.
We're also returning capital to stockholders.
We look forward to delivering on our earnings and cash flow commitments. So that we can continue to reward stockholders with direct returns.
As I said I remain bullish about our future we are better positioned than ever and we are confident in our ability to execute.
Kevin let's move to Q&A.
Thank you Dave Our first question comes from say technologies, we received a few questions on our demand outlook and growth strategies, Dave can you share your thoughts on outlook and groceries.
So I think Thats, an important question and it's kind of a boil the ocean questions. So I hope you're sitting down because they'll probably run through a bit of a stream of consciousness here as we think about.
The remainder of the year, and then 2023 and beyond but to be clear on the remainder of 2022, we've got near term challenges. There is no doubt and as we think about considerations for 2023 and then beyond.
The future's very bright as I said bullish so the remainder of the year demand headwinds likely persist into the fourth quarter.
Automotive has been more resilient.
We expect.
Flat to maybe slightly up shipments in the fourth quarter versus the third quarter.
For our clients impacted by consumer sentiment and we saw some slowdown in shipments in the third quarter service centers in the industrial and construction cautious buying saw shipment growth in industrial machinery and container containers in the third quarter Theres a resilient demand.
Construction energy energy.
<unk> unique exposure and strong market for us today energy shipments increased over 10% in the third quarter for both flat rolled and Big River.
And so as we think about the remainder of the year, yes, there's the near term challenges, but as we get into 2023 and beyond things get better.
Expect to see growth in steel demand in 2023 recently, you probably saw the growth forecast from world steel, which is up.
Modestly.
Pockets of demand, we're uniquely positioned to serve and that uptrend energy is expected to remain strong we think theres opportunities for us to grow share in the appliance.
And I think you'd know appliance as a strategic market for us and we're a key supplier on several or several of our popular appliances.
We're encouraged by feedback from the automotive negotiations and optimistic there is pent up automotive demand.
And build rates will be higher next year.
Automotive customers already signaling higher steel consumption in 2023, so that's all good news.
We're uniquely positioned we believe to sell a portfolio of differentiated differentiated automotive products advanced high strength steel exposed automotive steel solutions vertex deals are are green steel and of course now non grain oriented electrical steels that we're finishing up the big River.
John the market specific considerations demand catalysts and chips and inflation reduction acts in infrastructure. There is there are some really good news coming but that's probably longer term strategic market growth to outpace overall market growth demand for Greenfield rapid electrification.
Structure that kind of list goes on.
One of the key things that we've learned from the pandemic and the conflicts that we see geopolitically is that theres onshoring and strengthening of regional supply chain should also positively impact demand.
What are the things we think about is where we must win our advanced high strength steel automotive and nonautomotive applications electrical steels, we feel great about this we will have the world class NGL line.
This next year and Green steel with our verdicts line of sustainable steels that gives us.
Important reductions in gvhd, so so to win as you think about us in the future.
We are building differentiated capabilities, where we're not trying to be the biggest what we want to be is the best that we are building capabilities, we're focused on product and process innovation.
And the things we're doing in that space, we should be able to have some breakthroughs overtime.
We're getting some top talent in the organization, we're working differently. We're more nimble we're more flexible we allow folks to work from wherever and we're attracting talent. We never would have had access to because we are so much more flexible in our in our work from wherever design. So our goal basically over this.
Horizon, the future profitable growth in the markets, we serve and as I said.
Near term challenges longer term are very bright.
Okay. Thanks, so much Dave Tommy you May know, Cuba phone line for questions and just as a reminder, we ask that you. Each please limit yourself to one question and a follow up so that everyone has the opportunity to ask the question.
Thank you very much once again, if you'd like to register your question. Please.
First of all one whereby the floor on your telephone.
Hey, Tom prop nausea request.
The question has been asked me what surprised you about progression is the one to three.
One moment please for the first question.
And we'll go to our first question on the line from David Gagliano with BMO capital markets.
Ahead of that.
Yeah.
Hi, Thanks for taking my questions.
First I just wanted to ask a little bit about Europe , and you can see J in particular, obviously.
You've got one three blast furnaces idled there.
Given the.
The operating headwinds that you flagged what are your plans for the other two blast furnaces.
Well David Thanks, Thanks for that question and there is no doubt that.
It's an increasingly challenging market backdrop over there.
Broader macro considerations are clearly impacting the steel markets.
And buyers have been focused on Destocking limited.
Making and that continues across frankly, all of Europe , we got the continued raw material.
Prices elevated energy costs, and the big wildcard there Ukraine War.
We have idle a furnace there.
As we say, we will be nimble and adjust to whatever it takes to make sure that we continue to keep those operations robust and strong but.
Pivot a bit here because at some point in time, there is going to be a great opportunity for that facility to expand and grow with.
The steel shut off from Russia.
The damaged mills in Ukraine.
U S steel just 60 kilometers away from the border we're uniquely positioned.
Positioned to provide value to that construction market, so as far as shutting off another blast furnace, we'll see what the demand holds and what that looks like but longer term, we should be in good shape, we're going to we're going to adjust and be as nimble as we can in the short term manage these headwinds.
But at some point things turn around and then it'll be so robust heads will probably snapback as we start to build.
Rebuild Ukraine and the surrounding area there.
Okay. Thanks, and then I just have.
Two part two part follow up here.
On capital returns, obviously they've got.
Elevated spending we've got a stormy outlook near term.
Part one is why not pause of capital returns a focus on making sure that balance sheet.
These robust and then and then the other part of my question I was wondering if you could comment on the negotiations with the unions.
In the U S. Thanks.
David I'm.
I'm not sure I completely understood the stock buybacks, you're committed to the stock buyback program and making sure they get.
Fill in the gaps sure.
Did you say earlier, the $38 million that we reduced so far we are committed to this this is part of our program. This is what we're doing we're making sure. We're rewarding stock just great. Thanks, Dave Yes, I think you can think about it as.
Against the backdrop of a balance sheet that is dare I say strongest steel.
Again, the opportunity that we have as we even think about looking forward into 2023, who continue to generate cash flow even in an environment, where we are going to be spending.
Frankly, the bulk of cash towards our strategic investments in 2023.
We don't want to get ahead of ourselves as we.
Go through the 2023 planning process and we certainly don't want to get ahead of our board and we feel very comfortable that listen this is an and strategy and its strength in the business and strengthen the cash flow enough for us to feel very comfortable to continue to underwrite continued share repurchases at a minimum through the end of the year and then as I mentioned not getting ahead.
The board and not getting ahead of our planning process.
But as we look forward into 2023, we feel very comfortable that we can continue to frankly, a third our strategic initiatives without any trouble and be able to return.
Excess cash to our shareholders.
It's a very strong place today.
And David to your second question was an update on the Labor agreement is it did I hear that right.
Yeah Yeah.
Yeah, well, we continue to bargain in good faith.
I'll, just say I'm optimistic about the framework being developed and we're confident that we'll reach an agreement that is best for all best for employees does for our customers and best for our stockholder wish that enables us to make sure we fulfill our commitments on getting these strategic investments are completed we have.
Good progress so far and we're taking the necessary time to to make sure we get an inappropriate agreement that is best for all.
We'll give you an update as soon as we have an agreement.
Thank you very much.
Well take our next question on the line from Kristen Aggressor.
<unk> purpose Exane go right ahead.
Yes, hi.
Thanks for taking my question.
The first one is.
In Europe .
The European Commission has recently approved I think under EU State aid rules.
Two slovakian schemes for budget.
The $1 billion.
Euro to help company Decarbonize.
In the country.
So my question is have you applied or do you plan to apply to those schemes and.
And if so for what type of projects facilities and.
How confident are you to receive public funding there. Thank you.
Yes. Thanks for the question I'm going to turn it over to rich Fruehauf here you know one of the keys to our strategy is to make sure that we have a lot of Optionality. That's why we have so much cash in so much liquidity and so that's a key ingredient to the way we look at all things maybe rich.
Talk a little bit about.
The opportunity in <unk>.
Slovakia, Yeah. Thanks, Dave So, yes, youre absolutely right. The EU Commission did recently approved the Slovak schemes, obviously U S. S. K is.
A major employer and source of Cotwo in Slovakia, So we've been watching that process very carefully.
There is an allocation towards decarbonising heavy industry in Slovakia.
That we would anticipate being part of the scheme.
When the government of Slovakia issues the call for.
For projects.
We're pleased with the support towards de Carbonization, we've seen so far.
Europe and in Slovakia.
I think it's part of a comprehensive approach to Decarbonising. These energy intensive industries and as I mentioned, you know U S. S. K is a significant portion of the co two emissions that.
<unk> needs to address so we look forward to doing our part there and were looking at whats the best path forward for our.
Slovak operations, and obviously, we would look at any opportunity too.
To see what's available to help that path forward from the government of Slovakia. So we're evaluating that right now and we'll let you know where we had as we complete that evaluation.
Yes, I think again, it's back to we want to make sure we preserve as much optionality as possible and Thats. The way we look at all of these things that come our way.
Alright, that's very helpful and just maybe a follow up do you have any timeline regarding.
The approval process in silver and silver.
Yes.
Well I think thats really something thats up to the Slovakian government.
And again, they have to issue as I understand their process a call for projects. So really that's the next step is how the Slovakian government moves forward with its process and as I said, we'll be watching that very carefully and as Dave said evaluating the options under that call process from the Slovak government.
Thank you very much.
I will now proceed to our next question on line from Emily Chang with Goldman Sachs.
Go right ahead.
Good morning, David Johnson, Thank you for taking my questions.
My question is just a follow up around sort of the cash flow.
<unk> had so far this morning could you. Please help us with how you're expecting to see the working cap release patch in the fourth quarter and into 2023, and how that could help to support free cash flow generation.
Sure Emily I'll I'll take that one.
So we are seeing.
Some amount of working capital release, particularly NAR and and through inventory as we move into the fourth quarter.
We do expect to have positive cash flow through the fourth quarter and.
When you when you think about or I should say positive working capital through the fourth quarter. When you think about the continued spend that will ramp up on the strategic projects right. We feel very comfortable that the pace of that spend is something that we've planned for.
That we've.
Pre funded frankly with the cash position that we have on the balance sheet and even as we look forward into 2023 right very comfortable that.
Consistent with our capital allocation framework.
Our cash balances will remain robust even as we continue to spend what's necessary to.
Move those strategic projects forward and closer to completion with 40% already behind us.
Alright, that's helpful. Jeff.
And just one follow up if I may I wanted to dig deeper into the mini mill segment.
The profitability during the segment.
I know you did mentioned that a lot of the cost increases related to high cost inventory, but.
Perhaps are you able to share of the $200 ton sequential increase in cost.
Much of that was related to the high cost material and how quickly should we expect that drove us through the next couple of quarters. Thank you.
Yes, thanks for the question.
Answer it this way we definitely have some challenges here as we highlighted in the third quarter that will continue into the fourth quarter and likely bleed into the.
First first quarter of next year as we work it off.
The good news is thats.
A temporary situation and we will work through that over time.
We will have a lot better result, yes, normally just to add to Dave's comments. There. If you think sequentially total metallics cost of the furnace, we probably saw up somewhere in the range of $50 to $60 a tonne in the third quarter versus the second quarter I would say in total of our total kind of HRC costs add big River about $650.
So dollars was related to metallic so certainly at elevated levels and we would look to maybe six to seven weeks of metallics inventory on hand with more of a long term target of three to four weeks look to work that off through year end I think we remain selective in our buys for metallics and as we turned the page to 2012.
Three we expect to be in a much more normalized position related to inventory levels in and unit costs.
Okay.
Thank you very much.
We'll go to our next question on the line from Curt Woodworth with Credit Suisse go right ahead.
Yes, hi, good morning, David.
Okay.
I just wanted to drill down more into.
Because he could C J.
Berkeley, we always kind of viewed that facility as being among the lowest cost.
In Europe , and generally speaking fairly advantage from an energy perspective.
And you still have kind of the benefit of some of the semiannual contracts that will reprice over the summer so.
I guess question. One is just what is the path you think to get to profitability there.
And then with respect to the guidance you outlined $450 million of sequential EBITDA decline can you help break that out a little bit by segment, how much of that should we think about incremental decline into Europe .
A bunch of them.
Yeah. So Kurt this is Kevin I appreciate the question.
When it comes to U S. S. K certainly historically, it's been a low cost facility on a favorable side of the cost curve there in Europe .
In a really advantaged by its streamlined access to raw materials coming out of Russia, and Ukraine, but as we know that dynamic has changed as a result of the conflict. So we've seen challenges related to sourcing and resulting impacts on transportation costs and raw materials, and then just broader energy headwinds as certainly impact.
Good margins as well so I think we're more optimistic that we'll be working our way through some of the raw material impacts through year end and we'll continue to monitor.
Broader energy headwinds that I think are impacting our facility as well as well as many others in the region.
Shifting to the fourth quarter. If you think about sequential declines I mean, you should expect the pace of decline in our North American flat rolled business to be the to be the sharpest.
We would see.
Some stepped down from from the mini mill segment as Jeff alluded to.
And then some strength some sequential strength in our tubular business, maybe order of magnitude, 15% to 20% up quarter over quarter potentially approaching $200 million in the fourth quarter for the segment. So definitely not for given the flow through of prices as just described in her remarks.
With some more modest step backs in other segments and strength in tubular.
Okay, and then just respect to the cash flow outlook.
I believe just looking at your other comment regarding 2023 that you do see still I think positive free cash flow that you're talking about generating free cash flow. So can you just confirm that and then in the event that you would be free cash flow negative given the strength of the balance sheet do you still feel like you could continue capital return I know that.
Kind of a board level decision, but if you're going to speak to your confidence level on those issues. Thank you very much sure sure. So I really don't want to get ahead of the planning process for 2023, right now I mean, we're really knee deep in that.
I don't want to go too far just in terms of getting specific around what that free cash flow could look like what I will say is if the challenges continue and we're in a position where.
We would look to be.
Unfavorable firm or have negative free cash flow if you will.
You said it best there is confidence in our continuing without delay our strategic initiatives because of the opportunity we've had to pre fund the balance sheet.
No.
For sure we know that 2023 cash flow for those strategic projects is going to be heavy right. I mentioned in detail that will have about $1 7 billion of the $2 5 billion specific specifically spent towards those those.
[noise] towards those projects.
So to the extent that we have obviously offsetting cash from from the operations of the business.
Time will tell and we'll update you in January as we pull that budget together, but I think the bigger takeaway on cash flow and the bigger takeaway on.
On the balance sheet is that we are very comfortable to keep going in.
The strategic processes that we know are going to.
Enable that future of lower cost intensity lower capital intensity higher cash flow.
Kurt.
We've laid out the capital allocation process, we're following that capital allocation process and we're going to get through these strategic investments and direct returns are a part of that we have a lot of optionality. We got a lot of cash there is a lot of things that we can do with this we again need to get through the planning process.
Have a better view of the future. There is massive uncertainty is related to geopolitical issues macroeconomic issues. We're very fortunate to have the optionality that we do but direct returns should be a part of our our normal way that we reward our stockholders.
Yeah.
Thank you very much we'll now proceed to our next question from the line of Carlos de Alba with Morgan Stanley 's go right ahead.
Yes, good morning, Dave and yes. Some of my questions have been answered already but just on sustaining capex or the capex on your existing footprint.
I think as you mentioned around $650 million in 'twenty Duane Dewey.
How should we think about these going forward given the investments you Mr. <unk>.
That you have the nuance if you will.
Some extent or shifting your asset base.
Do we think about this number going forward and I understand that it might be early but just maybe just a path it would be it will be useful.
In basic.
We have challenges we're doing our best to overcome were too cost intense where two capital intense where two carbon intense and so over time. The problems. We're trying to say it solved does it become less cost intensive and less capital intensive so over time those numbers will come down as we implement our.
<unk> projects over the horizon here over the next.
Two to three years, so that the future is going to be a lot less capital intensity.
Yeah.
Thank you.
Thank you very much.
Our next question on the line.
Karl Blunden with Goldman Sachs go right ahead.
Hi, good morning, Thanks, very much for the time.
Just a question on the footprint that you commented on recently idling, some blast furnace operation with Gary and Mon Valley, and I intend to bring them back online depending on customer demand are there specific signals youre looking at to bring those back is it.
That customers wanted at a price signal just took some kind of.
Visibility into how that will evolve would be very helpful.
But it's obviously a multi variant analysis.
We're always staying very close to the customers and the priority is to make sure that we have the steel.
On time high quality delivered safely to them. So the signals are pretty basic we take a look at what their needs are and we do our best to fill them and when they tell us it looks like it's ramping up we will ramp up as well and we're looking for those signals, we're working closely with them we have.
Ongoing daily conversations and.
When they place the orders we feel we feel the book.
And then just on the balance sheet.
You recently extended maturities and.
At a pretty attractive interest costs by using.
By accessing different parts of the debt market is there more opportunity for that you don't have a lot of debt that's due near term, but a little bit of a 29 debt that you could extend is there.
The goal to do some more of those kind of extensions when you think about liability management.
Well, we're always looking at opportunities I mean, we have a fantastic treasury team that is always communicating with the market looking at opportunities to continue to tighten and strengthen our balance sheet going forward, there's nothing that I would speak to specifically now in terms of.
Looking for a near term action on the balance sheet, but I guess the takeaway is we're always looking we're always talking to the market had very close relationships with the banks.
And we will take advantage of opportunities as they arise for us to again continue to strengthen that balance sheet.
We will preserve optionality and we'll be opportunistic.
Thanks, Dave.
Okay.
Thank you.
Our next question on the line Gordon Johnson with <unk>.
<unk> research.
Ed.
Hey, guys. Thanks for taking the question.
A lot of my questions have been answered I know you've talked about.
Yes.
You talked a little bit about more about.
Well.
The value of the EBITDA, there roughly $40 million down slightly as a result reported.
Demand is down again in Q4 can you talk a little bit about I know there.
Higher costs associated with it can you talk a little bit about the underperformance there.
What should we expect.
Into 2023, and then I have a follow up thank you.
I'm, sorry were you talking about specifically.
We couldnt, we couldnt hear parts of your question.
Do you mind, just repeating we want to make sure. We're answering you're right on is it is it prs youre asking about.
Yes Drs.
Yes.
And your question was about.
Cost pressures or what were looking brs going forward into 'twenty three.
Yes, I guess, just overall a bit of underperformance this quarter and the guidance was a bit weaker than we expected.
I wanted to get your thoughts on kind of what's driving that beyond cost pressures does it just cost pressures.
And what you expect in 2023, and then I have a follow up.
Sure.
Thanks Gordon. This is this is Kevin so as Jeff articulated in the prepared remarks or at the raw material headwinds certainly believed to be temporary really persisting through year end, but resetting towards the beginning parts of 2023 had about 800 basis point impact on on margin. So if you add that back to the 6% a third.
Order performance that gets us back more towards the mid teens goal that we've set for the business before executing projects like the non grain oriented electrical steel line and the additional galvanizing capability. So what we saw in the third quarter. I think was also impacted by just the mix there at Big River.
As we continue to mature that facility and increase its capabilities.
Product mix in the third quarter was certainly more skewed towards towards Asia, HRC, which is about $60 to 65% of the book in the quarter as we bring on projects like the NGL line.
We will add additional volume 200000 tons of electrical steel as we add capabilities related to the galvanizing facility, which is another 300 plus.
Tons of downstream value added product, we would see that mix really rebalancing to something more certainly more diversified maybe 50% of the book being more hot roll with the remainder being downstream valve.
Value added products, including 10% of the book being NGL steel going forward, so to Dave and Jeff's comments, we made very very confident and that businesses financial and strategic impact on the enterprise and as we continue to complete these projects on time and on budget, we see tremendous opportunity to continue to enhance the mix.
And drive margins, even higher into the low 20% after the completion of those of those projects. So the fourth quarter. As you mentioned, we will continue to be I think burdened by some of the high cost raw materials, but as we turned the page into 2023.
We're confident the business will be more normalized from a cost perspective, and really really excited for the second half of next year as the NGL line comes on and we expect to meet really robust demand quite quickly and there is no doubt there are the short term challenges here in this temporary impact of the high cost raw materials, but to Kevin's point there.
We should be well into the mid to high teens on Big River, and then low 20% tile as we get the NGL and <unk>, we've got to get a better balanced book, we need to make sure we fill the mill, we need to make sure that.
We get this thing back on track and I don't think Theres any question of the best days are ahead for this facility facility, we had great talent down there, we got great operations and it's got a great future.
Okay. Thanks for that.
And then just one last one on my end.
Looking at imports is it fair to assume that.
Import prices are somewhat negatively affecting things now and if they can ship there.
Could see a positive impact and then you guys have done great with respect to capital allocation in my view.
And it seems like you guys are going full steam ahead with Capex and share repurchases is there an HRC price at which you guys would accelerate that <unk> decelerate that thanks for the question.
For our top priority of course here is to make sure that we're pleasing these stockholders right and the way we do that is do it over the longer term we've got to get this next mini mill in place we've got to get the NGL line, the Galvo, whom these strategic projects on budget.
On time, and those are really important for us to deliver the value that our our stockholders expect and deserve and along that path. We wanted to give them some direct.
Returns. So that's what we're headed for we're not setting a specific target on HRC or things like that we lead and we let the marketplace we lead.
The economic environment are we let our customers tell us how good we are going to be here in the short term, but longer term again, it's just over the top bullish.
Yes, Gordon I think on imports, where we've seen the global price gap continue to narrow and we think thats going to have a positive impact on import penetration into the imports are down. So it's a good place right now and we continue to be very very encouraged with various trade actions re confirmations of various policies.
That we've talked about in our prepared remarks so.
Domestic from that perspective, and these trade cases.
Great to see this administration carryforward with understanding the number one priority for any sovereign state is safety and security and when you get that right and you have a strong manufacturing base.
Bullish on the countries that understand that so I'm bullish on the USA for sure.
Thank you very much and there are no further questions at this time I will now.
I'll turn the call back to the U S Steel's CEO David Burke.
For closing comments.
Thank you again for joining us. This morning, we're on pace for the second best year in U S. Steel history and are set up for success in 2023 and beyond.
Thank you to our employees, who come to work every day to make the steel our customers. It depend upon when we do well you do well and we're demonstrating that again with another quarter of significant profit sharing we are working towards a common goal to make U S steel the best steel company and to provide our customers with profit.
<unk> steel solutions for people and planet, we are pleased to safely and reliably provide high quality steels to our customers. My thanks to each and every customer for your continued partnership and thank you also to our investors we are generating value by investing in the future.
While rewarding you along the way with direct returns we've already delivered record results in 2021, and 2022 and we're confident this business is better positioned than ever before to create long term value for stockholders. We look forward to proving the value of our best for all strategy.
Today.
And tomorrow.
Now, let's get back to work safely.
Thank you very much that does conclude the conference call for today, we thank.
Thank you for your participation and ask to disconnect your lines.
Have a good day everyone.
Okay.
[music].
Okay.
Yes.
Sure.
Okay.
Okay.
Uh huh.
Okay.
Yes.
Sure.
[music].
Yeah.