United States Steel Corporation (NYSE:X) Q2 2023 Earnings Call Transcript

United States Steel Corporation (NYSE:X) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, everyone, and welcome to the United States Steel Corporation Second Quarter 2023 Earnings Conference Call and Webcast. As a reminder, today’s call is being recorded. I’ll now hand the call over to Kevin Lewis, Vice President, Finance. Please go ahead.

Kevin Lewis: Okay, thank you, Tommy. Good morning, and thank you for joining our second quarter 2023 earnings call. We hope everybody is having a great summer. Joining me on today’s call is US Steel President and CEO, Dave Burritt, Senior Vice President and CFO, Jessica Graziano; and Senior Vice President and Chief Strategy and Sustainability Officer, Rich Fruehauf. This morning, we posted slides to accompany today’s prepared remarks. These can be found on the US Steel Investor Relations page, under the overview section. We also recently launched a new Investor Relations website, which includes a Quarterly Investor and Strategy Presentation. We hope that you’ve had a chance to review the slide deck and have found it useful. 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 US Steel President and CEO, Dave Burritt. And he will begin this morning’s call on slide four.

David Burritt: Thank you, Kevin and good morning to all of you joining us. We are grateful for your continued interest in US Steel and look forward to updating you on our business. We delivered a strong second quarter, reflecting solid market fundamentals and strong operational performance. We generated $804 million in adjusted EBITDA and 16% EBITDA margin. This includes an industry leading 23.5% adjusted EBITDA margin for our Mini Mill segment. Of course, strong performance begins with safe operations. Operations run best when safety is best. Frankly if companies aren’t talking about safety that sends a strong message about not only how they treat their people and customers, but also about how their operations are performing.

The summer has historically been a high-risk time of year for the steel industry. I’m pleased with our continued focus across the organization on working safely and we would like to remind all of those listening today to stay safe, follow high heat protocols and look out for others. We are on pace for another record best year of safety performance following record best in 2020, record best in 2021, and record best in 2022. I know of no other steel company that approaches our great safety results. So as we kick-off the call, I’d like to thank the US Steel team for always putting safety first for themselves, for their families, for their communities and for our company. Operations always run best when they are running safely and efficiently. Our flat-rolled segment ran at an adjusted utilization of 86%.

And our Mini Mill segment ran at 91% utilization. These high levels of utilization drive efficiencies throughout the business. US Steel’s best for all strategy is to provide customers with profitable steel solutions for people and planet to reward stockholders. And I’m pleased to say that we expect to continue rewarding stockholders as we continue to execute extraordinarily well. We have returned an outsized amount of cash to investors in-stock repurchases since the fourth quarter of 2021, nearly $1.2 billion or approximately 18% of our market capitalization at quarter-end. Meanwhile, we’re advancing strategic projects on-time and on-budget, no permitting delays, none. This team found ways to offset high inflationary pressures. On-time and on-budget is now standard work at US Steel.

Our strategy will reposition US Steel to benefit from long-term macro trends, which we believe signal a renaissance for American steel making, more on this later. Said very directly, I am bullish on the United States, I am bullish on American steel and I am very bullish on US Steel. That’s why we’re looking forward to getting to our best for all future faster. Yes, some challenges remain, but the challenge has become the way. We embrace this historic philosophy what stands in the way, becomes the way and we are making great progress transitioning to a less cost, less capital and less carbon intensive business model to become the best steel competitor. We’re doing this by expanding existing competitive advantages, enhancing our balanced capital allocation and leveraging bipartisan support for strong trade enforcement.

Our path is delivering on our best for all strategy. Let’s get into today’s discussion on slide five. To get to our best for all future, we must focus on the things that we can control. We are ensuring we have best safety performance, best environmental performance, best operations and are the best partner to our customers, employees, suppliers, communities, and of course our stockholders. At the same time, we’re expanding best capabilities in the US Steel portfolio to deliver the new US Steel today. Our strategic process is accelerating with favorable external mega trends and setting up a period of tremendous opportunity for US Steel and for our stockholders. Broadly speaking, those external factors are de-carbonization, de-globalization and digitization.

Let me begin with de-carbonization on slide six. The push towards a greener future is undeniable. That’s why we were an early industry adopter of interim and net zero-emission goals. Our customers want to partner with companies that help them meet their own de-carbonization targets. That’s where our strategic investments come into play. Later this summer, we’ll start producing non-grain oriented or NGO electrical steel, on-time and on-budget. We’ve combined our state-of-the art sustainable steel making assets at Big River Steel with a model for next-generation NGO electrical steel right here in the United States. Our investments in sustainable steels continue to strengthen domestic supply chains and bring advanced manufacturing back to our shores.

The attractive electrical steel market is one of the fastest-growing markets with considerable margin expansion potential. We forecast a 7% compounded annual growth rate, just in NGO and in motor laminate, compared with 1% for the broader sheet market. Our new InduX branded electrical steel product will provide the most capable and efficient NGO steel in the market today. To those that think this is new to us, we’ve been making electrical steel in Europe for over 20 years with our Slovakian team providing essential support for the successful completion of our NGO project. I am so confident in our ability to be not only successful, but disruptive to the electrical steel market in the United States. You’ll see what I mean on slide seven. These next-generation electrical steels will be unmatched in scale.

We can produce 200,000 tons of NGO steel, more than any other domestic competitor. Unmatched in capabilities, we’ll be able to produce electrical steels that are thinner, able to go 0.1 millimeters to 0.8 millimeters thin, wider up to 1,650 millimeters wide and bigger up to 30 metric tons, better than what the domestic market can produce today. Why does that matter? Because it allows customers to improve their production yields and process efficiencies. Our NGO will also be unmatched in customer value, strategically located to support manufacturing concentration in the US, Canada and Mexico and producing next-generation steels that aren’t widely available today. When we set out to build this line, we went straight to the customers to hear what’s most important to them and here’s what we heard.

Customers want thinner steels. The thinner we can make our NGO steels, the further their electric vehicle motors can go between charges. Customers want bigger coils, bigger coils mean more throughput and less downtime. And customers want wider coils, wider coils mean less yield loss, more efficient stamping and optimize slitting for less waste. We’ll be able to offer NGO electrical steel that can do all of this and more. For instance, we’ll go thinner than what electric vehicle manufacturers currently require. This means we can meet their requirements today and tomorrow. The future of electrical steel is combining state-of-the art sustainable steel-making with world-class electrical steel technology and that future for customers starts now.

We are pleased and excited to recently have earned our first customer orders for industrial and ex-EV auto grades. Those are orders in hand before the assets are running. So not only are we confident in our NGO steels, so are our customers. The sales team tells me, when we make it, we take it, meaning we will take market-share, since no competitor comes close to our NGO steels. We are delivering the new US Steel today. NGO is part of Big River Steel, our state-of-the art Mini Mill operation that is crucial to US Steel’s ongoing and accelerating de-carbonization strategy. We’re also constructing a new continuous galvanizing line at Big River Steel that is slated for start-up next year. This project remains on-time and on-budget. We know that making our business more environmentally sustainable is the best thing to do for our customers, for our planet and for our bottom line.

That’s why we’re building Big River 2 right next door. The new state-of-the art Mini Mill remains on track for a 2024 start-up and in-line with its $3 billion budget. Once complete this cutting-edge facility in combination with the existing Big River Steel will form a 6 million ton mega mill, supplying the most advanced and sustainable steels in North America. Slide eight illustrates the considerable construction progress to-date. 87% of the project’s spend has already been committed and 59% of the project execution is complete. As you can see we’re past the peak execution risk phase and are approaching the equipment installation and commissioning milestones. So while others in the industry haven’t started construction, we are well on our way to greater free cash flow for stockholders from our Mini Mill investment.

25% to 30% of Big River 2 equipment is already onsite, which again largely derisks the next phase of construction. Most of the critical equipment not onsite has been physically inspected by the team to ensure the equipment is ready for installation once delivered. We have the best in-house construction project team in the industry by far and they are proving their expertise time and time again. First, by successfully delivering Big River Steel under budget and ahead of schedule and by achieving world-class commissioning. Then by successfully delivering NGO later this quarter. And today, Big River 2 is on-track and on-budget in-spite of extraordinary supply-chain and inflationary pressures. With an average of 25 years’ experience across the team, there is considerable experience at the helm that you can’t easily replicate.

This is a true and differentiated competitive advantage for US Steel. Our iron-ore assets are also differentiated, competitive advantage. We continue to see the success of our Gary pig production as it supports our overall metallic strategy. Our investment at Keetac to add DR-grade pellet capabilities during 2024 also remains on-time and on-budget. Let’s move to slide nine to discuss another trend moving in our favor, de-globalization. As you can see, we’re investing in the place we’ve called home for 120 plus years, America. For decades, the big global trend was outsourcing and overseas investment. We saw the expansion of global supply chains, and we also just recently how delicate those supply chains really are. The COVID-19 pandemic exposed the fragility when lockdowns and labor shortages led to product shortage and the worst inflation in more than a generation.

The opportunity, companies both American and foreign have realized they need to have operations here to access American markets and keep their supply chains resilient. The Inflation Reduction Act and Bipartisan Infrastructure law also provide meaningful incentives for investing in America. I’d say the IRA is misnamed. It’s a manufacturing renaissance act. We applaud those that made it happen and we look-forward to the tailwinds we believe it will provide for the steel industry for years to come. I believe our country has finally realized how important it is to our national security, to have a strong and resilient manufacturing sector here at-home, supported by strong trade enforcement. Of course, US Steel has always been here. For 122 years, our steel has been mined, melted and made right here in the USA.

So we say welcome back to the rest of these companies coming home and look-forward to partnering with them. And they really are charging back. In 2022, construction spending related to manufacturing was over $100 billion in the United States. And encouragingly, you can’t have a manufacturing boom without steel. US Steel is poised to supply steel to builders of everything from automobiles to roofing. In a brutally competitive global marketplace, advantage United States. And advantage US Steel, because we are investing in new capabilities that expand our iron ore, Mini Mill and finishing line advantages. Hope you can hear the excitement in my voice, when I discuss these global trends, de-globalization, de-carbonization and how they align with US Steel strategy.

These are long-term tailwinds that will provide uplift as we execute our strategic transformation to being a less cost intensive,, less capital-intensive and less carbon intensive business. The path to value creation is clear. I’m also energized by another trend on slide 10, one, where we’ve only begun to scratch the surface. That’s digitization. New digital tools like generative AI provide us with tremendous opportunity to become a more productive and more profitable US Steel. At US Steel we’ve been working with multiple forms of AI with our recent strong focus on generative AI. We are already seeing results. Here are just a few examples. At US Steel Europe, we’ve achieved a $5 million annual run-rate savings by deploying energy cost optimization models based on market price and electricity purchase recommendations.

Also at US Steel Europe, we’re leveraging machine-learning with exhaust gas sensors to predict final values for carbon temperatures to recommend process actions. The benefit has been a $3 million annual run-rate savings. At Gary Works, we’re utilizing advanced analytics to reduce natural gas usage at our boilers by monitoring key performance indicators to improve boiler operations and reduce fuel consumption, the value, $4 million of savings. And at our mines in Minnesota, we are leveraging advanced analytic models for operator recommendations to increase productivity at our concentrator. This has achieved nearly $3 million of value. This is only the beginning of our digital and AI journey. To accelerate our work, we also recently launched a partnership with Carnegie Foundry, a leading robotics and AI studio here in Pittsburgh.

The Carnegie Foundry team are clear leaders and innovators in autonomy and this partnership will ensure we are at the forefront of emerging innovation in robotics and autonomous solutions. The bottom line, we may be 122 year-old company, but we are intensely future focused, and we have a bias for speed. Now before we turn to Jess to go over the numbers, I’d like to briefly recap my opening remarks. We had a terrific second quarter. We’re making great progress on strategic projects and remain on-time and on-budget. And we’re extremely well-positioned for what we believe will be the best American steel market in a generation and to capitalize on global trends of de-globalization, de-carbonization and digitalization to build a stronger, more resilient and more profitable US Steel.

We are excited by and committed to a capital allocation framework that consistently rewards stockholders. We’re executing with confidence and incremental EBITDA from strategic projects will continue to strengthen our already strong balance sheet. We’re building a stronger business for you, our stockholders. As we get stronger, you will see the direct returns. We’ve returned nearly $1.2 billion of capital to stockholders through buybacks since 2021 and I expect that to continue. And as we continue to think about capital allocation, we’ll consider opportunities for the dividend given our confidence in generating resilient cash flows. This is the power of our strategy. I’m bullish on the future of US Steel. And I couldn’t be more pleased to lead the steel company with United States right there in the name.

Now let’s turn it over to Jess, who will go over the financials. Jess?

Jessica Graziano: Thanks, Dave, and good morning to everyone on the call. I’ll pick up on slide 11. We were very pleased with our second quarter performance with sizable sequential increases in both adjusted EPS and adjusted EBITDA. Adjusted EPS of $1.92 for the quarter is up nearly 150% sequentially in large part from higher net income, as well as a lower share count from our buyback activity in the quarter. Adjusted EBITDA of $804 million is up about 90% sequentially, in-part due to higher steel prices across our Flat-Rolled and Mini Mill segments and in Europe. Adjusted EBITDA also increased due to better mix, as we responded to customer demand with our diverse order book and from continued cost improvements we’ve seen across the segments.

Adjusted EBITDA margin for the quarter with a healthy 16%, with our Mini Mill being a significant contributor. Robust EBITDA margin in our Mini Mill segment in the second-quarter was 23.5% after we adjust for construction and some onetime costs. More on the segments in a minute. We translated this strong performance across the business into a lot of cash, generating over $100 million of positive free cash flow in the second quarter and that’s after investing $476 million in strategic CapEx for our in-flight projects and another $136 million for sustaining projects across the business. All that cash further strengthens our balance sheet and we ended Q2 with approximately $3.1 billion of cash and total liquidity of $5.5 billion. Our leverage at June 30th was 1.8 times adjusted debt-to-EBITDA, well below our through-cycle target range of 3 to 3.5 times.

We’re checking the box on each of our capital allocation priorities, maintaining a strong balance sheet, while we invest in and execute against our strategy. We’re also checking the box on direct returns, with $75 million in share repurchases and $11 million in dividends returned to stockholders in the second quarter. As we near the completion of our current $500 million repurchase authorization and add to the nearly $1.2 billion of buybacks completed since Q4 2021, we’ll continue to consider direct returns of priority in capital deployment with the potential for a new sizable repurchase authorization and a fresh review of our dividend policy. What’s really exciting is seeing our key in-flight initiatives come online, we start to generate free cash flow in bigger and more resilient ways as we began producing NGO coils at Big River this quarter and we look forward to Big River 2’s on-time start in mid-2024.

Let’s move to slide 12, remember, last quarter when I called Big River a lean green cash machine. It’s lean, when you compare half of the sustaining CapEx needs per ton versus our legacy assets producing green feel with 70% to 80% fewer GHG emissions versus blast furnaces. And with over $1 billion of annual through-cycle free-cash flow we expect from the Big River campus, once Big River 2 is at run-rate, the cash machine continues to get closer and ring louder. Let’s spend a few minutes within the segments and get into the details of the second quarter on slide 13. I’ll then share our thoughts on Q3. Our Flat-Rolled segment delivered a sequentially strong second quarter, with EBITDA of $377 million, up over 2.5 times from Q1. The higher steel prices we saw building in Q1, were realized in Q2, coupled with a benefit in mix across a more diverse order book.

Now for our second quarter results were also helped by the absence of seasonal headwinds in the mining operation that affected Q1. The Mini Mill segment was the star of the show this quarter with segment EBITDA of $173 million, up nearly 3.5 times sequentially in large part from higher steel prices. Reported margin for the quarter was 22%, but that includes certain startup costs for the new lines and for BR 2 as well as some one-time costs in the quarter. Together, if we exclude those $12 million of cost, the second quarter Mini Mill margin was the 23.5%, I mentioned earlier, a best across public peers. Our European operations also saw meaningful improvement in the second quarter. We delivered $97 million of EBITDA in Europe, reflecting price and volume tailwinds and lower energy costs.

We also benefited from cost absorption and other efficiencies from running all three blast furnaces in Slovakia. While Q2 results have moderated from sequential gains in our Tubular segment, second quarter EBITDA for the segment remained robust at $169 million due to historically strong pricing, cost control and a focus on premium connections. Tubular delivered a very healthy 42% margin for the quarter. Now looking forward to the third quarter, where we will still see positive results, albeit slowing sequentially. The Flat-Rolled segment results should reflect lower steel prices than we experienced in Q2. Volumes are expected to be stable as we continue to focus on mix that keeps the segment nimble to changing market dynamics. In the Mini Mill segment, we expect lower steel prices will impact third quarter results and lower sequential EBITDA.

However, with a strong level of EBITDA expected, margins in this segment should remain strong, approaching mid-teens for the third quarter. In Europe, current market dynamics are expected to pressure both steel prices and demand, which we expect will impact third quarter results. We’re continuing to monitor the order book to ensure our production schedule and forward demand remain balanced. At our Tubular operations, we expect volumes and average selling prices to be negatively impacted by more muted demand as onshore rig counts decline and pipe inventory rebalances throughout the quarter. As we look forward for Tubular, we remain focused on keeping fundamentals extremely strong as we monitor the impact of higher imports, increasing inventory levels across the supply chain and lower rig counts.

And we’ll do that by serving our customers in strategic basins, leveraging our proprietary premium connections and enhancing our structurally improved cost profile. Taken together, we expect third quarter adjusted EBITDA to be between $450 million and $500 million. I’ll wrap-up with this on slide 14. Our stock provides a unique opportunity for investors to invest in a growing business with a transformed balance sheet and continued and meaningful direct returns to stockholders, all at a significant discount versus peers. I’ll turn it back to Dave before we take your Q&A. Dave?

David Burritt: Thanks, Jess. So to recap on slide 15. We delivered record safety performance during a strong second quarter, while advancing strategic investments on-time and on-budget. With each passing quarter, we are saying, what we’re doing and doing what we say. We are focused on the things we can control, to get to our best for all future faster. By delivering our best every day, we ensure continuous improvement, our best for all strategy is setting us up to capitalize on favorable external trends to create tremendous opportunity for US Steel. I truly believe we’re entering an exciting time in the domestic steel market and I am very bullish for US Steel’s future. Kevin, let’s move to Q&A.

A – Kevin Lewis: Okay, thank you, Dave. Our first question comes from Say Technologies. And just as a reminder, the Say Technologies platform is the platform that we use here at US Steel that allows retail and institutional investors to submit questions to management ahead of our earnings call. We’ve seen this platform used across other public companies like Tesla, like Chevron and Pfizer to name a few. So today, several of the pre-submitted questions that we saw from our investors focused on the expected impact from the Inflation Reduction Act and Infrastructure Bill. This isn’t a new question but one I know continues to be top of mind. Dave you want to get us started with your latest thoughts on the topic?

David Burritt: Sure. Will be happy to do. The IRA and the Infrastructure bill offer unique opportunities, really validates some of the trends I spoke about earlier. We agree with what some of you have said. We are on the cusp of a once in a generational steel cycle. Our strategic projects, position us well to benefit from the favorable macro trends. The IRA Bill should be renamed as I said, the manufacturing renaissance act. Critical for industrial de-carbonization. De-carbonization includes steel and iron-making which is confirmation of the critical role our business plays in US manufacturing. And it’s all about re-shoring. And our mantra of mined, melted and made in the USA and Rich I know you’ve been living this every day. Anything you’d like to add?

Richard Fruehauf: Yeah, thanks Dave. On the Infrastructure bill, we are well-positioned. As you mentioned mined, melted and made in the USA, that’s what we do here at US Steel every day. Re-shoring of manufacturing to the US and regionalization of supply chains, that’s right in our wheelhouse. As you noted, the Infrastructure bill includes so-called Buy American provisions and there’s no better American steel than the steel that we make here at US Steel. And I think the industry is just really starting to see the benefit, about $220 billion of the Infrastructure bill has been announced, it takes time for these projects to get into the hands of the construction teams. But we’re going to see more of that likely in the second half as it filters into actual projects on the ground.

So a lot more come from the government spending here to be announced. And I think that points to additional upside for the industry and that’s why we have increased confidence about this being the generational moment for steel that you mentioned before and other analysts have talked about it. So a lot to be optimistic about here and then you look at the $370 billion in climate investments in the Inflation Reduction Act. That’s another policy support for the industry and another area of opportunity for us. The government is working through the process through various funding opportunity announcements from the Department of Energy, on where that spending is going to go, but certainly a potential tailwind for steel and also for the technologies that will be developed to allow the industry to decarbonize the lower carbon intensity.

Obviously, that’s something we’ve been working on for a long-time with our net zero goal and our 20% reduction of emissions intensity by 2030 goal. So we’ve positioned the company to benefit from these potential future funds and we think those can be very supportive future investments for us. So especially technologies that will lower our carbon intensity.

Kevin Lewis: Well, thank you both, Dave, and Rich. And with that, Tommy, you may now queue the phone line for questions. We ask that you each please limit yourself to one question and a follow-up, so that everybody on the call has the opportunity to ask a question.

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Q&A Session

Operator: Thank you. [Operator Instructions] I will proceed with our first question on the line, from Tristan Gresser with BNP Paribas Exane. Please go right ahead.

Tristan Gresser: Yes, hi, good morning, and thank you for taking my questions and for the presentation. The first one is maybe on the Q2 volume numbers, notably, the decline in external shipments at Big River. If you could provide a little bit of color there? And moving into Q3, I appreciate the color you gave on the moving pieces of the guidance. But what are the expectations for US volume into Q3? And is the volume guidance by division that you provided at the start of the year still valid? Or does it look a little bit ambitious now for Big River? And also on volumes in Europe, could you confirm if there has been a shutdown of the blast furnace for maintenance and also what does that mean for the volume guidance? That’s my first question. Thank you.

David Burritt: Yeah, thanks for that question. I’ll turn it to Kevin in a moment, but we appreciate you calling out Big River Steel, just because of the great performance that they’ve had. They’ve demonstrated that they can be incredibly nimble in a short period of time are competing with the best amongst the best. So Kevin, maybe you get into a volume question, and I think you had a tacked on question related to Europe.

Kevin Lewis: Sure. Sure, Dave. Thank you and good morning. Good morning, Tristan. Related to volumes, we did see a sequential decline as you called it out and shipment volumes out of our Mini Mill segment. I think that just really relative to how the order book transpired in the quarter and strong levels of shipments in Q1. So as we look forward to Q3 would see shipment slightly down likely within the Mini Mill segment, but certainly still north of 0.5 million tons of volume that we kind of saw in Q2. So I think still a reasonable level of shipments coming out of that segment. If you think about just shipments more broadly. I think as Jess mentioned in her comments, we do see the potential to see shipment decline in Q3 relative to Q2.

I think that’s probably just a little bit across the board, if you think about all four of our segments and how we’re seeing the order book shape up for Q3. So with that, I’m going to pass it Jess, and she going to comment on US SK and specifically your question around the blast furnace.

Jessica Graziano: Hey, Tristan, good morning. Thanks for the question. So we take advantage of a seasonally slow summer kind of mid a Q3, let’s call it a seasonally slow August to do a planned outage in Slovakia. So we’ve just started that outage on July 17th. That’s going to run about 50 days. And again is sort of normal timing for us given the relatively slow summer. So we’ll take advantage of doing that planned outage on one of the three blast furnaces. So you can expect that because of that, shipments are going to be, let’s call it, as much as 100,000 tons lower versus what we saw in Q2. But we do expect to get back over a million tons in Q4 right now. As we mentioned in prepared remarks, we’ll watch closely what’s happening, just to make sure demand and production stay on balance. But for right now, we were feeling pretty comfortable underwriting that will again get back over those million tons shipping in Q4, out of Kosice.