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Sunday, November 24, 2019

United States Steel Corp (X) Q3 2019 Earnings Call Transcript

United States Steel house (X) Q3 2019 Earnings decision Transcript
United States Steel house (NYSE:X)
Q3 2019 Earnings decision
Nov 1, 2019, 8:30 a.m. ET

Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator

   Good morning everybody and welcome to the u. s. Steel Corporation's Third Quarter 2019 Earnings telephone call and Webcast. [Operator Instructions].

I'll currently hand this decision over to Kevin Lewis chief of capitalist Relations.

Kevin Lewis -- chief, capitalist Relations

   Thank you and morning. we have a tendency to appreciate your continuing interest in U.S. Steel and welcome you to our Third Quarter Earnings decision. On the decision with ME this morning are going to be U.S. Steel President and chief executive officer Dave Burritt; our govt vice chairman and CFO Kevin Bradley; similarly as Dame Agatha Mary Clarissa Christie Breves UN agency can transition into the CFO role starting on Nov four. conjointly on today's decision is Senior vice chairman of Strategic coming up with and company Development wealthy Fruehauf. once the shut of business yesterday we have a tendency to denote our earnings unleash and earnings presentation underneath the Investors section of our web site. On today's decision we are going to practise via webcast choose slides in our third quarter results.

   The link in slides for today's decision may also be found On our web site.Before we have a tendency to begin let ME prompt you that some info provided throughout this decision might embrace it for wanting statements that are supported bound assumptions and are subject to variety of risks and uncertainties as delineate in our SEC filings and actual future results may vary materially. For wanting statements within the handout that we issued yesterday in conjunction with our remarks nowadays are created as of today and that we undertake no duty to update them as actual events unfold.

   I would currently prefer to flip the telephone call over to U.S. Steel President and chief executive officer Dave Burritt UN agency can begin today's presentation on slide four.

David Burritt -- President, Chief military officer, Director

   Thank you Kevin. morning everybody and many thanks for your interest in U.S. Steel. We've been creating massive changes over the past few months positioning U.S. Steel for a brighter future. Our strategy ought to be returning into focus for you with our investment in massive stream Steel that closed yesterday. however this strategy has been the arrange right along to become the world-competitive better of each best of the integrated model and also the best of the mini mill model. Our investment in massive stream helps North American country to induce to wherever we have a tendency to were going quicker. Still important market headwinds stay across all three operative segments however this doesn't deter North American country. It provides clarity that our strategy is that the right one for our success. As a result we have a tendency to are moving quickly toward centering our North yankee flat-rolled footprint around three foremost assets. This includes rescoping our plus improvement programming reducing fastened prices reprioritizing money and building a team in support of the business we have a tendency to are getting and with ultimately exploit 100% of huge stream our #1 strategic priority. however let's be clear.

   While our investment in massive stream Steel is our #1 strategic priority we are going to be versatile with our portfolio of strategic investment defrayment and that we will get all of the comes completed as a result of their slot in our strategic profile. we have a tendency to conjointly proclaimed plans to reinforce our operative model to raised align with capital punishment our strategy and that we created necessary progress finance our strategy in October as Kevin Bradley can cowl fully detail. however 1st here are today's highlights. we have a tendency to reportable third quarter adjusted Earnings Before Interest Taxes Depreciation and Amortization of $144 million. This was previous our steerage issued on Gregorian calendar month eighteen and at the highest finish of the vary provided within the preliminary earnings issued on October ten. As a reminder we have a tendency to issued preliminary earnings on October ten previous our Environmental Revenue Bonds and senior convertible notes offerings. This as you recognize is needed prior to of serious capital market group action. Our flat-rolled facilities operated well within the face of a big market headwinds. Our operations groups outperformed expectations and delivered value savings and industrial results on top of our arrange. In Europe market challenges continue and margins stay underneath important pressure.

   And in our hollow section market conditions worsened as rig counts still decline. and every one market conditions to shut out the year stay difficult supported what transpired within the flat roll market over the past 2 months.But signs of life are rising. the top of the UAW strike at g removes a big steel demand gap that existed within the marketleader times have extended and our flat world order rates have materially improved and scrap costs are expected to extend around $20 a time providing support for steel mercantilism prices. All of those factors offer North American country confidence that the market is poised to enhance. From here Turning to slip 5. Safety could be a core worth and a pillar of our steel principles and that we are delivering on these principles. Our Days faraway from Work metric showcases our continuing improvement in safety and that we are a security leader in our business. At U.S. Steel safety is 1st and that we are committed to being first in safety and take our environmental spot duties terribly seriously. many thanks to our workers for his or her continuing focus and commitment to figure safely.

   Let's communicate slide six. On October eight we have a tendency to proclaimed Kevin Bradley can transition out of the CFO role. Kevin has been a crucial half in setting U.S. Steel on its strategic path. His leadership was instrumental in reworking our record and providing the pliability to commence our strategic comes. And he was at the negotiating table serving to to create our investment in massive stream Steel a reality. Since the large stream announcement Kevin has been directly engaged to confirm a robust execution across our finance activities. many thanks Kevin for your contributions to make a stronger and a lot of prosperous future for U.S. Steel. Kevin has united to remain with North American country as govt vice chairman and authority to ME through the top of the year.Starting next week Dame Agatha Mary Clarissa Christie Breves can become CFO and it couldn't be a lot of well-deserved. Dame Agatha Mary Clarissa Christie is another massive contributor to setting the corporate on today's strategic path. Her work to determine U.S. Steel as a steel leader in money conversion cycle and her leadership in our plus improvement program have provided the muse for U.S. Steel's future. I anticipate to you meeting her and looking for for yourselves what makes Dame Agatha Mary Clarissa Christie therefore special.

   She has been a covert leader however not any longer. Congratulations Dame Agatha Mary Clarissa Christie. conjointly proclaimed that very same day was AN sweetening to our operative model targeted around operational industrial and technological excellence. This detail is on slide seven. we have a tendency to have gotten to the longer term quicker and that we are implementing AN increased operative model and structure structure to accelerate the company's transformation. This new structure can produce a a lot of nimble and economical govt perform permitting North American country to accelerate our strategy. we have a tendency to are enhancing our specialize in operational and industrial excellence and promoting technological innovation therefore we will establish a a lot of competitive value structure and enhance our capabilities. 2 key drivers to our strategy. slide eight illustrates our world-competitive best-of-both strategic framework and highlights the key actions that rework our business. Over the past many years we've taken steps to remodel our record as shown within the as-is portion of the diagram. we have a tendency to use the strength and foundation of our business to align our record with the investment horizon to execute our strategy. in barely 2 years we've got proactively extended our debt maturity profile to support our strategy.

   Our next senior notes maturity isn't till 2025. succeeding step of our strategy operative enhancements is targeted on our crucial success factors move down the price curve win in strategic markets and move up the talent curve. Investments we've got proclaimed can position North American country to deliver on these key attributes. Let's take our recently proclaimed investment in massive stream Steel as AN example that we have a tendency to will ultimately acquire through exercise of the decision choice. it'll move North American country down the price curve thanks to a slow cost fixed charge extremely versatile cost structure and least sustaining capital necessities. this mixture ought to facilitate offer long-run monetary stability in any market dynamic. massive stream conjointly positions North American country to win in strategic markets. This mill is strategically settled to serve the Southern U.S. and North American country and broadens our offerings in existing finish markets and expands our presence in alternative engaging markets. And adding massive stream to our portfolio can move North American country up the talent curve. we have a tendency to are investment within the best EAF-based mini mill plus in North America and a few of the simplest steel talent obtainable. we are going to learn from them and with them.

   And we have plenty to supply massive stream similarly in terms of business capability qualifying and running trials quicker and valuable R&D and holding. The third step in our strategy strategic comes outlines key investments that once complete can equip North American country with the industry's most advanced and property steel-making technology. Our investment in massive River's mill is aligned with these investments with every building on or making a definite value or capability advantage. and that we are currently but a year out from starting to notice a number of the Earnings Before Interest Taxes Depreciation and Amortization edges of our electrical conduction chamber at hollow. Our massive stream Steel investment the portfolio moves step within the strategy unlocks the worth across our entire footprint and accelerates our path toward a world-competitive better of each footprint. massive stream is that the newest most technologically advanced mill in North America however is basically still in start-up mode as they execute on section 2a of the enlargement to double capability and drive important efficiencies. slide 9 showcases this strategy. By transferral along the simplest of each integrated ANd mini mill capabilities we are going to enhance our competitive positioning in high-margin finish markets and alter North American country to supply an incomparable product platform to customers.

We believe this world-competitive better of each strategy can drive long-run income through business cycles however we have a tendency to are being tuned in to the present market atmosphere. we will flex our defrayment and do what works best to support strategic priority beloved to amass 100% of huge stream. slide ten outlines however we are going to grade our investments to realize the deliverables of our strategy. Our strategy can deliver value and capability differentiation to make a world-competitive better of each footprint however we have a tendency to are being versatile to confirm this strategy is dead. Ultimately exploit 100% of huge stream is our beloved strategic priority as a result of mini mills create cash within the trough and that we would like the power to try and do an equivalent. Our hollow EAF is additionally high priority. we've got finance completed to support the project and also the Earnings Before Interest Taxes Depreciation and Amortization edges are mostly derisked since we have a tendency to are in-sourcing the spherical substrate for seamless pipe production that we presently procure from a 3rd party. The Endless Casting and Rolling project at Mon natural depression is that the definition of better of each. Here we have a tendency to are combining our lowest-cost liquid steel at Mon natural depression achieved through our absolutely integrated mining and cokemaking with best-in-class mini mill technology not obtainable nowadays within the u. s..

   And after all we will be versatile in stage gating this project if required to manage money flows fittingly whereas still meeting our commitments. however create no mistake this can be a crucial strategic project which is able to deliver each value and capability differentiation. This project is predicted to deliver $275 million of run rate Earnings Before Interest Taxes Depreciation and Amortization annual edges once complete. we have a tendency to are implementing a series of comes at our Gary hot strip mill that may expand the line's competitive blessings notably in serious gauge product. This project is an element of the plus improvement program and is around half-hour through the expected $500 million investment. we've got the power to pace the remaining portion of those comes similarly. and that we are evaluating the pace of the USSK generator line investment thanks to the numerous market challenges in Europe. This remains a compelling investment to expand our capabilities in a very strategic market. As we've got mentioned over and over flexibility and optionality could be a key element of our engineering contract and project management ways particularly for these growth product. supported current market conditions we have a tendency to presently expect 2020 capital defrayment to be around $950 million. massive stream is our beloved priority and that we can end the hollow EAF within the half of 2020. we have a tendency to are demonstrating our flexibility on our alternative comes to confirm we execute through the cycle.

I will flip it to Kevin Bradley currently to allow North American country a finance update. Kevin?

Kevin Bradley -- Chief money dealer, govt vice chairman

   Thanks Dave. Given it's my last decision I simply need to require the chance to many thanks Dave and also the Board for giving ME the opportunity to serve this nice company. It's been a privilege on behalf of me to figure with an out of this world leadership team and a very exceptional international finance team.

   In the last number of years there's been tremendous amendment within the international landscape for steel. however I've ought to say that everything that I've seen and learned over the last number of years I couldn't be a lot of excited regarding the daring strategy that this company has chosen and committed to. i believe it's AN absolute game changer and I'm proud to possess vie alittle half in creating that happen. I even have zero doubt that this leadership team can execute the euphemism out of this game-changing strategy. Dave I conjointly need to echo your comments associated with Dame Agatha Mary Clarissa Christie. I've had the chance to figure closely with.With Christy ANd what what individuals on this decision can come back to visualize within the returning quarters is she's a real talent and an exceptional individual. She's been quietly owning plenty of the owning and rising a lot of the plumbing that produces this place work from it and engineering essence OP industrial valuation such a big amount of things Christy that you've been ready to bit and improve.I think this company is in nice hands going forward. i believe it's simply a matter of your time before everyone on this decision gets an opportunity to visualize you in action. therefore congratulations.

Christine S. Breves -- Senior Vice President-Manufacturing Support, Chief offer Chain Officer

Thank you Kevin.

Kevin Bradley -- Chief money dealer, govt vice chairman

   Okay. therefore let's jump into slide eleven. With the announcement of huge stream we've been ready to begin finance our world-competitive better of each strategy. And as Dave stated earlier within the previous couple of weeks we've closed on around $2.6 billion of finance activity ANd additional an progressive $1.1 billion of capital handiness. The $1.1 billion breaks down as follows: around $350 million in senior convertible notes; approximately $275 million in Environmental Revenue Bonds; and approximately $500 million from upsizing our U.S. ABL. The $350 million of senior convertible notes had a seven-year maturity and a five-hitter coupon. The Environmental Revenue Bonds closed on October twenty five. They represent around $250 million of unsecured 30-year due cash at a coupon of five.75%. And last we have a tendency toek we closed on our $2 billion ABL facility. we have a tendency to extended the term once 5 years and hyperbolic handiness by $500 million. we have a tendency to were very happy with the craving and support we saw from our bank cluster. As proclaimed yesterday we have a tendency to thespian on this facility to fund the initial investment in massive stream Steel. Bottom line we've created sensible progress within the last number of weeks to boost a significant portion of the strategic funding wants of this company.

   We will still measure further finance opportunities as our money necessities and market conditions evolve over the investment horizon. therefore let's point out monetary results on slide twelve. we have a tendency to closed out Q3 stronger than we expected delivering $144 million in adjusted Earnings Before Interest Taxes Depreciation and Amortization. This was on top of our initial expectation and at the highest of the preliminary vary we have a tendency to provided on October ten. Our Flat-Rolled section adjusted Earnings Before Interest Taxes Depreciation and Amortization of $167 million was below the second quarter primarily associated with market value erosion. we have a tendency to foreshadowed this on our Q2 earnings decision as roughly hr of our Flat-Rolled section are shipments -- are directly wedged by short-run changes in market value. we have a tendency to expect the similar dynamic to occur within the fourth quarter because the market declines have continuing into October. to boot we have a tendency to are anticipating a cargo decline in this autumn. Weakness across our European markets still erode our segment's monetary performance. This was combined by seasonal we have a tendency toakness we usually see in Q3. industrial headwinds can continue the fourth quarter however ought to be mostly offset by lower staple prices primarily ore contract valuation. Energy value ought to even be a air current in Europe versus the third quarter. The hollow market continues to be troublesome. industrial market dynamics drove quite 100% of the serial section Earnings Before Interest Taxes Depreciation and Amortization decline. This industrial decline was partly offset by lower substrate prices. we have a tendency to expect to slender the loss in hollow for the fourth quarter as lower substrate prices ought to quite offset industrial headwinds.

With that I'll flip it back to Dave.

David Burritt -- President, Chief military officer, Director

   Thank you Kevin. Let's communicate slide thirteen. We're in a very troublesome market atmosphere immediately. this can be not lost on anyone here. however our current reality has tried that our world-competitive better of each strategy is to right one. we have a tendency to are targeted on what we will management and are taking action. for instance once more we have a tendency to raised around $1.1 billion of progressive capital in support of our strategy and have articulated that ultimately exploit one00% of huge stream is our beloved strategic priority. we are going to stay versatile to manage the pace of our alternative strategic investments. we have a tendency to are specializing in what we will management rescoping our plus improvement investment and reducing associated capex by around $200 million to $250 million and reducing fastened prices by approximately $200 million over succeeding number of years.

   And we have a tendency to have already begun prioritizing money toward the business we are getting and stay value-focused over the long run. Kevin let's move to Q&A.

Kevin Lewis -- chief, capitalist Relations

Thank you Dave. [Operator Instructions] Operator may you please queue the road for questions?

Questions and Answers:
Operator

[Operator Instructions] the primary question comes from Martin Englert from Jefferies. Please move

Martin Englert -- Jefferies -- Analyst

   Hi, morning, everyone.Congratulations on finishing the large stream acquisitions and finance there. currently that it's over if massive stream will pursue a greenfield project are you able to seek advice from North American country a bit bit regarding if U.S. Steel would be needed to supply finance supported its junior varsity share today?

David Burritt -- President, Chief military officer, Director

Sure. we've got wealthy Fruehauf here UN agency is heavily concerned in this strategy and also the negotiations. So Rich?

Richard Fruehauf -- Senior vice chairman, Strategic coming up with & company Development

   Yes. many thanks Dave. therefore as Dave aforesaid we're extremely excited to be obtaining this relationship off the bottom. we have a tendency to did shut on the forty nine.9% acquisition yesterday and we're extremely excited to be a member of the possession team with bacteriologist Minerals with TPG Growth with the Arkansas lecturers Retirement System and after all with Dave disciplinarian and his very proficient team. i do know they're targeted on finishing section 2a that is that the second line about to the three.3 million tons. then that's progressing to be our focus going forward. however to your question we have a tendency to do have customary consent rights over bound material actions. then we're progressing to ought to measure any of the comes that massive stream might wear the table or bring around the capitalist cluster going forward. therefore that's however we're progressing to approach it.

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