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Text: We are looking forward to discussing our record third quarter performance and the enhancements to our capital allocation priorities announced yesterday, as well as providing an update on our strategy execution.
Joining me on todays call is U.S. Steel President and CEO, Dave Burritt; Senior Vice President and CFO, Christie Breves; and Senior Vice President and Chief Strategy and Sustainability Officer, Rich Fruehauf.
I would now like to turn the conference call over to U.S. Steel President and CEO, Dave Burritt, who will begin on slide four.
As Kevin just mentioned, we delivered record performance in the third quarter, record net earnings, record EBITDA, record EBITDA margin and record quality and reliability.
Our record-setting performance in the third quarter and throughout 2021 has truly transformed our business and demonstrates the progress we are making in pursuit of best.
By year-end, we will have transformed the balance sheet by repaying over $3 billion of debt, achieving our deleveraging target ahead of schedule.
We expect to have total liquidity of approximately $5 billion, creating the foundation to confidently execute our strategy and invest in our competitive advantages and we will have put the business in position to deliver another strong year in 2022.
Our transformed balance sheet, the ability to prefund critical strategic investments, and continued optimism for our business gives us confidence to return capital to stockholders while executing the next phase of our Best for All strategy.
We believe the market is significantly undervaluing the progress weve made and the value our strategy is creating and now is the time to be more balanced in our capital allocation priorities.
Our strategy is truly best for all, of course, including our stockholders.
Were delivering strong performance year-to-date.
Continued bullish outlook for 2022 and beyond and expectations for a super cycle continuing put us in a position to move faster on the next phase of our strategy execution while beginning to reward stockholders with direct returns.
Our biggest challenges remain lowering our capital and carbon intensity.
Investments in mini mill steelmaking, like the construction of a second mini mill, while investing in our competitive advantages can deliver on these objectives and reposition the company for the future.
The solution is to continue moving toward a more balanced capital allocation strategy by successfully executing our Best for All strategy with mini mill number two and an electrical steel line and coating line at Big River Steel.
We are moving quickly on our path forward by expanding our competitive advantages through strategic investments that help us achieve our strategic objectives aligned with long-term value creation, improved through cycle earnings and cash flow and reduced capital and carbon intensity.
Whether youre looking only at next year or our ability to build long-term value, we believe that investors are undervaluing our progress and potential.
But not our customers.
They are noticing the transformation thats taking place at U.S. Steel and the importance of a regional supply chain.
Our industry-leading finishing line capabilities are increasing our value proposition and customers are excited about the opportunities we are creating together.
Whether it is advanced high-strength steels, differentiated electrical steels or green and sustainable steels, discussions with customers continue to shift from transactional to strategic.
We continue to create longer-term value with customers by prioritizing innovation, differentiation and strategic goals, and we look forward to building deeper relationships that unlock the value of U.S. Steel for our customers and provide them the certainty of a regional supply chain.
slide six further emphasizes our progress and performance.
We are encouraged by our record-setting performance, performance that is outpacing even those records being achieved by direct competitors.
But there is more we can do.
As we said, our goal is to be the best steel competitor.
And while there is certainly much more opportunity ahead, weve clearly come a long way quickly.
As we always say at U.S. Steel, safety first, and Im so pleased with the U.S. Steel team for continuing to prioritize safety and for embodying our steel principles each day.
Moving to our margin performance.
Our enterprise EBITDA margin reflects the disciplined, value-focused approach weve taken to our footprint.
With revenues of nearly $6 billion in the quarter, the quality of our earnings demonstrates a business model that is increasingly built upon capability and cost differentiation.
From our iron ore advantage to our integrated assets and from the newest mini mill in the country to the most efficient mill in Eastern Europe, our diversified footprint is extracting significant value from todays stronger for longer market.
While the competition isnt standing still, the actions weve taken over the past several years to invest in our assets, streamline our footprint and add capabilities have created significant value, leading to out-performance versus peers this quarter.
Our mini mill performance also continues to be the industry leader, further widening its performance versus other mini mill producers.
Our position as a mini mill leader creates the perfect platform for high-return investments in capabilities that expand our margins, reduces our carbon and capital intensity and furthers our customer value proposition for sustainable green steel solutions.
Those investments continue to be supported by strong liquidity, and we are moving forward with investments that create enduring value while rewarding stockholders for the progress weve made so far.
slide seven expands on what makes U.S. Steel unique and why Best for All will continue to grow the competitive advantages of U.S. Steel.
We are investing to get better, not bigger, and expanding our three competitive advantages that differentiate us versus the competitors.
First, low-cost iron ore; second, lower greenhouse gas emission mini mill steelmaking; and third, best-in-class finishing capabilities.
Those competitive advantages are built on a foundation of research and innovation and deep customer relationships.
We are pleased to report the first step in our metallic strategy, which pivots our iron ore advantage in Minnesota toward our growing fleet of EAFs.
We are finalizing an agreement with a strategic partner to produce up to 500,000 tons annually of pig iron at Gary Works.
Under the contemplated deal, our potential partner would fund, install and operate pig iron production assets, which we would supply with excess liquid iron production.
This potential partnership would further enhance the cost structure of Big River Steel by in-sourcing high-value metallics while driving blast furnace efficiencies at Gary Works.
The permitting process has begun, and we expect pig iron production at Gary to begin in early 2023.
This is an efficient and quick way to expand our iron ore advantage to our mini mills, and we continue to evaluate other opportunities to extract additional value from iron ore.
slide nine provides some additional context on our mini mill number two investment.
Last month, we commenced the site selection process to build a new state-of-the-art mini mill.
This new mini mill will provide differentiated steelmaking supported by a comprehensive suite of finishing assets, including advanced high-strength steel galvanizing, hot-rolled galvanizing, painting and slitting.
We are expanding our mini mill steelmaking capability as we continue to transition toward sustainable, lower greenhouse gas emission steelmaking.
This investment is a platform to provide our customers with more of the Greens deal they expect from like-minded partners like U.S. Steel.
Were in the process of filing permits in multiple states and are on track to begin construction as early as the first half of 2022.
Mini mill number two will be built by the same experienced construction team who built Phase 2A of Big River Steel, ahead of schedule, under budget and fully ramped in record time.
We expect the value-added capabilities of mini mill number two to drive an approximately $650 million of incremental EBITDA contribution from this investment once fully ramped.
Also yesterday, we announced plans to build a new coating line at Big River Steel.
slide 10 has the details.
This line will have 325,000 tons of annual capability and will sustainably produce both Galvalum and galvanized product.
We expect the investment to contribute another $60 million of annual run rate EBITDA to Big Rivers already industry-leading results.
We expect the line to produce a mix of 75% Galvalum and 25% hot-dip galvanizing.
Galvalum capabilities create opportunities to target the higher value construction market, including exposed building panels.
Hot dip galvanizing capabilities create additional opportunities to serve the appliance, automotive and construction markets.
The investments we are making at Big River are natural extensions of the Big River campus and further utilize the state-of-the-art capabilities of the facility as we provide customers with sustainable steels to help meet their own decarbonization objectives.
As we continue to demonstrate our industry-leading position at Big River, were excited to expand the mini mill footprint, invest in downstream capabilities and further enhance the commercial mix of our business model.
The progress we have made in 2021 is undeniable.
Over the past several quarters, weve transformed our balance sheet.
When we closed on the Big River Steel acquisition at the start of the year, we carried $7 billion of debt and expect to end the year with $3.9 billion.
Weve extended the maturity profile and expect next years run rate cash interest expense to be approximately $225 million.
Our pension plan is overfunded, an enviable position that others in our industry are not close to achieving.
We are in a clear position of strength.
So while well continue to look at the ability to delever further as debt becomes callable, we are very confident that this level of debt puts us in a sustainable and manageable position to support investments in our business.
Next, we continue to believe the highest source of long-term value creation is from investing in expanding competitive advantages that reshape our earnings profile and reduce our capital and carbon intensity.
Our cash and liquidity position more than supports these high-return projects and allows us to execute with confidence.
And today, given the undeniable progress weve seen over the past several quarters, we are announcing enhancements to our capital allocation priorities that begin to directly reward stockholders with the improvements weve made to the business.
We believe the market is not rewarding us for the strong performance we expect in 2022 and is not yet recognizing the long-term value creation potential of our Best for All strategy.
Our strong financial performance and the significant returns we believe we can generate by buying our own stock is the reason we are accelerating direct returns to stockholders.
Reinstating the $0.05 per share quarterly dividend and moving quickly on a $300 million stock buyback demonstrates our commitment to ensuring our strategy is indeed best for all.
Our goal is to ensure direct returns become an enduring part of our capital allocation strategy, and we believe there are catalysts that could drive additional buybacks in the future.
Aside from additional free cash flow generation, we believe there are near-term opportunities to divest noncore assets, primarily real estate, which could further accelerate or increase further authorizations.
In addition, the option for Stelco to acquire 25% of Minntac remains in place through January of 2027 and presents an opportunity to return up to $500 million of incremental capital to stockholders.
Christie will now provide details into our quarterly performance before I provide some thoughts on 2022.
Ill begin on slide 12.
As Dave mentioned earlier, the third quarter was a quarter of records.
We delivered adjusted EBITDA and EBITDA margin of over $2 billion and 34%, respectively.
This represents a nearly $750 million or a 58% increase over the second quarter.
Adjusted earnings per share in the quarter was $5.36 per diluted share.
We also generated approximately $1.3 billion of free cash flow in the quarter, including a $400 million investment in working capital.
We expect another quarter of strong free cash flow generation in the fourth quarter.
Next, let me expand on some key points related to the balance sheet.
Year-to-date, we have repaid approximately $2.7 billion of debt and expect to end the year with $3.9 billion of debt on the balance sheet, an amount we are confident is sustainable and supports the investments we are making in our business.
We ended the quarter with net debt to last 12 months EBITDA of 0.6 times and expect to end the year at 0.2 times.
With the balance sheet strengthened, 80% of our remaining debt due in 2029 and beyond and a fully funded pension plan, we are well positioned for a future of value creation.
Let me now transition into the individual segments, including expectations for the fourth quarter.
Our Flat-Rolled segment delivered record EBITDA and EBITDA margin of over $1.1 billion and 32%, respectively.
This represents an approximately 60% improvement versus the second quarter.
Higher selling prices flowing through our contract structure in the third quarter will likely continue to be a tailwind in the fourth quarter.
We expect lower volumes from our planned blast furnace outage at Gary Works and higher energy costs to be an offset.
We currently expect fourth quarter Flat-rolled EBITDA to be near our record third quarter performance.
Our mini mill segment also delivered record EBITDA and EBITDA margin.
Third quarter EBITDA was $464 million or an industry-leading 42% EBITDA margin.
Higher prices continue to be reflected in the segment results, partially offset by higher scrap and other metallics cost.
In the fourth quarter, we expect higher prices to continue to flow through the segments, primarily monthly contracts.
We currently expect the fourth quarter to be another record for our mini mill segment, potentially exceeding $500 million of EBITDA in the fourth quarter.
USSK also posted record EBITDA and EBITDA margin in the third quarter.
EBITDA was $418 million in the quarter or 33% EBITDA margin.
A 60-day outage planned on number one blast furnace will begin in November through the remainder of the year.
This will remove approximately 250,000 tons of lost steel equivalent capacity from the market in the fourth quarter.
Operational headwinds as a result of the planned outage, modestly lower shipments and changes to the pricing dynamic in Europe are expected to result in reduced fourth quarter EBITDA versus the third quarter.
I also want to take a moment to recognize and congratulate the USSK team for completing Slovakias first revolving credit facility containing sustainability-related performance targets.
The new EUR300 million unsecured sustainability-linked credit agreement reinforces our commitment to creating profitable solutions for sustainable steelmaking and replaced the previous EUR460 million credit facility.
Our Tubular segment reported similar quarter-over-quarter results.
Improved commercial performance was largely offset by higher scrap and energy costs and continued high levels of imports.
Imports continue to capture roughly half of the U.S. tubular market.
And earlier this month, we and the USW filed new OCTG trade cases.
We expect fourth quarter performance to be similar versus the third quarter as higher selling prices are offset by elevated scrap costs for the Fairfield EAF and continued high import levels.
We expect enterprise earnings in the fourth quarter to continue to reflect the strong market conditions we are seeing as we exit the year and we currently believe that our fourth quarter results will be near our record third quarter performance.
Were entering 2022 in a great position to both create value for our stockholders and deliver value to our customers.
We are executing a robust contract process with customers, in most instances, having begun discussions 90 days sooner than we have historically.
Our strategy is paying dividends.
Assuming the forward curve, which we believe to be a pessimistic view of spot prices, we fully expect average selling prices to be higher in 2022 than 2021 for our Flat-rolled segment.
Weve also listened to our customers and in some instances, have signed agreements beyond 12 months.
This creates longer uplift and supply continuity while fostering collaborative product development opportunities to solve their most difficult challenges.
Finally, we continue discussions on commercial terms for more than just price.
Leveraging continued strong interest in advanced high-strength steels, our planned NGL electrical steel line and other future sustainable steel offerings from U.S. Steel.
Customers value domestic supply chain and we value their partnership.
We are delighted to hear from multiple auto customers who are foreshadowing that the trough of the chip shortage could be behind us.
They are beginning to add to the fourth quarter and first quarter build schedules and indicating to us increasing usage rates starting as early as next week.
Kevin, lets move to Q&A.
We ask that you each please limit yourself to one question and a follow-up so everyone has the opportunity to ask a question.

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q3 adjusted earnings per share $5.36.

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