United States Steel Corporation

Good morning, everyone, and welcome to United States Steel Corporation's first quarter 2022 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 of Investor Relations and Corporate at P&A. Please go ahead.

Okay. Thank you, Tommy. Good morning, and thank you for joining our first quarter 2022 earnings call. Joining me on today's call is U.S. Steel President and CEO Dave Burrett. Senior Vice President and CFO Christy Brees, and Senior Vice President and Chief Strategy and Sustainability Officer Rich Ruhoff. This morning we posted slides to accompany today's prepared remarks. The link and slides for today's call can be found on the U.S. Steel Investor page under Events and Presentations. Before we start, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions, and are subject to a number of risks and uncertainties, as described in our SEC filings, and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today, are made as of today, and we undertake no duty to update them as actual events unfold. I would now like to turn the conference call over to U.S. Deal President and CEO Dave Burritt, who will begin on slide four.

Thank you, Kevin, and thank you, everyone, for your interest in U.S. Steel. Thanks for your time this morning. We appreciate your continued support of our company. With each quarter, we demonstrate our progress, and it is a pleasure to provide an update on yet another quarter of record-setting performance. But first and foremost, we set a record this quarter for safety performance. is better than the record set in 2021, which was better than the record set in 2020, which was better than the record set in 2019. The drumbeat of continuous improvement demonstrates our role as the industry leader, a position we take very seriously at U.S. Steel, where safety is always first. Thank you to the U.S. Steel team for continuing to work safely. We appreciate you. We all know when safety is great, operations run great. Your hard work and dedication are at the center of our success. Let's take a moment to recognize our colleagues in US Steel Europe for being safety champions and embodying our steel principles. They exemplify our code of conduct. The human tragedy in Ukraine has hit very close to home in Eastern Slovakia, And on behalf of the entire leadership team at U.S. Steel, we are grateful for the support and aid you've offered to your neighbors and for the resiliency you've demonstrated to overcome deeply disturbing and disruptive events over the past several months. Looking across the enterprise, we expect 2022 to be another exceptionally strong year for U.S. Steel. We delivered our best ever first quarter and expect to do it again by delivering our best ever second quarter, expecting to beat last year's record second quarter EBITDA. Over the past 12 months, U.S. Steel has delivered EBITDA of $6.4 billion and $3.7 billion of free cash flow enablers of our best for all strategy and our balanced capital allocation framework. Best for all has us well positioned to continue our transition to a less capital and carbon intensive business while becoming the best steel competitor. To become the best, we are combining highly capable integrated facilities, low cost and highly sophisticated mini mills, and our unique low-cost iron ore to create an economic engine that best serves our customers, best supports our employees, and of course, best rewards our stockholders. And to become the best for all, we need best from all, which includes from our colleagues, customers, communities, and countries where we live and work. Specifically, we count on the continued strong support of the U.S. government to ensure a level playing field. We need strong trade enforcement to answer the administration's call to action to address climate change. We know the administration knows the role steel plays in our national and economic security and the opportunity we have to continue to advance actions that make steel more sustainable. We have been pleased with the work of our Commerce Secretary and U.S. Trade Representative. We expect their strong leadership and enforcement to continue. Our customers, employees, and stockholders are counting on it. Our stakeholders are also counting on the best from us to continue to deliver by expanding our competitive advantages in lowest cost iron ore in North America, mini mill steelmaking, and best in class finishing while executing our balanced capital allocation strategy. The work we have done on the balance sheet and our bullish outlook for 2022 puts us in a great position to deliver on our solution to expand our competitive advantages while maintaining a balanced capital allocation strategy, including the opportunity to significantly increase direct returns to stockholders. We like to say, when we do well, you do well, and I'm pleased with our ability to continue to reward not only customers with great steel solutions and employees with record profit sharing, but also stockholders with more direct returns from stock buybacks. Now more than ever, delivering on our best-for-all strategy is our path forward. Let's turn to slide five, where I will introduce the key messages for today's call. First, we achieved record first quarter performance, and as mentioned, we expect record best second quarter performance, too. If we deliver expected second quarter performance, we will have executed the best 12 months of financial performance in our company's history. Next, as I mentioned earlier in my remarks, we had success. strong execution across the enterprise and are assembling a portfolio of differentiated assets to deliver profitable steel solutions for people and planet. Finally, we are returning capital to stockholders in line with our capital allocation framework. Later, we'll take a few moments to summarize our competitive position and unique customer value proposition in each segment. And lastly, as we continue to execute the transformation of our business model, demonstrate the resiliency of our strategy, and maintain the financial strength that will allow us to complete our strategic investments on time and on budget. We continue to believe the market is significantly discounting our strategic position and valuation. making stock repurchases a continued source of tremendous long-term value creation. Moving to our financial results on slide six. The first quarter presented challenges to our industry and our business, including normal seasonal impacts amplified by volatility and supply chain disruptions. And at USDA, we view each challenge as an opportunity, and we delivered. Record first quarter net earnings, record first quarter adjusted EBITDA, and all-time record liquidity. And most importantly, we translated record earnings into strong free cash flow generation, over $400 million of free cash flow in the quarter. Our strong free cash flow positioned us at quarter end with $2.9 billion in cash to support our best-for-all investments and our balanced approach to capital allocation. Looking ahead to the second quarter, we expect each of our segments to contribute to higher EBITDA generation in the second quarter. Given the anticipated upward trajectory of our business, I'll spend a few minutes on each of our operating segments outlined on slide seven to highlight. How we are differentiating our business segments by leveraging our unique capabilities, and how we're using u.s steel advantages to meet our customers needs let's start with north american flat rolled segment on slide eight our north american flat world segment is a critical element of our best for all strategy as we continue to leverage our low-cost iron ore and our integrated steelmaking assets to serve a diverse mix of customers demanding increasingly differentiated grades of steel. We offer our customers steel that is mined, melted, and made in the USA. Our low-cost iron ore is a truly sustainable competitive advantage, the importance of which has been amplified by the recent disruptions in the global metallic supply chain. Our structurally long iron ore position is a source of long-term value creation as we continue to expand our competitive advantage to increasingly benefit our mini mill steelmaking operations. We announced the first step in our metallic strategy in February with the construction of a pig machine at our Geary Works facility. Our investment in pig iron capability at Geary is a capital light investment that unlocks significant benefits across the enterprise. First, it will utilize excess blast furnace capacity at Geary Works to produce pig iron without sacrificing steelmaking capability. Geary Works is long iron, which means the facility can produce more liquid iron than the steel shop can consume to make steel. By installing a pig iron machine, we can increase blast furnace utilization and create efficiencies within our flat-rolled segment. And second, this pig iron investment with expected startup in early 2023 will supply up to 50% of Big River Steel's ore-based metallics needs, meaning it could replace up to 50% of third-party purchases of pig iron, DRI, HBI, or prime scrap. U.S. Steel has a unique opportunity to translate ownership of low-cost iron ore into feedstock for an expanding fleet of electric arc furnaces. We continue to evaluate additional opportunities to further increase our self-sufficiency and unlock additional sources of differentiation. Our integrated steelmaking footprint is also being reshaped. We've made difficult but necessary decisions to reposition our integrated facilities by moving our blast furnace footprint down the cost curve and enhancing our capabilities. Our enhanced capabilities include our best-in-class finishing lines to produce the high-end steels our customers, particularly automotive and packaging customers, demand when only the best will do. Auto OEMs have historically had the biggest need for advanced high-strength grades of steel, but our business and commercial development efforts are rapidly identifying other end markets that benefit from advanced high-strength steels. Our customers tell us time and time again that we're the leader in advanced high-strength steels and we continue to grow share. And while supply chains experienced challenges last year, we shipped more advanced high-strength steel in the first quarter of 2022 than we did in the first quarter a year ago. The progress we've made in our North American flat-rolled segment has resulted in improved earnings power and resiliency. In the first quarter, we realized relatively flat average selling prices versus the fourth quarter of last year, despite a decrease in spot prices of 34%. Our contract positioning allowed us to generate first quarter EBITDA that was over two times higher than last year's first quarter performance and resulted in EBITDA margins of over 20%. Our mini mill segment on slide nine, which includes Big River Steel, is the industry leader in electric arc furnace steel production. Yet again, Big River Steel delivered industry-leading financial performance First quarter EBITDA margins for the segment were 38% or 900 basis points better than the best mini mill competition. Big River Steel's unmatched process and product innovation combined with its ability to produce sustainable steel with up to 75% fewer greenhouse gas emissions than traditional integrated steelmaking makes Big River Steel a platform for growth with customers. We listened to our customers over a year ago in regards to electrical steel, and through this, we have demonstrated our commitment to serving the broader electrical steel market. It is a customer that drives our actions and informed our investment in non-grain-oriented or NGO electrical steel. We are not skeptical about moving forward faster and don't need to wait to see what automotive customers will do. Our co-host relationships with OEMs have us eager and strongly convinced that the thinner and wider NGO electrical steels that will be made at Big River Steel will capture customers' demand because we know where they are headed. Customers are already reserving their time on the new world-class NGO line, construction of which is on time and on budget for a third quarter 2023 startup. We're also expanding our presence in value add galvalume and galvanize capabilities, again, informed by our customers to meet the growing demand expected in construction, appliance, and automotive. This investment is also on budget and on time for a second quarter 2024 startup. Given our well-timed acquisition of Big River Steel last year and the rapid success we've driven together, We broke ground earlier last quarter on Mini Mill No. 2, co-located at the existing campus of Big River Steel. Big River Steel plus Mini Mill No. 2, or what we call Big River Steel Works, combined is expected to deliver $1.3 billion of annual through-cycle EBITDA by 2026 and will be capable of producing 6.3 million tons of raw steel. And we've always said, it's not about getting bigger, it's about getting better. Investing in capabilities is what our customers need and what helps us to improve our through cycle EBITDA performance, increase our free cash flow generation, and lower our capital and carbon intensity. We know what our customers want, high quality steels made sustainably. to help them meet their own decarbonization targets. That's why we are so pleased when Big River Steel achieved responsible steel facility certification, the first and only North American steelmaking facility to do so. Customers want rigorous standards that have been independently verified to inform choices on how they partner with suppliers and Responsible Steel provides the common platform across the steel value chain. The Responsible Steel standard is based on 12 principles with a wide range of criteria covering core elements in environmental, social and governance or ESG responsibility. This designation affirms our leadership role in delivering sustainable products and a process for our customers and our commitment to ESG. We plan to seek responsible steel facility certification for mini mill number two as well in time for its planned startup in 2024. As an innovator steel producer, Big River Steel is setting a new gold standard for North America. Now let's talk about our European segment on slide 10, the gold standard for integrated steel production in Eastern Europe. Over the past several months, our teams in Slovakia and in the United States have worked incredibly hard to mitigate the impact on our raw material supply chain caused by the Russian invasion of Ukraine. We are leveraging new and existing relationships to secure a supply of iron ore, coal and other raw materials while continuing to profitably meet customer demand. Despite the continuing conflict in Ukraine, our operations are running at high levels of utilization and remain a critical manufacturer of steel. and a trusted supplier to customers in Slovakia, Czech Republic, Poland, Hungary, and Western Europe. We will continue to support the Slovakian economy and communities by continuing to operate to serve those communities. Through the cycle, our Slovak operations have demonstrated consistent earnings and free cash flow, and their performance in the first quarter was their third best quarter in their history. Finally, on our tubular segment on slide 11. Our tubular segment has endured several years of difficult market conditions, but I'm so pleased with their ability to persevere. The team has worked diligent through the downturn to improve their cost position, fight unfairly traded tubular imports, and enhance their product offerings to better positioned once the recovery came. Well, that time is now, and our tubular segment is profitably serving the U.S. energy market resurgence. The EAF at Fairfield, commissioned in 2020, is allowing for more efficient production by controlling the process from start to finish. This allows for faster response time for customers instead of relying on third parties to provide the substrate necessary for seamless pipe production. In-source rounds production plus proprietary connections, including API, semi-premium and premium connections, creates a comprehensive suite of solutions for customers. In the first quarter, the tubular segment doubled their EBITDA performance from the prior quarter, and we expect to demonstrate continued improvement in the second quarter. I've said it before and I'll say it again, this isn't your great-great-grandpappy's U.S. Steel. Moving to capital allocation on slide 12. Our capital allocation priorities are clearly on track. The balance sheet remains strong and aligned with our through-cycle adjusted debt to EBITDA objectives. And our ending cash balance remains more than our next 12 months capex, ensuring our best for all strategic investments are fully funded. With our capital allocation objectives met, we expect to meaningfully increase our stock buybacks in the second quarter. We currently expect to return cash in excess of our currently projected second quarter free cash flow generation and will continue to take advantage of our dislocated cash. valuation. It is worth repeating, when we do well, you do well, and we're doing extremely well. Our best days are ahead. We know where we're headed, and we are assembling a portfolio of low-cost, highly capable assets and expanding our unique competitive advantages. Christy will now walk through our first quarter performance and expectations for the second quarter. Christy?