United States Steel Corporation

Good morning, everyone, and welcome to United States Steel Corporation's second quarter 2023 earnings conference call and webcast. As a reminder, today's call has been recorded. I'll now hand the call over to Kevin Lewis, Vice President, Finance. Please go right ahead.

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 USTO President and CEO Dave Burritt, Senior Vice President and CFO Jessica Graziano, and Senior Vice President and Chief Strategy and Sustainability Officer Rich Ruhoff. This morning we posted slides to accompany today's prepared remarks. These can be found on the USTO 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 the 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 U.S. Deal President and CEO Dave Burritt, and he will begin this morning's call on slide four.

Thank you, Kevin, and good morning to all of you joining us. We are grateful for your continued interest in U.S. Deal 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 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 U.S. 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. U.S. 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 are 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 U.S. Steel. Our strategy will reposition U.S. steel to benefit from long-term macro trends, which we believe signal a renaissance for American steelmaking. 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 U.S. 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 the Stoic 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 U.S. steel portfolio to deliver the new U.S. steel today. Our strategic process is accelerating with favorable external megatrends and setting up a period of tremendous opportunity for U.S. Steel and for our stockholders. Broadly speaking, those external factors are decarbonization, deglobalization, and digitization. Let me begin with decarbonization 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 decarbonization 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'm 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 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 optimized 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 steelmaking 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 XEV 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 U.S. Steel today. NGO is part of Big River Steel, our state-of-the-art mini mill operation that is crucial to U.S. Steel's ongoing and accelerating decarbonization strategy. We're also constructing a new continuous galvanizing line at Big River Steel that is slated for startup 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 II right next door. The new state-of-the-art mini mill remains on track for a 2024 startup 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 8 illustrates the considerable construction progress to date. 87% of the project 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 our stockholders from our mini mill investment. 25 to 30% of Big River II equipment is already on site, which again, largely de-risks the next phase of construction. Most of the critical equipment not on site 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 II 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 U.S. steel. Our iron ore assets are also differentiated competitive advantage. We continue to see the success of our Geary Pig production as it supports our overall metallic strategy. Our investment at Ketak 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, deglobalization. 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 saw 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 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. U.S. 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 U.S. Steel because we are investing in new capabilities that expand our iron ore, mini mill, and finishing line advantages. I hope you can hear the excitement in my voice when I discuss these global trends, deglobalization, decarbonization, and how they align with U.S. 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 U.S. Steel. At U.S. Steel, we've been working with multiple forms of AI with a recent strong focus on generative AI. We're already seeing results. Here's 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 VeriWorks, 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 a 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 deglobalization, decarbonization, and digitization to build a stronger, more resilient, and more profitable U.S. 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 U.S. Steel. And I couldn't be more pleased to leave 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?