United States Steel - Q3 2023

Transcript

Operator (participant)

Good morning, everyone, and welcome to United States Steel Corporation Third 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.

Kevin Lewis (VP of Finance)

Thank you, Tommy. Good morning, and thank you for joining our third quarter 2023 earnings call. 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. I would also like to take the opportunity to welcome Emily Chieng, who recently joined US Steel as our Investor Relations Officer. Emily brings tremendous experience from her time as a sell-side analyst covering metals and mining. I know many of you already had the chance to meet Emily in her new role, and we look forward to your continued engagement with her and the investor relations team. 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.

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. With that, I would like to turn the conference call over to US Steel President and CEO, Dave Burritt, who will begin on Slide 4.

Dave Burritt (President and CEO)

Thank you, Kevin, and good morning to all of you joining us. We appreciate your continued interest in US Steel and look forward to this morning's discussion. But as we begin, we are deeply saddened by recent events in Ukraine, the Middle East, or earlier this week in Maine. Our thoughts and prayers go out to those impacted by these tragedies. But this morning, we'd like to focus on three key messages that will shape our commentary. First, the high level of interest in US Steel that has come to light from the strategic alternatives review process. Second, the continued strong performance of the business today, as Jess will discuss in our third quarter results. And third, the opportunity we have today to bridge the market to higher expected EBITDA than what we currently believe is being projected by the Street for 2024.

Throughout the call, we hope you'll hear the enthusiasm we have for maximizing stockholder value. Let's start with the first point, the strategic alternatives review process. We announced in August that after receiving multiple unsolicited proposals from credible bidders, ranging from the acquisition of certain production assets to the entirety of US Steel, the US Steel Board of Directors had initiated this strategic alternatives review process. The company's Board of Directors, with the assistance of the management team and its advisors, is progressing a robust, fair, and rigorous review process. The board's North Star is and will continue to be maximizing stockholder value. The process remains ongoing and therefore, we must respect our confidentiality obligations and the work the board is doing. Rest assured, steady progress is being made as we continue to support the due diligence efforts of the bidders in the process.

To be very clear, again, our board is fully committed to maximizing stockholder value. While I can't speak to the specifics of the process, I can tell you this: there is serious interest from many highly credible bidders in the board's competitive process. Guided by our code of good conduct, known as our Steel Principles, once the process is complete, the US Steel Board will make a decision that is in the best interest of our stockholders. With that update, we will not answer any questions about the process or participants. We are flattered by all the interest in our company. Flattered, but not surprised. We know that US Steel is strategically positioned for tremendous value creation in the months and years ahead.

We've been climbing a mountain of strategic CapEx, and now that we're coming down the other side of the mountain, we're not surprised so many see it won't be long before these new world-class assets generate strong, free cash flow. In fact, we are creating value today as we continue to deliver on our Best for All strategy, the second point of enthusiasm for stockholders. To that end, we are very pleased to have safely delivered a strong third quarter performance, our twelfth consecutive quarter of profitability, and even with elevated capital spending, we generated another positive free cash flow quarter. Consistency has become our middle name. Our results reflect a solid operational performance. Our position in the heart of the USA, the world's most robust steel industry, our resilience and flexibility in the face of shifting business conditions, and our continued laser focus on safety.

In fact, we're on pace for another record best year of safety performance. I say another because our exceptional safety record follows record safety performances in 2021 and in 2022. Our stellar safety record is part and parcel of our stellar operations. We have a culture of caring. Safety has always been and always will be one of our core values. The way we see it, if you aren't operating safely, you aren't operating well. Our safety performance, enabled by the best employees in the steel industry, allowed us to deliver strong financials in the third quarter. Our Best for All strategy is paying off. We've talked about this before. US Steel is well-positioned to leverage mega trends that favor our industry. We are up to the challenge to harness these mega trends with our competitive advantages.

With much of the global steel industry stagnant at best, when you consider industry dynamics in China and in Europe, we are bullish on American steel. Why? On our last call, I mentioned the three global mega trends that will provide tailwinds for American steel and our business in the months and years to come. One is accelerating de-globalization. In a world impacted by conflicts like those in the Middle East and Ukraine, and emerging from a global pandemic that stretched supply chains to the limit, we are witnessing a stark reversal after decades of globalization. The upshot? Enabled by legislation like the Bipartisan Infrastructure Law, the CHIPS Act, and the Inflation Reduction Act, what we like to call the Manufacturing Renaissance Act. The United States is experiencing a once-in-a-generation onshoring boom.

The de-globalization boom means US Steel's nearly 123-year history of producing steel that is mined, melted, and made in the USA is paying significant dividends, with more to come and significant room for continued growth in North American steel demand. Fundamental to the de-globalization trend is the USA's achievement of energy independence. Between our strong segment in Tubular steel and our line pipe products coming out of North American Flat-Rolled, we are seeing, and we will continue to see, a robust order book supporting America's energy markets. Another mega trend is decarbonization. There is a strong global commitment to reducing greenhouse gas emissions. With our electrical steels that are empowering the transition to EVs, plus our exposure to sustainable steelmaking at Big River, US Steel is well positioned to harness the decarbonization trend. The last is digitization.

Tools like Generative AI are enabling us to improve safety and efficiency and capture value in truly unprecedented ways. For instance, at our Minnesota mining operations, we are using AI to improve the maintenance of our truck fleet. AI applications are assisting crews with truck repairs, ordering parts, and distilling complex information. We believe these mega trends will provide strong tailwinds for the domestic steel industry and especially for US Steel. Finally, we're excited for what lies ahead as our Best for All strategy unlocks significant value in the next 12 months. This is an exciting time. We are in the heart of, if not the world's best and brightest steel industry, the United States of America. Of course, it's up to us to harness these mega trends, to strengthen our business and ride the tailwinds, and that's exactly what we're doing with our strategic investments.

This leads us to the third key message of today's call, Bridging to 2024. As mentioned at the start of the call, our Best for All strategy unlocks significant value. Value we don't believe the Street is fully projecting into their expectations for next year. Consider our new non-grain oriented or NGO electrical steel line, which just had its completion celebrated with a ribbon cutting this month at Big River Steel. Our new InduX-branded electrical steel is now officially out in the market, enabling us to leverage both the decarbonization and de-globalization trends. And by the way, we delivered NGO on time and on budget. Next, our dual galvanized Galvalume coating line, or CGL-2 at Big River, is nearing its anticipated startup in 2024. This line will leverage the sustainable steelmaking at the Big River complex to offer value-added construction and appliance steels.

And then there's Big River 2, our state-of-the-art mini mill that remains on track for a second half 2024 startup. As we shared during the last call, Big River 2, in combination with the existing Big River Steel, will form a cutting-edge, 6 million ton mega mill, supplying the most advanced and sustainable steels in North America, with up to 70%-80% fewer greenhouse gas emissions than the traditional integrated steelmaking route. Our progress at Big River 2 is tangible. When we last spoke in July, we just had a quarter of the equipment on site. Today, almost two-thirds, and our experienced construction team is progressing us closer to first coil in the second half of 2024.... Today, we'll spend time unpacking 2024 and helping bridge the gap between Best for All and 2024 Street estimates.

This is time well spent, given the transformation in our business model and the benefits we expect to see next year. Simply put, we believe that the trajectory of our performance, both today and tomorrow, has not been fully appreciated by the market. We are 12 months away from the scheduled launch of Big River 2, which means incremental strategic EBITDA creation and about a $1 billion reduction to CapEx in 2024 relative to 2023. After years of heavy investment, we are finally coming down the CapEx mountain and ready to collect the bounty of free cash flow and unlock stockholder value. Even as we invest in strategic projects that will reshape our footprint and drive our Best for All strategy forward in 2024, we are taking necessary actions today in the face of volatile market conditions.

We have recently had to make some tough decisions related to reducing fixed costs. In September, we made the difficult decision to temporarily idle our last operating blast furnace at Granite City Works. I say this was a difficult decision, and it truly was, but it was a necessary one. With the auto worker strike impacting the order book in the fourth quarter, we acted to ensure that our melt capacity is in line with demand. We remain nimble, enabling us to maintain profitability as we manage through uncertain market conditions. Now, let's turn things over to Jess, who will go over the financials and 2024 expectations. Jess?

Jessica Graziano (SVP and CFO)

Thanks, Dave, and good morning to everyone on the call. I'll pick up on Slide 5, where we'll start with a look at the third quarter. We were very pleased with third quarter performance, with net earnings of $299 million, or $1.20 per diluted share. Adjusting for certain one-time items, Adjusted Net Earnings were $350 million or $1.40 per share. Both the Adjusted EPS of $1.40 and adjusted EBITDA of $578 million were stronger than expected, in large part from better performance across our NAFR segment. Free cash flow during the quarter was a positive $232 million.

When you consider that we spent $423 million in strategic CapEx related to our in-flight projects, I'll note the business generated a robust $655 million in investable free cash flow in the third quarter. The balance sheet continues to be in excellent shape. We ended the quarter with $5.5 billion of total liquidity, including $3.2 billion of cash. Our leverage at September 30th remains very low, at 2x Adjusted debt to EBITDA. Buybacks are on a pause as a result of the strategic alternatives review, and to date, we have $125 million left to buy on our authorized $500 million program. Now, let's spend a few minutes on Q3 within the segments on Slide 6.

Our Flat-Rolled segment delivered a sequentially strong third quarter, with EBITDA of $378 million. Now, that's in line with Q2 performance. Despite a sequentially lower HRC environment in Q3, we realized higher-than-expected average selling prices, driven by mixed benefits from a greater proportion of higher-value products sold in the quarter. The third quarter was also helped by raw material tailwinds, including lower outside purchased scrap and alloy costs. We also benefited from fixed cost reductions and lower mining-related costs during the quarter. Mini Mills segment EBITDA declined sequentially to $84 million, as spot steel prices were lower and we had slightly lower shipments. Lower metallics costs served to offset some of the pricing headwinds we experienced in Q3, with both the benefit of having our Gary pig machine ramped to full run rate production during the quarter, as well as lower scrap prices.

The Mini Mill segment EBITDA margin for the quarter was 13%. Now, I will note that that results this quarter included about $17 million of non-recurring, anticipated startup costs for our in-flight projects at Big River. Adjusting for those expenses, Big River EBITDA margin would have been 15% in Q3, which is in line with expectations. Moving to our European business, we delivered $10 million of EBITDA in the third quarter. We experienced declining prices and lower volumes impacting the top line in Europe. We also incurred costs related to the planned outage in August on one of our blast furnaces. The Tubular segment continued to deliver historically high EBITDA for the third quarter of $99 million at a very healthy 32% margin.

You'll recall that we mentioned on our earnings call back in July that we expected results to slow in Q3 versus Q2. The sequential decrease in EBITDA was primarily driven by a reduction in lower average realized prices and shipments for Tubular. Later, I'll wrap up my prepared remarks with our customary outlook for the fourth quarter. But before I do that, I'll spend a few minutes providing context around 2024 expectations. As Dave mentioned, 2024 is an important year for us strategically, as all of our in-flight projects will begin generating EBITDA and cash flow for at least a portion of the year, and our strategic capital spending starts to wind down. We're assessing the timing of those benefits as we get closer to project completion. We also expect to generate savings from identified and, in some cases, completed actions that we're taking in fixed costs,...

with continuous improvement projects in our mills and mines. These 2024 numbers are still assumptive and subject to change, so we'll continue to provide quarterly guidance. As we've pulled forecasts together for the year, we noticed a sizable gap to current analyst models. To be helpful, we wanted to highlight year-over-year changes that we expect to see. I want to start on Slide 7 by showing you the strategic project progress made over the last couple of years. Now, as you can see, we are over the hump on the heavy CapEx that is a critical path to Best for All. We're about 12 months away from when we expect all of these initiatives will be up and running, and we're in the execution phase of our Gary pig machine project. As we've discussed, first coil was achieved last month on our NGO line.

Next up at Big River is our continuous galv line, or CGL-2, which remains on track for startup in mid-2024. Our DR grade pellet facility in Minnesota is also on track for a fourth quarter 2023 startup. We're in the midst of completing equipment installation as we speak in Minnesota, and our commercial team is progressing negotiations for offtake agreements. And finally, Big River 2 is progressing by leaps and bounds. Take a look at the photos on Slide 8 in our investor presentation. Clearly, a picture's worth a thousand words. It is a beautiful site. So as you can see on Slide 9, using Dave's analogy, we are getting to the other side of the mountain towards the point of considerable value unlock. Once this investment period is complete, our footprint will support increased earning stability, decreasing capital intensity, and improving free cash flow generation next year.

On Slide 10, we want to provide some detail behind the pieces that together will help bridge the gap to 2024. Let's start with 2023 as our baseline, which we're expecting will shake out at around $2 billion of adjusted EBITDA. Moving from left to right, let's first layer in the $155 million-$210 million of incremental EBITDA from our strategic projects. And where we fall in that range is largely dependent on the exact timing of the startup. Next, we are implementing roughly $100 million of cost benefits, focused primarily on fixed cost reductions within the North American Flat-Rolled segment. And finally, we anticipate certain headwinds, primarily from foreign exchange impacts and lower steel prices based on average consensus sell-side estimates of about $750 per ton HRC in 2024.

That's partially offset by tailwinds from raw material costs, and the sum of those impacts is reflected in the all other bucket of $300 million. Taken together, we feel comfortable with projecting at least a similar level of EBITDA performance in 2024 compared to 2023. Now, it's worth spending a few minutes on the strategic project contributions in 2024 on Slide 11, that together make up the $155 million-$210 million range. We believe the contributions from these projects in 2024 remain underappreciated in many of the analyst models. Let's start with the Gary pig machine. As you may remember, this came online, under budget, and ahead of schedule in Q4 2022. Using pig iron from Gary, provides an approximate $50 per ton cost advantage relative to third-party purchases.

We expect to see the full $30 million of EBITDA benefit next year. Moving to the NGO line, we expect to deliver a $60 million EBITDA uplift in 2024 on our way to the full $140 million EBITDA benefit in 2026 as we ramp up and optimize product mix. On our dual coating line or CGL-2, it's on track for startup in the second half of 2024. Depending on the exact timing of that startup, we are anticipating an incremental $10 million-$15 million of EBITDA. And finally, BR2. Depending on the exact timing of the startup in the back half of the year, we're expecting to deliver an additional $75 million-$125 million of EBITDA that we did not have in 2023. We wanted to provide a segment view for 2024 on Slide 12.

Starting off with the North American Flat-Rolled business, we believe our Flat-Rolled segment can deliver approximately $1 billion of EBITDA in 2024. Now, that's in line with the $1 billion or so we believe through cycle looks like for this segment, when you consider the impact of recent investments and improvements we've made over the last few years. We've talked a lot about the value being generated in our Mini Mill segment, and we think it's only going to keep getting better. We expect 2024 adjusted EBITDA in the neighborhood of $600 million, on its way to a projected $1.3 billion of EBITDA in 2026, as Big River 2 hits run rate.

We've actioned cost savings in Europe, which together with expected energy tailwinds, should deliver about $100 million of EBITDA in 2024, offsetting impacts from a top line that's going to continue to be challenged and from an extended supply chain. And finally, Tubular, a true transformation. What was recently a segment that was inconsistent and vulnerable to commodity cycles, is now generating material and resilient EBITDA. We've seen Tubular benefit from a structural improvement in the cost structure, insourced rounds production and proprietary connections, and a continued strong commercial backdrop. Our current estimates for 2024 will see Tubular contribute about $300 million of EBITDA. Let's take a look at the free cash flow profile on Slide 13. Our free cash flow profile has fundamentally changed over the last 10 years.

Our annual average free cash flow generation has gone from essentially breakeven in the 2015-2019 period, to what we estimate could average about $1 billion in the 2021-2024 time frame. Again, as you consider what is driving our free cash flow outlook, it's three things: the decline in our strategic CapEx requirements, the ramp-up of our strategic projects, and the decrease in capital intensity of our transformed footprint. As you can see on Slide 14, this has afforded us the flexibility to strengthen our balance sheet, invest in our strategy, and return capital to stockholders, checking the box on each of our capital allocation priorities. As we discussed earlier, our balance sheet is, as I like to say, strong as steel. We're advancing our strategic projects, and we have maintained our quarterly dividend.

While our buyback program is currently on a pause, we will continue to assess capital returns as appropriate, given the business will continue to generate excess cash. I'll wrap up with our current view of the fourth quarter. Pricing across the segments will be a headwind in the quarter, and we expect sequentially lower EBITDA in the fourth quarter versus the third. We expect a sequential decline in Flat-Rolled segment EBITDA, reflecting lower pricing and volumes. Now, this is due in part to lower spot prices and the decreased volumes and associated costs from planned maintenance that's occurring in the fourth quarter. In the Mini Mill segment, we expect lower steel prices and a planned maintenance outage to impact fourth-quarter results, driving lower sequential EBITDA. These items are expected to be partially offset from lower metallics costs.

In Europe, we expect Q4 EBITDA to be consistent with Q3 performance, as we expect lower raw material costs and the absence of planned outage spending to broadly offset pricing headwinds during the quarter. And finally, we also expect sequentially lower EBITDA at our Tubular operations. That reflects decreased average selling prices, partially offset by shipments returning to more normalized levels. Taken together, we expect fourth quarter adjusted EBITDA to be between $200 million and $250 million. Now, before I turn it back to Dave, I do want to invite you to take a look at refreshed slides we've included in the appendix of this presentation on our website. The analysis includes detailed assumptions on pricing and product mix information, and a bottoms-up cost breakdown for our integrated segments and the mini mill business.

Of course, you can always reach out to the investor relations team with any questions you may have. With that, I'll turn it back to Dave before we take your Q&A. Dave?

Dave Burritt (President and CEO)

Thanks, Jess. Before we move to Q&A, I'd like to thank the stockholders for the opportunity to provide an update on the strategic alternatives review process. We are flattered and excited by the robust interest in US Steel and especially excited for our stockholders. But we have provided all of the information we are going to give. We kindly ask that you keep your questions focused on our operational and financial performance, which we will be more than happy to discuss. Kevin, let's open up the line for Q&A.

Kevin Lewis (VP of Finance)

Okay, thank you, Dave. And of course, as many of you know, we typically begin our calls with a question submitted from our retail and institutional investors platform, Say Technologies. But today, we believe we've adequately addressed these in our prepared remarks. So I will now ask the operator to open the line for questions.

Operator (participant)

Certainly. Thank you very much. And if you'd like to register a question, please press the one by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, to withdraw your registration, it is the one followed by the three. One moment, please, for our first question. Thank you, and we'll proceed with our first question on the line from Bill Peterson with JPMorgan. Please go right ahead with your question.

Bill Peterson (Senior Analyst of Metals & Mining and Clean Tech)

Yeah. Hi, good morning, and thanks for taking the questions. Interesting, you're putting out the 2024 sort of illustrative guidance on EBITDA. Just want to clarify, you're using 750, I guess, HRC, just to make sure. And then also, can you give a little more detail on the underlying assumptions around input costs, energy, labor, or inflation, or any other things on the cost side?

Jessica Graziano (SVP and CFO)

Hi there. Yes, morning, Bill. So we are using 750. That's right. I'll start there, and then I'll give a little bit of color behind both NAFR and the mini mill segment. Couple of things. So first off, clearly, that $750 HRC is gonna have some sensitivity around it, right? Just given that 30% of our shipments are sold on fixed price contracts. And our market-based contracts, particularly the quarterly ones, are gonna exhibit a little less volatility than what we would experience in spot price movements. So that plays through some of our estimates for the $1 billion that we're expecting for NAFR. We do believe that we will see a tailwind in coal costs, right?

So 2024 coal costs are expected to be a tailwind when you think about, you know, we sort of start off with lower cost base than the competition in coal, and we have a competitive advantage in our coal blending abilities, right? So when we put that together and we're looking out across commodity prices, we believe that's going to be a benefit in that number. We also believe raw materials, you know, we're not gonna go into much more detail by commodity, but raw materials as a whole will be a tailwind for us in the year as well. And then for NAFR, you know, that $100 million of cost benefits, right? That annualized number that we're seeing in 2024 is a significant driver as well.

As far as Big River, right, in terms of the mini mill, we do see an increase in the shipments that are expected, particularly when you think about the impact of the additional lines, right? The NGO line at about 100,000 tons, and additional shipments from CGL-2 and Big River, depending on the timing of when those get started. We do also see better product mix as we think about, you know, the value-added benefit to the portfolio in bringing those lines up and running, right, NGO and CGL specifically. We do also see additional benefit in the mini mill, and that's playing through that $600 million number from the continued benefit coming out of Gary pig, or, and within the metallics costs.

So, you know, I think, I think that gives a high level of probably some of the biggest puts and takes within those numbers. If there's something more specific, Bill, if you'd ask a second question.

Bill Peterson (Senior Analyst of Metals & Mining and Clean Tech)

Yeah, no, that's a good overview. Wanted to ask about, I guess, what you're looking for in terms of a market environment to turn Granite City B back on. I mean, you know, we've seen prices improve here in recent weeks, but what are the kind of, you know, signposts or guideposts you're looking at before you turn that asset back on?

Dave Burritt (President and CEO)

Yeah, maybe I'll just make a—this is Dave, just make a few comments, then Jess, I'll turn it to you.

Jessica Graziano (SVP and CFO)

Sure.

Dave Burritt (President and CEO)

The key for us is we got to be nimble and respond to whatever the market dynamics are. And certainly, the update we've heard from the UAW and Ford is clearly a positive sign, but negotiations with Stellantis and General Motors remain outstanding. It's clearly something we're watching closely as the days go by. And maybe, Jess, you just give a little more color, if you could.

Jessica Graziano (SVP and CFO)

Sure, Dave. Thank you. So clearly, as Dave just mentioned, you know, it's a positive outcome to see the settling of the strike between Ford and the UAW, but we are still watching for both Stellantis and GM to see what happens, right? Auto makes up about 30% of the Flat-Rolled segment. And so while we also have exposure to, you know, other transplants which have not been impacted, we did take the impact of the strike into consideration on the decision to temporarily idle Granite City. So as we look through the quarter, we're really going to focus on the order book, right?

Ultimately make a decision on whether or not we see that order book activity reaccelerate, and use that as the guide to decide on making the most efficient use of the footprint, and then get to ultimately whether or not we decide to turn Granite City back on. Just, it's too early at this point to be able to give an update on that.

Operator (participant)

Thank you very much.

Jessica Graziano (SVP and CFO)

Thanks.

Operator (participant)

I will proceed with our next question on the line. It is from the line of Alex Hacking with Citi. Go right ahead.

Alex Hacking (Equity Research Analyst)

Yeah, morning. Thanks for the call. So I guess first question on Big River, the new mill. When that was announced, you know, I think you guys said that that would not necessarily represent incremental tons into the marketplace. You know, as we approach the startup of that mill next year, is that still the strategy, or will you take more of a market-based approach and, you know, see how demand is? Thank you.

Dave Burritt (President and CEO)

Well, I'd say yes, Alex. You know, Big River is progressing well, and obviously, this is the driver to incremental EBITDA in 2024. And I think that's one of the reasons that we focused on that today, with Jess providing additional color. But the opportunity to align the market on the tremendous value is obviously gonna be happening next year. We're tracking towards a second half 2024 startup, and we're gonna be generating EBITDA, of course, next year. Jess, I think you got maybe some more to say on that.

Jessica Graziano (SVP and CFO)

Yeah, I think it's similar to... You know, as you think about the footprint and the impact on incremental volumes, I think it's a similar conversation as we just had for Granite City, which is we're gonna look at the order book, right? We're going to make sure that we're always balanced in terms of the way we think about our capacity with our footprint. Now, we're not going beyond 2024 today, so as we make decisions, you know, in the future, right, it's too early to be able to talk about any other changes to the footprint, as we bring Big River 2 online and we start to, you know, look at the volumes that we expect will come into the market from BR2, specifically in 2024, right?

We're really kind of limiting our conversation today to what we see, you know, the level of visibility we have for 2024. But obviously, those decisions are real-time ones that we make as far as how to best align our footprint with what we're seeing across the market, and we'll continue to do that.

Alex Hacking (Equity Research Analyst)

Okay, thanks.

Dave Burritt (President and CEO)

Okay.

Alex Hacking (Equity Research Analyst)

And then a follow-up. I have in my notes that all the Strategic CapEx is done in 2024, and there's no carryover into 2025. Is that correct?

Jessica Graziano (SVP and CFO)

There’s a little bit of timing. So right now we’re looking at, you know, let’s call it maybe $50 million-$100 million of some cash outlay, not commitments, cash outlay that would flow into 2025, but nothing material. The bulk of it, I mean, almost all of it, really, is going to be completed by 2024.

Alex Hacking (Equity Research Analyst)

Okay, thanks. Best of luck with everything.

Jessica Graziano (SVP and CFO)

Thanks, Alex.

Operator (participant)

Thank you very much. We'll get our next question on the line from Carlos de Alba with Morgan Stanley. Please go right ahead.

Carlos de Alba (Senior Equity Research Analyst)

Yeah, good morning. Thank you. Just we saw news this morning that US Steel is increasing hot-rolled coil prices, or all flat prices by about $100 per ton. Just wanted to maybe ask you if you could confirm this, or what color can you offer? What are you seeing in the marketplace that supports this decision, if indeed you are going ahead with it?

Dave Burritt (President and CEO)

Yeah, I'd say, yeah, I confirm that, of course. And obviously, we had a full order book for this quarter, so a lot of the price increases that will come will likely show up in the first quarter of next year. But we're seeing a lot of different drivers across our four operating segments. And maybe, Kevin, I'll ask you just to go through each one of these real quickly here to give them a sense of what those drivers are.

Kevin Lewis (VP of Finance)

Yeah. Thanks, Dave. Happy to do that, and good morning, Carlos. So as Dave mentioned, we were out with a $100 a ton price increase earlier this week. We believe it's very much supported by the strength that we're seeing in the order book and the continued momentum that continues to be built here as we conclude calendar year 2024. So if you think about automotive, we know it's been impacted by UAW work stoppage, but hopefully with some light at the end of the tunnel, we think that will rectify itself in the short term and will continue to support demand through our automotive portfolio.

You know, we have a unique and diverse end market exposure through our product portfolio, so we benefited from increase in inquiries and order activity through line pipe and energy markets. Appliance sector remains strong, you know, on track to achieve its third best year ever in appliances. Construction's been stable, and service center activity, I think, you know, from our vantage point, is beginning to increase, and we're seeing higher levels of order activity in the fourth quarter. So with inventories low and continued, you know, strong demand through our diverse end markets, we think the pricing momentum is real and certainly excited about the increase that we announced this week. In Europe, we do expect higher volumes versus the third quarter.

We have all three blast furnaces operating for the quarter. We did have a two-month planned outage in Europe. So while demand remains, you know, sluggish, is probably how we would call it, you know, we still will be in a position to run all three blast furnaces. And then Tubular. Oil and gas markets are improving. They remain quite strong, and we've seen rig counts tick up. Imports have declined throughout from peak levels, but still remain obviously elevated, and with reduced inventories in the system, we see certainly improved Q4 shipments. So all in all, I think we're starting to see a positive momentum continue to be built, and we expect that to begin to flow through in Q4 and put us in a very good position to start 2024.

Carlos de Alba (Senior Equity Research Analyst)

Thank you, Kevin.

Kevin Lewis (VP of Finance)

Thanks.

Carlos de Alba (Senior Equity Research Analyst)

Just another question. Given that you are well ahead or well advanced in your transformation and with your capital projects on time and on budget, is there any timing as to when would you make a decision on whether to increase the dividend or or buybacks? And or, you know, establish a capital allocation framework that either links returns to shareholders or money- cash flows to shareholders to, you know, EBITDA minus sustaining CapEx or free cash flow, or some sort of that metric.

Dave Burritt (President and CEO)

Yeah, Carlos, you've seen our capital allocation process, if you will, and the priorities for cash, and we're going to be staying with that. But Jess, maybe you talk a little bit more specifically about the dividend question.

Jessica Graziano (SVP and CFO)

Sure, sure. Absolutely. Well, as I mentioned in prepared remarks, I mean, as we continue with the strategic alternatives review process, right? It's not that we aren't prioritizing our capital allocation framework. I mean, on the contrary, right? We've been checking boxes across those priorities, as we manage the business every day. But as far as what's next, right? That's a conversation that, if and when appropriate, we would have with our board, right? Right now, the focus is on completing a fair and adequate process. The board is fully committed to and engaged in that process. And as you know, the conversation on capital allocation and priorities with dividend and buybacks will be something we'll have, again, if and when appropriate. So appreciate the question.

You know, it's clear that, as we think about where we are in, to your point, the Best for All process, right? There is a tremendous free cash flow unlock that's coming for us, as Dave says, as we get to the other side of the mountain on CapEx, right? So clearly, we are focused on being the best stewards of that cash, and we'll have conversations as appropriate on what to do with that cash.

Dave Burritt (President and CEO)

We're focused on very clearly maximizing stockholder value, and this strategic process has put us in a really good place for unleashing a lot of value. And you heard Jess's remarks about, you know, the stock buyback program was delayed, frankly, for confidentiality reasons, right? Because we have a lot of information on what's going on here, so we can't actually do that program. So we've got to get through this, obviously, and you can count on us in this environment. The board will make a great decision to maximize stockholder value. Because in fact, every time we meet on this, we talk about our jobs are to fulfill our fiduciary duties, to maximize stockholder value within the code of conduct, our Steel Principles.

So we're committed to doing that, and then, we can talk about some of these other issues, but our priorities are getting through this strategic alternative process and, and maximizing that value.

Operator (participant)

Thank you very much. We'll proceed with our next question on the line. This is from Tristan Gresser from Exane BNP Paribas. Please go right ahead.

Tristan Gresser (Head of Steel Equity Research)

Yes, hi, good morning, and thank you for taking my questions. The first one is on Europe. It looks like you operate full again despite the poor market conditions. So if I understood correctly, you don't anticipate capacity cuts there and maybe shutting down a furnace like last year. And also, you guide for stable EBITDA quarter-on-quarter, but if I look at spot margins there, demand, all the indicators are pretty negative. So why is it not as bad as last year? And why your message is a bit more constructive this year versus last year? That's my first question.

Kevin Lewis (VP of Finance)

Thanks, Tristan. This is Kevin. If we look at the fourth quarter for Europe, you're right, we're kind of guiding to a flat quarter-over-quarter level of performance. There are some moving pieces, obviously, that uniquely impact the third quarter, and then will really start to reverse themselves in the fourth quarter, and that's being some of the significant outage work that was done in 3Q. We do expect to have an order book that supports 3 blast furnaces worth of production, and we'll see that really generate, you know, sequentially higher shipments in the fourth quarter versus the third quarter. Order of magnitude, maybe somewhere between 30,000 and 40,000 tons quarter-over-quarter of incremental volumes.

We are seeing proceeds soften, as you mentioned, in the fourth quarter, but with our continued focus on costs, some of the operating efficiencies that we will be able to generate, in the fourth quarter and some raw material tailwinds, we think the business will be in a position in, in Slovakia to deliver, stable EBITDA quarter on quarter.

Dave Burritt (President and CEO)

There's no doubt Europe is a challenge with where we are today. But just keep in mind also, that this business has been extraordinarily well run. These guys know how to run the operations very, very well. This last year, I think the EU steel demand is expected to fall 5%, and it's more like expected to rebound 6%. So how all of that transfers through our numbers into this next year, we'll have to see, but it is not as strong, frankly, as what it has been in the past. It's a challenged business for sure in the short term.

Tristan Gresser (Head of Steel Equity Research)

All right. That's clear, and actually brings me to a quick follow-up there for next year. I mean, $100 million EBITDA for the business is pretty much what the COVID levels. I mean, expectations are we would see some rebound in demand, at least upfront demand. So, is there something in the business that is structurally different, or are you just being really conservative on how the first half of the year will shape out there?

Kevin Lewis (VP of Finance)

So if we think about performance in 2024 versus 2023, you know, let me speak to some of the favorable changes that we expect to see in the segment. First, energy should be a tailwind for us in 2024 versus 2023. We do expect to see increased shipment volume once again with three blast furnaces running throughout the year. Recall the two-month outage that we had in the third quarter of this year, plus we did have an idled furnace to start calendar year 2023. So that's a year-on-year change. We will see likely some raw material headwinds, whether that's in iron ore pellets using the IODEX kind of as our barometer for costs or with coking coal versus 2023, as well as some higher labor and CO2 costs.

But all that taken together gives us a line of sight to sequentially stable EBITDA, as well as FX being flat on a year-over-year basis.

Tristan Gresser (Head of Steel Equity Research)

All right. That's fair. And just a quick one on CO2 costs you just mentioned. Is that a big hike into next year?

Kevin Lewis (VP of Finance)

It will certainly be a headwind. I don't think we're in a position right now to assess an absolute value as the level of year-on-year change, but you should think about it as a year-on-year headwind.

Tristan Gresser (Head of Steel Equity Research)

All right. That's, that's very clear. And maybe my, my second question, given that that was all Europe, is a bit more on capital allocation and, and putting the strategic process aside, I think, you know, looking for 2025, what, what would really be the plan after Big River 2 from, from the point of view of management? Is there, you know, a Big River 3 somewhere in the future? It seems that is, you know, the strategy that is maximizing shareholder value. Or do you expect some, some time off in 2025 on growth and, you know, pause a bit to, to growth and reward shareholders a bit more? What, what kind of is the strategy after Big River 2?

Jessica Graziano (SVP and CFO)

I have to say, you're getting a little greedy on this call. I just gave you 2024. Now, listen, we're not going to go that far on this call right now, right? We feel very comfortable with the path we see for 2024. We're very comfortable with talking about what we expect the financial impacts of that are going to look like, but we're not going farther than that today.

Dave Burritt (President and CEO)

It's a good thing we didn't give him any more. He'd be asking for 2026.

Jessica Graziano (SVP and CFO)

Could you imagine?

Tristan Gresser (Head of Steel Equity Research)

No, that's fair, and I appreciate the additional disclosure you provided. Thank you. That's all from me.

Jessica Graziano (SVP and CFO)

Thank you.

Operator (participant)

Thank you. We'll get to our next question on the line from Gordon Johnson with GLJ Research. Please go right ahead.

Gordon Johnson (CEO and Founder)

Hey, guys, congrats on the results.

Jessica Graziano (SVP and CFO)

Thank you.

Gordon Johnson (CEO and Founder)

Just a quick question from me. I mean, a lot of, a lot of the questions have been asked, so maybe I can ask a tough one, so I will. So it seems like there's been some inventory built, some purchases made, up until now. Prices are up. I have heard some concerns from some of the service centers and distributors in the Midwest that you could potentially see a lull in buying, given that some of the inventory concerns have been addressed. Have you guys seen any of that? And if not, could you elaborate? Thank you.

Kevin Lewis (VP of Finance)

Yeah, sure, Gordon, this is Kevin. I would say on the inventory side, you know, inventories at service centers were low as we ended the third quarter. You know, I think it was somewhere around 1.9 months of inventory on hand, which is well below the 10-year average. So we think with some resolution to the UAW, better demand picture entering into 2024, that'll actually bring some of the buyers off the sidelines and start to see, as we already have, a recovery in order entry rates. So I think we're quite at least optimistic in the near term, that as some of the uncertainty becomes more, more resolved, more fully resolved, that that'll provide some some good demand.

Gordon Johnson (CEO and Founder)

Actually, one more, if I could. You guys are assuming $750 in 2024 for the guide, but the curve is currently at $850. Could you guys be being a little conservative there? Thank you.

Kevin Lewis (VP of Finance)

You know, obviously, Gordon, we wanted to align around a level of expectations that we believe is currently reflected in the market from a sell-side perspective at $750. Obviously, our results will fluctuate as steel prices move. And to the extent and just recently, as you pointed out, the forward curve has kicked out significantly. Obviously, we'll continue to be focused on running our operations extremely well, having the right commercial strategy in place, whether that's the right mix of end market exposure, the right mix of contract fixed volumes, index, monthly, and spot, to optimize results regardless of the pricing environment. So we do see that same momentum that you're seeing, but we didn't necessarily include it in our outlook for 2024 at this juncture. But I'll pass it over to Jessie.

She's got some additional comments.

Jessica Graziano (SVP and CFO)

Yeah. Yeah, just to underscore, you know, we wanted to be helpful in bridging the gap that we saw, and these numbers are still assumptive, right? So from our perspective, if you think about on the slide where we show the walk, right? That all other $300 billion, that's gonna move, right? That's gonna have the puts and takes of what happens across the market in 2024, both in the top line and within the cost base. So for the level of visibility that we have right now, right, we feel comfortable making clear that we expect 2024 will likely look the same, you know, right in the same ballpark as 2023.

But, you know, all the puts and takes in the business that we're going to experience are kind of in that bucket, if you will.

Gordon Johnson (CEO and Founder)

Thanks again, guys. Congrats.

Jessica Graziano (SVP and CFO)

Yeah, thanks.

Operator (participant)

Thank you very much. And once again, as a reminder, if you'd like to ask a question or have any comments, you may do so now by pressing the one followed by the four on your telephone keypad. Once again, it's a one four to register your question. I will get our next question on the line from Carlos de Alba from Morgan Stanley. Go right ahead.

Carlos de Alba (Senior Equity Research Analyst)

Yeah, thank you very much. Dave, so I heard what you said about no comments on the process. I just have one. I'm gonna risk it. Any color on the timing? Like, no details other than, you know, is this a process that the board obviously is taking very seriously, but you know, is there a sense of will it be completed this year, next, you know, early next year? That would be extremely helpful. Thank you.

Dave Burritt (President and CEO)

Well, Carlos, I just want to make sure you heard my earlier comments, that, I just say, you know, we're really not able to provide any further details on the strategic alternative process beyond what, what's already been said. As I stated earlier, there is a serious interest from many highly credible bidders, right? And it also said, we're very flattered by that interest. Rest assured, we're running a robust, fair, and rigorous process. We will remain focused on maximizing the stockholder value, and we'll provide updates when it's appropriate, but not before then. Until then, we're just not gonna be able to give you additional details.

Carlos de Alba (Senior Equity Research Analyst)

Fair enough. I respect that. Thank you very much.

Dave Burritt (President and CEO)

Thanks.

Operator (participant)

Thank you.

Dave Burritt (President and CEO)

Thanks.

Operator (participant)

That was the final question. I'll turn it back over to US Steel CEO, Dave Burritt, for closing comments.

Dave Burritt (President and CEO)

Thank you to everyone for joining us this morning, and for the discussion. We, we truly appreciate your interest in and engagement with US Steel. Thank you as always to our stockholders. We appreciate your feedback as we progress on our strategic alternative process to maximize stockholder value. Thank you as well to our customers. We're, we're honored to partner with you and to help you fulfill your needs by serving you with the best steel solutions available anywhere. Of course, there wouldn't be so much interest in US Steel if it weren't for the incredible employees we have, who are enabling our success every single day. So thank you to the US Steel employees everywhere. You guys are truly the best in the industry, and in your hard work, your innovation, your commitment to safety first, are taking U.S.

Steel to new heights. At US Steel, we value each of these stakeholders. We are pleased to deliver differentiated steel solutions that are best for not only people, but for the planet as well. Now, let's get back to work, safely.

Operator (participant)

Thank you. That does conclude the conference call for today. We thank you for your participation, and we ask you please disconnect your lines. Have a good day, everyone.