United States Steel (X 8.99%) Q2 2022 Earnings Call July 29, 2022, 8:30 a.m. ET
Contents:
Prepared Remarks:
Good morning, everyone, and welcome to the United States Steel Corporation second quarter 2022 earnings conference call and webcast. As a reminder, today’s call is being recorded. This may interest you : Ameri-coup: A Brief History of American Misdeeds. I will now turn the call over to Kevin Lewis, vice president, investor relations and corporate FP&A.
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
Thank you, Tommy. Good morning, and thank you, everyone, for joining our second quarter 2022 earnings call. Joining me today on today’s call is the president and CEO of U.S. Steele, Dave Burritt; senior vice president and CFO, Christie Breves; and senior vice president and chief strategy and sustainability officer, Rich Fruehauf.
This morning, we posted slides to accompany the comments prepared today. These can be found on the US Deal Investors page under the events and presentations section. Before we begin, let me remind you that some information provided during this call may contain forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties such as the described in our SEC filings, and actual future results may differ materially.
Forward-looking statements in the press release we issued yesterday, together with our comments today, are made as of today, and we undertake no duty to update them as actual events taking place. I would now like to turn the conference call over to the president and CEO of US Steel, Dave Burritt, who will begin on Slide 4.
Dave Burritt – President and CEO
Thank you, Kevin, and good morning to everyone joining us today. We appreciate your continued support of US Steel. I am bullish on U.S.
the future of Steel because we act. And most importantly, we operate safely. We are on pace for a third consecutive year of record safety performance as measured by days off work and construction at our already industry-leading, second-to-none site. We take our role as the industry leader in security very seriously.
At US Steel, safety always comes first. When security is great, our operations are great. Thanks to our employees.
We appreciate your continued focus and commitment to our shared security goals. As we continue to implement our Best for All strategy, we are progressing towards a less capital and carbon intensive business. We are pleased to share an update on our latest sustainability disclosure later in our prepared remarks. The rapid progress we have made demonstrates our continued commitment to becoming the best.
To become the best, we expand our competitive advantages by leveraging our unique competitive advantage and lowest cost iron ore, combining highly capable integrated assets with low-cost and high-tech mini mills, and investing and finishing capabilities that serve our customers best. As we have said before, to become the best of all, we need the best of all. I want to take a moment to acknowledge the ongoing trade enforcement by the current administration. We are very pleased with the ITC’s recent decision to continue designing the eight AD/CVD orders on cold rolled steel for another five years.
Continued strong trade enforcement by the US government supports our national economic security and gives the domestic steel industry an opportunity to move forward with actions that make steel more sustainable. The United States remains the leader in sustainable steelmaking as many in our industry have embraced the electrification of the steelmaking process, which is the most sustainable way to make steel. We do what’s best for everyone because our customers, our employees, and our stockholders are counting on it. As geopolitical and macroeconomic impacts change, our Best for All strategy remains constant.
We will spend the next few moments highlighting three key messages shown on Slide 5: our record second quarter performance, our differentiated strategy, and our balanced capital allocation framework that supports profitable growth and direct returns to stockholders. Let’s start on Slide 6. 2022 continues to be another year of exceptional financial performance for our company. We reported our best ever first quarter in April and are proud to deliver another quarter of record-setting performance.
Over the past four quarters, we have generated EBITDA of $6.7 billion, free cash flow of over $4 billion, and returned nearly $850 million of capital to stockholders. We delivered a record second quarter adjusted EBITDA of $1.6 billion with all operating segments contributing meaningfully to enterprise performance. We also continued to convert our earnings into cash by generating another $642 million of free cash flow in the quarter. This strong performance contributed to our quarterly cash balance of over $3 billion and nearly $5.5 billion of liquidity.
Last quarter, you heard us say when we do well, you do well, and I want to continue that drumbeat today. In April, we made a commitment to meaningfully increase direct earnings in the second quarter, and we delivered on that commitment to stockholders. In the quarter, we returned approximately $400 million of capital to stockholders, and continued our direct returns in July, exhausting our $800 million program in less than a year. Since October, we have repurchased approximately 13% of our stock.
We continue to see tremendous value in repurchasing our own stock and are pleased to announce another $500 million program that will further reduce our share count and give us the opportunity to acquire more of the best value steel company , US Steel. We are confident that we are the best value because of our differentiated strategy. Today, we will discuss on Slide 7, the structural improvements to our business that improve our cycle resilience, the decarbonisation of our footprint and action towards our decarbonisation goals for 2030 and 2050, and the unique metallic strategy that we is developing it to expand it. our lowest cost iron ore advantage.
Let’s get into the details on Slide 8. The well-timed acquisition of Big River Steel has outperformed expectations. Since its inception in the first quarter of 2021, our small mill segment has contributed EBITDA of nearly $2 billion. The Afon Fawr acquisition has already paid for itself.
Our new small mill segment now represents nearly 30% of our domestic flat rolled steel EBITDA. It lowers our capital and carbon intensity and is expected to deliver more consistent results. While the acquisition of Big River Steel has transformed our business model, we have also transformed our balance sheet. In particular, we have strengthened our balance sheet.
Last year, we repaid over $3 billion of debt and cleared the maturity runway to complete strategic projects with confidence. We have no significant debt maturities coming up until 2029 and an overfunded pension scheme. At the end of the second quarter, our net debt is 0.2 times. A stronger business enables stronger customer relationships.
We are closer to the customer than ever before and we are exposed to the various end markets such as automotive, construction, equipment and tin packaging. Importantly, we are uniquely positioned to serve the resurgent energy market from our flat roll, mini mill, and tubular segments. We continue to see growth in today’s order book for energy products while investing in capabilities to serve future growing markets. The electrical steel market is expected to grow at a compound annual growth rate of 9%.
The state-of-the-art non-grain oriented, or non-GW, electric steel line we are building will position us as the leader in non-GV steel in North America. We will produce thinner and we will produce wider NGO electrical steels through this brand new asset to become the supplier of choice. We are developing the next generation of electrical steels that will be needed to support the ongoing electrification of the automotive market. We are also expanding our coating capabilities at Big River, particularly on galvalume.
With enhanced capability, coupled with our strong customer relationships, we are well positioned to profitably grow our participation in this expanding market. While we invest to support our customers’ sustainability strategies, we are also making progress towards our own decarbonisation goals. Last week, we published our sustainability report, which highlights the steps taken in 2021 to improve our carbon footprint and develop our ESG programmes. On Slide 9, as an enterprise, we are achieving our targets for 2030 and 2050.
The intensity of our greenhouse gas emissions has fallen by 16% since 2018, and we are well placed to reach our target for 2030 of a 20% reduction in the intensity of greenhouse gas emissions. We also remain committed to achieving net zero greenhouse gas emissions by 2050. As we expand our low greenhouse gas emission electric arc furnace footprint, raw materials will be a key differentiator. On Slide 10.
We continue to expand our lowest cost iron ore to benefit our small mill segment. While 10% of our metallurgy is internally sourced today, that number could increase to 40% by 2024 with the addition of pig iron at Gary Works and the proposed Granite City pig iron facility in collaboration with SunCoke. We look forward to reaching a final agreement with SunCoke to provide a win-win transaction for both US Steel and SunCoke, securing 500 good Union jobs while transitioning to a more sustainable future.
We are also expanding our metallic strategy by upgrading our iron ore pellets. We are investing to upgrade our capabilities at Keetac to make direct, lower grade pellets. Keetac’s high quality ore body and long mining life make it the best choice for DR grade pellet capabilities. We will have the ability to produce blast furnace and DR grade pellets at Keetac in the future.
These steps will enable us to become increasingly self-sufficient in feeding our mini mills segment with key metallurgy. Access to virgin metals is what keeps our mini mill competitors awake at night. We are making full use of our powerful competitive advantage in our iron ore mines here in the United States, strengthening our supply chain, an advantage that will be very difficult for our competitors to replicate. The final topics shown on Slide 11 are our disciplined and efficient approach to capital allocation.
Our capital allocation priorities are guided by three main considerations, namely balance sheet strength, published Best for All investments and direct returns. These capital allocation priorities are on track. The balance sheet remains very strong and then — and better than our cycle-adjusted debt-to-EBITDA objective. And our final cash balance continues well beyond our next 12 months’ capital, ensuring that our Best for All strategic investments are fully funded.
With those capital allocation objectives achieved and the completion of our previously announced stock repurchase program, we are pleased to have a new authorization of $500 million in place as we expect positive free cash flow to continue into the third quarter . We now have an industry leading minimill segment that we didn’t have in the past. Our balance sheet is strong, and we have record levels of cash and liquidity to complete our investments. By 2026, we expect those Best for All investments to achieve $880 million of run rate through the EBITDA cycle and position our small mill segment to contribute $1.3 billion annually.
Backed by less than $100 million of sustaining capital, we expect our small mill segment to have differentiated cash generation capabilities, a feature that will significantly increase the EBITDA multiple of our business. Now before I turn it over to Christie, let me take a moment to acknowledge her tremendous contributions to US Steel over the years, especially in her most recent role as Chief Financial Officer. This will be Christie’s final earnings call, but we are extremely fortunate that she will be staying with us through the end of the year as executive vice president of business transformation to continue to support our Best for All initiatives.
Christie’s great knowledge, leadership and insight have contributed greatly to today’s best ever performance. We would not be the same company today without the benefits of her efforts. We are also excited to welcome Jessica Graziano as US Steel’s new Chief Financial Officer starting August 8.
I’m excited for you to have the opportunity to speak with her directly after she’s settled into our new role. With that, I will turn it over to Christie to cover the financials. Christie?
Christie Breves – Senior Vice President and Chief Financial Officer
Thank you, Dave, and thank you to the entire team at US Steel, our stockholders, our board, and our customers. It has been the highlight of my career to serve as Chief Financial Officer of this iconic organization. Being part of the incredible transformation of this company has been an exciting and rewarding experience.
I can’t wait to see how the progress we’ve made so far and the strategy underway delivers for all our stakeholders. I am confident that you, Jessica, and the rest of the team will succeed in getting U.S. Steel at its best for the whole future. I’ll start on Slide 12.
We delivered a record second quarter adjusted EBITDA of over $1.6 billion generated from revenues of nearly $6.3 billion. Our adjusted EBITDA margin of 26% represents another strong quarter of profitability. At the segment level, flat rolling EBITDA was $902 million or 23% of EBITDA margins in the second quarter, compared to $636 million and 21% in the first quarter. Higher volumes and the seasonal absence of first quarter iron ore mining were partially offset by raw material inflation headwinds as well as higher steelmaking additions costs.
Higher utilization rates and the associated efficiency savings also helped improve our flat rolling segment margin performance versus the first quarter. In our Small Mill segment, we delivered EBITDA of $309 million and EBITDA margins of 31% in the second quarter. Higher volumes more than offset the combination of lower average selling prices and higher metallurgical costs. In Europe, our operations in Slovakia once again overcame significant geopolitical obstacles to deliver EBITDA of $302 million and EBITDA margins of 22% in the second quarter, compared to $287 million and 23% in the first quarter.
Higher average selling prices more than offset rising raw material costs in the second quarter. And in tubular, we reported a strong quarterly performance. EBITDA totaled $119 million in the second quarter. The flow through of higher steel selling prices and the benefits we are starting to see from trade cases in progress outweighed higher scrap costs, resulting in continued improvements in profitability.
Our second quarter EBITDA translated into free cash flow of nearly $650 million to contribute to our record cash and liquidity. This performance gave us the confidence to accelerate our stock buybacks in the second quarter, returning another $413 million of cash to stockholders, including our quarterly dividend payment. We repurchased over 17 million shares in the quarter and another 7 million shares were repurchased in July. We have completed our authorized share buyback program and are pleased to announce another 500 million share buyback program.
Our business continues to perform well above cyclical averages and remains on track against our clear capital allocation priorities. Not surprisingly, the deteriorating steel price environment through much of the second quarter and into the third quarter has kept some buyers on the sidelines. This is expected to result in lower sequential EBITDA for our flat rolling segment. Conversations with customers and recent customer inquiries suggest that end market demand is healthy.
Customers are waiting for the right time to re-enter the market. In our mini mills segment, increased market-based monthly contract exposure versus the flat rolling segment is expected to accelerate the flow through of lower steel selling prices. We also continue to work through more costly inventories and therefore expect significantly lower sequential EBITDA at Big River Steel in the third quarter. In Europe, the conflict in Ukraine and the negative impact on raw material and energy prices are reducing industrial and manufacturing demand.
As a result, in the third quarter, our USSE segment is experiencing significant margin compression as steel prices have softened while raw material costs remain high. Finally, our tubular segment continues to capture higher selling prices and is running at higher utilization rates to meet strong customer demand. Supported by the ongoing OCTG trade cases, we expect another meaningful increase in segment EBITDA in the third quarter. Spot prices falling from high levels over recent months are expected to have a negative impact on results in the third quarter.
Our diverse end market exposure and increasingly flexible operations are expected to make business more resilient than in the past and third quarter EBITDA is expected to be just under $1 billion. Opportunities in working capital in the third quarter are expected to keep cash from operations resilient and the business continuing to generate free cash flow while also moving forward with our strategic projects as planned. The market remains dynamic, and we cannot stand still. That is why we are taking advantage of the temporary slowdown by moving a period of downtime originally planned for October to September in the Anglesey.
This decision allows us to be more prepared for the anticipated recovery as steel prices are at rock bottom. Dave, back to you.
Dave Burritt – President and CEO
Thank you very much, Christie. Before we get to questions, let me summarize today’s comments on Slide 13. The record second quarter performance was the result of continued execution across all of our operating segments. For us.
Steel, we must implement, implement, implement a differentiated strategy, and we have. Certainly, the economic environment is uncertain, but we know and you know this is not the same US Steel from just a few years ago. We now have industry-leading minimill operations, a rock-solid balance sheet and a cash record with liquidity of over $5 billion.
All of these factors support the execution of our Best for All strategy and are expected to deliver an additional $800 million of run rate through the EBITDA cycle. We are achieving our objectives and capital allocation priorities and look forward to earning a rating from our stock. Kevin, let’s move to Q&A.
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
Thanks, Dave. Our first two questions today come from Say Technologies. The first question, Dave, we had several questions about domestic demand for steel, our outlook across key end markets. Can you share your views on our markets and customers?
Dave Burritt – President and CEO
Thank you, Kevin. I can see how that is at the forefront of so many people’s minds with that line of questioning. We’ll break it up into a couple. The near term, of course, there is a lot of uncertainty.
And the growth we are talking about being able to grow, creating profitable growth. In the near term, there are different dynamics across many of the markets we serve. But our order book and end market diversification, it’s a big advantage. We are not dependent on just one market.
It’s not just cars for us. We have multiple markets that we serve. No one dominates. We are much more balanced.
On the automotive and appliance side, supply chain issues persist. I would say they are a little less, but we are still going to have those challenges. The good news is mine is melted made in the U.S.A. basically we find ourselves in a much more resilient position, especially with strong trade enforcement.
Industrial construction and service centers, I would say we see mixed or cautious buying. Just saw the inflation headline here. Obviously, that affects everyone. But even though we saw GDP negative in the first quarter and the second quarter, that does not mean that U.S.
Steel is tied to those GDP numbers. What it means is that we are more resilient than ever before, and we are preparing for the future and ready for whatever markets we serve. But the real bright spot here for us is energy. It is a unique and very popular exposure for us today.
The tubular business, for example, is so different than a year ago, and is a much more meaningful contributor to EBITDA. So as the near-term goals, the steps we’re taking, we’re managing the inventory, optimizing our loading plans, matching our production with the order books, and it’s going well. But there is a lot of uncertainty, and the third quarter will definitely be lighter. In terms of growth, profitable growth, it’s about being low cost and/or high capacity.
Those are the things we are pursuing with our differentiation strategy. And frankly, we’re – I’d say I’m more than a little excited about the future here because strategic market growth is outpacing overall market growth, and we’re winning in the strategic markets. There is a growing demand for advanced high strength steel. There is more interest in green steel.
There is rapid electrification. And the infrastructure bill has been passed, and we expect to see the benefits of that come through sometime next year. And we know we have to win in these strategic markets, higher strength deals in automotive and non-automotive applications. We see a lot of opportunities there.
And electrical steels, we have the world-class non-ferrous line that will be completed soon and we’re very excited about the potential there. Then, of course, green steel with our verdeX line of sustainable steel that we’ve come out with and the much lighter carbon footprint than we’ve had in the past. We are performing very well again. So we invest in capabilities, we invest in talent, and we make sure that we invest in profitable growth in the markets that we serve and grow the strategic markets .
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
OK. Thank you very much, Dave. The second question we received relates to the adoption of green energy in our sustainability road map. So Rich, can you please give your opinion on that question?
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
Sure, Kevin. Thank you for that question. Well, first, as we say, US Steel, we are committed to doing our part to address climate change and develop sustainable steelmaking technologies.
Last week we published our latest sustainability report, so I encourage everyone to check that out on our website. Look, there’s a global race going on right now to decarbonise steelmaking, and we wanted to be part of the solution. That requires the development and use of new technologies in conjunction with governments and other companies and communities. So what have we been doing in this space? Let me start with — in February, we announced an alliance with leading companies, such as GE, Power, EQT, Equinor, Shell, Marathon, Mitsubishi Heavy Industries for the Tri-State region of Ohio, Pennsylvania, West Virginia, which share our vision for a more sustainable industrial future.
And that alliance, that partnership, we are looking for ways to create a national model for sustainable energy and production systems. And that includes things like hydrogen, carbon capture. In the near future, we are working with utility providers towards more renewable energy sources. So for example, in our Big River Steel, Big River 2 complex, and [Inaudible] our partner is Entergy for electricity supply.
And they’re already – they’re today, I guess, is the way I put it, they’re already today supplying significant amounts of non-greenhouse gas, nuclear power generation to Big River. But they are also committed as part of the development of our Afon Fawr 2 project to supply more renewable power such as solar. So we look forward to continuing that partnership with Entergy. And at our Cwm Môn Works, we have obtained emission-free energy certificates from our local utility partner.
So that’s – those are some of the things that we’re working on. We have other projects in other parts of our footprint, which look at generating renewable power as well. And then we would say on the customer side, we play an increasing role in making renewable energy possible by selling sustainable steel, for example, to the solar market. We have a new partnership with Nextracker, who opened a new facility here last month to make solar tracking systems.
DOE Energy Secretary Granholm was there to cut a ribbon. So we are very proud to partner with Nextracker. So what I would say is that while we’re not standing still as a company, if we really want to unlock the full potential of green steelmaking in the United States, we need these kinds of partnerships across the public sector and private. For us, it’s about making profitable steel solutions.
We need to be able to make money in these investments. But it is also – its clear implementation is required. It’s not just about concept. So anyway, here are a few examples.
So I hope that helps address the question. It was a good question.
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
OK. Thanks a lot, Rich. And thanks, Dave. So now, operator, if you can queue the line – the phone line for questions.
Questions & Answers:
Certainly. [Operator instructions] And our first question on the line from David Gagliano of BMO Capital Markets. This may interest you : Business People: Blue Cross and Blue Shield announce executive appointments. Go straight ahead.
David Gagliano – BMO Capital Markets — Analyst
Hello. Thanks for taking my questions. My first question is about the capital allocation strategy and the buyback authorization that has just been announced. Obviously, U.S.
the sale generated a lot of free money historically recently. But things are changing, going into a transition period of very high capex and obviously, results are coming down. So the cash balance, which is $3 billion now, could go below that $1.5 billion. It is not unimaginable.
So my question is on the car before buying back stock. My question is on the authorization. How aggressively will US Steel buy back shares in the near term, given the changing environment? That’s my first question.
Dave Burritt – President and CEO
Well, thanks for that question. And I think you know, David, that we are in this very desirable position because of the purposeful execution of our strategy. So with $3 billion in cash and well over $5 billion in liquidity, we have a lot of opportunities. And as you heard in some of the comments, how strong we are about being able to implement the strategy.
You have seen our capital allocation framework. We put it in the deck. Again, we are committed to that capital allocation framework. We’re going to be opportunistic.
Do you go through the individual pieces of that, we’re guided by the strength of the balance sheet? Best investments for Everyone, we’re going to make sure we get everyone down; and then we get the direct return. So you go through all of those and you say. OK, balance sheet strength, check. Strong cash position, check.
Advancing the strategy that makes our business, our earnings, and our free cash flow more resilient, check. So we felt the authorization was essential. And so we are within that framework. I would be opportunistic.
We are not going to commit to a specific amount per quarter, but we feel very good where we are, and we will see how the economy develops and we will, once again, be opportunistic within the framework. We are going to be as active as our framework dictates and operate at a pace that maintains a high level of strength and liquidity to support our investments. So we think this is a good program. Again, we have completely exhausted the $800 million that was actually committed to not so long ago within the last year.
So we feel very good about where we are, and we will see how the economy develops and remain committed to that capital allocation framework because we need to deliver the strategic investments this, and we need to make sure we deliver. rewards our stockholders with stock buybacks and dividends.
David Gagliano – BMO Capital Markets — Analyst
OK. That is useful. Thank you My subsequent work is a two-part follow-up in terms of the European operation.
My questions are, A, will Europe be EBITDA positive in the third quarter? And B, as far as the contingency planning mentioned in the press release, is US Steel considering either cutting it back or shutting it down until things improve in Europe?
Dave Burritt – President and CEO
Well, I think you’ve seen the numbers with USSK. He has been a significant contributor to U.S. Steel. And obviously, there has been a compression of margins over the last few months.
And we’ve seen Northern European prices, where they peak at around $600, $700 a tonne, and now they’ve dropped to $700 a tonne. So we definitely have some margin compression. But we will be EBITDA positive, no doubt here. I feel very comfortable that USSK is going to continue to be EBITDA positive.
This business, frankly, I think has always been EBITDA positive, and it’s running very well. There is a lot of uncertainty because of the war in Ukraine. And while prices have fallen, the basket of raw materials has only fallen by about $400 a tonne. So you think about that, and that’s a bit of a squeeze.
But we still feel good that USSK is going to continue to contribute, and the thing to remember here is that USSK is coming down. And although a tube won’t be able to make up for all that reduction, the tube business continues to perform extremely well. And I think in the first half, it had EBITDA that was more than $200 million, and the second half is going to outperform the first half. So we feel good about that in terms of some offsets.
And again, the diverse footprint helps us with that. But USSK is an excellent business. These people, our team over there know how to run this very, very well. And when the war hit the Ukraine, they bought in advance and made sure there were no supply disruptions.
And so now they carry additional inventories. We normally target an inventory of around 30 days but we have increased that target to 60 days, and we are slightly above that at the moment. So the softer demand is going to make the use of higher priced raw materials longer. So yes, there will be some stress on that, but it’s still — it’s a very good business in Europe.
Thank you very much. I will now move on to our next question on the line from Emily Chieng with Goldman Sachs. Go straight ahead.
Emily Chieng — Goldman Sachs — Analyst
Good morning and thank you for taking my question. The first one I have is around CD Granular pig iron – perhaps you could help us frame the strategy behind the potential sale to SunCoke. And maybe help us understand what the technical and capital differences are between that granular pig iron facility and the Gary Works pig iron unit you’ll be building instead?
Dave Burritt – President and CEO
Emily, thank you very much for the question. I’m going to turn it over to Rich, but just to punctuate again how important metallurgy is to our business. This is a competitive, sustainable advantage for the US Let’s face it.
They don’t make the iron field anymore. God no longer makes the iron field. So this is something that cannot be repeated. So we feel very good about the strategy and where it’s going.
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
Yes. Thanks, Dave. So Emily, yeah, let’s start with a little bit of context. So pig iron right now, before the warning in Ukraine, about two-thirds of the market for it comes out of Russia and Ukraine, right? So with that supply cut putting pressure on iron ore and HBI DR – excuse me, HBI DRI pig iron.
And as we know, you are talking about 75% or more of your cost to produce a ton of steel and EAF as your metallurgy. So as Dave said, first and foremost, having these pig iron ore metallurgy in our footprint and being able to supply the EAF fleet is a huge advantage for us because then we won’t be as vulnerable to change and bad in the scrap market or cut off supply or price spikes in hogs. I believe hogs reached close to $1,000 a ton delivered to NOLA, New Orleans earlier this year as a result of the cut from Russia and Ukraine. So that is the fundamental issue we are addressing.
So in terms of Granite City, I mean, we’ve already produced low-cost iron ore in Minnesota for our blast furnaces, and what we’re working on doing here leverages that to be able to supply the EIS also for the reasons I am alone. specified. Now in relation to pig iron, pig iron trades at a higher price than DRI and HBI because it is exothermic. You get value and use. What that means is that it releases heat in the furnace, which means you improve productivity by loading pig iron into your furnaces.
You speed up the tap-to-tap times. So having pig iron, whether in Gary or in Granite City is a huge win. Now the difference between what we do in Gary, which is what we would call a standard lumped pig type and the granular pig iron at Granite City, is a granulated type of smaller pellets. It distributes more evenly in the furnace.
And so you get faster and better melting, which is why we chose to go with the granular pig iron at Granite City. There is no significant risk here. The granular pig iron will be unique to North America. We’re partnering with SunCoke because we think that’s the best way to get this project up and running as quickly as possible.
As you know SunCoke is our coke supplier in Granite City. So I mean the basic model is moving the — just doing what we’re doing today, moving iron ore from Minnesota down to Granite City. But instead of turning it into steel, we’re going to turn it into granular pig iron and get the benefit of having that vertical integration in our EAF fleet.
Emily Chieng — Goldman Sachs — Analyst
And maybe just as a sequel. To be clear, why was this decision for Granite City to possibly be for SunCoke rather than US Steel operating on that capital project itself? Is it the fact that Granite City, the granular hog greasing facility may not have met your 15% IRR target? Or was there something else that triggered that decision?
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
I think the main thing I would say, Emily, is that we’re already partnered today with SunCoke for Granite City because they’re the coke provider on site — so running blast furnaces to making pig blast furnaces versus running to make them. liquid metal that is turned into steel. We are already in partnership with SunCoke and I think in terms of the path forward, we saw this as an opportunity to take that partnership with SunCoke to the next level. So that’s really what prompted this. We think SunCoke will be a great partner, a good operator for doing the GPI.
And this allows us to focus on our core talents and skills in steelmaking. And I think in relation to this, we really see this as a win-win situation. Because like I said, we’ll be able to benefit from our low cost iron ore movement through Granite City and then turn into a pig. That is, it is our iron ore that they will convert to GPI for us.
Dave Burritt – President and CEO
Yes. I might add, Rich, I would say it’s a win-win-win because it’s not just a win for SunCoke. A win for US Steel, it saves 500 jobs that would normally disappear.
I mean, I think people remember, what it was like, in March 2018 when the trade tariffs came into effect. That’s when we opened those blast furnaces in Granite City. And when the tariffs came off Canada and Mexico with USMCA, that challenged demand that challenges other aspects of the business. So this, I think, is the best we can do to keep as many jobs as we can, and at the same time, make sure we look after the company and also, frankly, take care of SunCoke as well as the workers.
Thank you very much. We get to our next question on the line Seth Rosenfeld with BNP Paribas. Go straight ahead.
Seth Rosenfeld — Exane BNP Paribas — Analyst
Good morning. Thanks for our questions today. I have had the first thing on the tubular business with a very strong recovery in earnings. How do you think about the capacity of this business? Obviously, in recent years, you have idled a great deal to their capacity.
Is there an opportunity to restart welded pipe facilities? On the raw material side, can you touch on how the new EAF with enticularis affects your competitiveness against half rings? I’ll start there, please.
Dave Burritt – President and CEO
Yes. Maybe first, I’ll start with the EAF. It is extremely well run. Great safety performance there now, and we got really strong talent that understands how to run the EAF.
So that’s a big improvement for us. The investments we made through the energy downturn are paying off significantly with that EAF providing approximately $100 million in annual cost savings. So that’s a big thing for us. We now control the supply of rounds at Fairfield, and we use that wide range of seamless capabilities that we have.
So the cost steps we’ve taken to invest in EAF capabilities combined with the opportunity to continue to earn higher average selling prices in the second half, frankly, I’m very optimistic about the tubular business. But again, we rely on strong trade enforcement so that we can continue to profitably serve the domestic energy market and create value for our stockholders. But I would say this, — there are no plans at the moment to open anything or expand which would be far too soon to suggest anything like that.
Seth Rosenfeld — Exane BNP Paribas — Analyst
OK. Thank you And the second question, please, regarding the mini mills segment. In your prepared comments, you commented on higher raw material costs when working through inventory.
I think back in April, you will discuss some efforts derisk pig iron supply selling representation of Ukraine. Can you tell us the impact of that expenditure in terms of potential safety stocks? In short, is Mwyaf now sitting on extremely high inventories of pig iron or prime scrap acquired at peak prices a few months ago? How should we think as people?
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
Well, I think – this was a problem, obviously, when the war started in Ukraine. So we had to get guarantees from the supply. It has been crucial. And so we have secured new sources of raw material from Brazil and India and, of course, moved away from the Ukrainian supply, especially the pig.
And so we have raised pig iron and HBI inventory. And so we have to manage that. And that, obviously, is a high cost, and so we’re going to have some price compression there with the small mill business and have to manage that very closely. So on the good news side, we expect to release some working capital in Big River of about $250 million, which would be a nice, favorable lift.
But there is no doubt with spot prices falling throughout the quarter, we expect EBITDA to be sequentially lower in the mini mill segment. But we would expect similar third quarter volumes versus the second quarter.
Thank you very much. We move on to our next question on the line from Michael Glick with JP Morgan. Go straight ahead.
Michael Glick — J.P. Morgan — Analyst
Good morning. In terms of your raw material strategy going forward, beyond the pellet investment, how do you think DRI fits into the picture?
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
Yes. So I think, Michael – this is Kevin. I think we said it’s not a matter of if, when and where it comes to DRI. So the investment we are making in Keetac to produce DR grade pellets, I think, further expands the option we have to develop a DR strategy in the future.
However, as Rich expressed, and as we noted in our prepared materials, the steps that are underway are relatively capital-light steps that are underway to meaningfully develop the pig iron strategy has increased our self-sufficiency from metals. So I think that’s where our near term focus will be on pig iron, no regrets decision to invest in DR grade capabilities at Keetac, our best our best ore body. This is our longest life. So a very logical choice to add that capability to their already type blast furnace pellet production capabilities, and that puts us in a great position moving forward to explore DRI.
But Rich, maybe anything else to add?
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
Yes, Kevin. I think you touched on it. I mean we focus on pig first and foremost because of the benefit that pig gives you against DRI in the furnace. And we saw earlier opportunities, and opportunities in the near term sooner to turn that metallurgy into pig iron and into our EAF.
But as you said, DRI is an opportunity for the future. And with the announcement of the floating factory at Keetac, that allows us to get started. I will tell you that once we went public with that we had a tremendous outreach. So we see a lot of commercial opportunities.
And there is, as Kevin said, potential for partnerships that we could also look at in the future when we think about DRI, which, as Kevin said, is not a question of if, when and where.
Dave Burritt – President and CEO
Think about the key word in all this, what I heard was optionality, that’s what everyone should think about. We need to make sure we feel agile, flexible and adaptable. And right now, there’s nothing in the capex related to DRI although that wouldn’t necessarily be a huge number because again we have a lot of options in terms of how we put that in and when we put it in. So we feel pretty good about our footprint and the capital that we have issued, and we need to make sure that we stick to our capital allocation strategy and make sure that not only our showing good results on the bottom line, but also we make sure that we take care of our stockholders, which is why we announced this stock buyback program.
That is important to us. We continue to reward stockholders.
Michael Glick — J.P. Morgan — Analyst
Understood. And then in Europe, probably from a high level only, how should we think about the longer term strategic direction of USSK? I think in the Slovakian papers, it looks like there is a recent Memorandum of Understanding on the energy side there. So curious to get any of your thoughts there.
Dave Burritt – President and CEO
Well, USSK has been an amazing business for us. Again, as I said, we have great talent at this. These guys are Kaizen, progressive improvement experts. And obviously, at the moment, we are in the transition period with Ukraine only 60 kilometers from the border.
We have been very fortunate not to have had any disturbances there. But this is one of those things that we have to go through with the current geopolitical concerns. We have to manage this well, and then we will find out what that future is. Meanwhile, this business has always established positive EBITDA, and we expect that to continue.
Thank you very much. We now move on to our next question on the line from Karl Blunden with Goldman Sachs. Go straight ahead.
Karl Blunden — Goldman Sachs — Analyst
Hello. Good morning. Thanks for the time. Just want to focus on your capex number of investments in the process right now.
When you think about how things are running compared to your budget, your planning assumptions, I wonder if you could comment on which elements are above or below? And give us a sense of what’s still uncontracted, the big buckets you’re focusing on there.
Dave Burritt – President and CEO
Let me take the first part of that. One of the things we really focus on is on budget, on time. And we’re very pleased, frankly, with the work that’s going on with the NGL, the galvalume, and Big River 2. You think about all the inflationary costs that have come in, – – this team knows very well how to work across our entire footprint, not just Afon Fawr, but it’s integrated people, our procurement people and looking for creative ways to make sure that the things this on time and within budget.
And whether it’s non-governmental electrical steel, which I think is $240 million or Big River 2, everything is on track, according to plan. And the coating lines are on the plan, the metallic strategy, everything is planned there. The cast iron machine is underway. You go through all of these things.
It is within budget, perhaps ahead of plan in many cases. We feel good about the way the whole team is managing this. There is a lot of rigour.
Christie Breves – Senior Vice President and Chief Financial Officer
Yes. I would add, Dave, I think that team is there. They are long lead time items, they got that fast and early. So they’ve been located a long time ago as well and I think the team there does an excellent job of looking for several different suppliers of something so they have some options.
They’ve done a good job of expanding the supplier base to create a bit more competition, that team is really on top of that.
Karl Blunden — Goldman Sachs — Analyst
That is useful. Thank you The second is just a follow up on a potential HBI investment. Is there a date that we should consider as a no-before date? Or could you accelerate that if you see good progress and enough cash flow to go after that? Or do you want to make some of the existing investments and understand the option better?
Dave Burritt – President and CEO
I think we need to go back to the capital allocation strategy and look at those individual pieces in order to keep the balance sheet healthy. We’re going to take care of the investments we’ve put out, and that’s what we need to focus on. There is no commitment to anything else at this time. We’re going to let the economy tell us the answer here, but don’t look for anything big anytime soon.
We feel very good about where we are executing the strategy and delivering value to our stockholders. Let’s face it. There is a lot of uncertainty. Some people say there is more uncertainty than ever before.
I’m not so sure that’s true. But we know that these are different times, challenging times, and we need to make sure that what we say we are going to do, we do. And that’s something we haven’t always been able to say, but we have integrated assets that are running extremely well, and the mill assets are running well. Europe is performing despite all the challenges there, and now the tubular business is coming back.
So we won’t be looking for anything here. We once again keep optionality available. If there is a big opportunity here that adds a lot of value, of course we do it, but nothing is committed to it at the moment.
Thank you very much. We get to our next question on the line from Carlos De Alba with Morgan Stanley. Go straight ahead.
Carlos De Alba — Morgan Stanley — Analyst
Yes. Thank you very much. Good morning everyone. So just coming back to the DRI strategy.
Is there – I understand that it is a future opportunity and optional, where you have created. But any color you could add as to a possible timing of when you could exercise that option you now have? And then my second question, if I may, has to do with a little more color on the end markets. You mentioned that consumer related sectors like autos and appliances are a bit soft. But could you comment a little bit more on those two, along with the other key end markets that you supply?
Dave Burritt – President and CEO
OK. The first part, can I put more color on DRI? No. I think you got all the color we’re going to give you on DRI right now because we talked about the metallic strategy. We say it’s inevitable, not anytime soon, and so we’ll leave it at that.
As far as the actual markets, I might talk a little bit about each of these. The auto – maybe the auto rebound. We stay very, very close to the customer and ensure we are well positioned for what feels like an inevitable ramp-up in cars. We don’t see what some would say is the hockey stick getting bigger, but we feel pretty good about what’s to come.
Obviously there is a shortage of semiconductors. This is a big bottleneck. And by the way, we’re very supportive of the Chips and Science Act from Congress. And reestablishing essential industries, it is so important to national security.
Everyone needs to have this. We need to make sure we are self-sufficient in the USA If we didn’t learn anything from the pandemic, that’s it. We had to be able to take care of ourselves and we are big on my melting made in the United States, as you well know.
But easing the semiconductor bottleneck is critical. And it has taken longer, I think, than anyone imagined. And it’s still going to take longer. There is a lot to do.
But we have seen in cars consistent order entry rates across the various domestic and foreign OEMs, and this constant speed of removal has enabled us to use some auto-oriented assets to serve other pockets from accelerating demand to optimizing loading. Kevin?
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A
Yes. And Dave, along those lines and other pockets of demand, I would say, across the industrial space, we continue to see good foreign rates and expect that to be stable in the second half. If you look at the construction market, particularly the non-residential value-added construction market, that has been quite resilient. Service centers, I would say, in general, are mixed.
We have seen good shipments out of service centers, but as we acknowledged earlier, buy more carefully. So when you look at that kind of relationship, that can’t continue, that imbalance can’t continue, where you have more goods and less purchases, which means they’re going to have to start buying soon. So if you couple that with the energy, which is certainly, as Dave mentioned earlier, the brightest spot in our order book. Big River, that facility is extremely well positioned to service the strong OCTG demand that we are seeing.
We’ve talked about it before, Gary Works and the unique capabilities there in line piping. And we’ve also addressed tubular today, which performs extremely well and is certainly a key differentiator, a big competitive advantage for us in today’s market. So given that balanced portfolio of products that we have, there are certainly different dynamics manifesting themselves in different pockets, but I think we feel that the balance book that we have will give us some resilience here. So we will continue to focus on creating value together with our customers.
We know they want partners who provide green steel, who are ready to innovate for the future, and we look forward to continuing to build long-term and mutually beneficial relationships with them.
Dave Burritt – President and CEO
I think this diverse exposure to the end market keeps us insulated from relying too much on just one set of customers. We had automotive with 30% to 35%. Construction, 15% to 20%. Tin, something like 15%.
Equipment, 10%, energy, and line pipe to 10%. So there is much more variety. And of course, with the footprint in USSK and then also with energy, there is this bright spot with tubular but also Afon Mawr. OCTG is also in high demand there.
And Gary, Gary pipe line. That’s a good deal, too. So as Kevin said, the brightest spot in the book is energy. And yet, the short-term, comfortable uncertainty.
But what better time to have $3 billion in cash and over $5 billion in liquidity? We can navigate through anything and still make sure we are proud of the stockholders.
Carlos De Alba — Morgan Stanley — Analyst
Thank you, and that concludes the Q&A. I will now turn the call back to the CEO of US Steel, for any closing comments.
Dave Burritt – President and CEO
Thank you for your time this morning and your interest in U.S. Steel. It’s been another incredible quarter, and we look forward to continuing to demonstrate the growing power of our Best for All strategy. None of this is possible, however, without the commitment and hard work of our employees who deliver for our customers every day.
We recently received a top score of 100 from the Disability Equality Index and are among the Best Places to Work for Disability Inclusion. We are proud to see the recognition and our commitment to a workplace that works for everyone. We appreciate that our employees thank you for using your talent to drive our business forward and for doing it safely. When you do well — when we do well, you do well, and we’re proud to continue to reward you with ever-higher pay to match performance record.
Of course, none of us could do this without our customers. Thank you for trusting your products and your reputation with US Steel. You continue to provide the quality steel you need to meet the demands of your own customers.
We look forward to growing with you towards a greener future. And finally and importantly, to our investors, thank you for your continued support of our mission and strategy. We align with the execution of the strategy while rewarding you with ongoing direct stockholder returns in line with our capital allocation priorities. We look forward to our joint success in becoming the best steel company together.
Now let’s get back to work safely.
Call participants:
Kevin Lewis – Vice President of Investor Relations and Corporate FP&A This may interest you : Ophir Lupu Leaves UTA After 10 Years as Head of Video Games (EXCLUSIVE).
Dave Burritt – President and CEO
Christie Breves – Senior Vice President and Chief Financial Officer
Rich Fruehauf – Senior Vice President and Chief Strategy and Sustainability Officer
David Gagliano – BMO Capital Markets — Analyst
Emily Chieng — Goldman Sachs — Analyst
Seth Rosenfeld — Exane BNP Paribas — Analyst
Michael Glick — J.P. Morgan — Analyst
Karl Blunden — Goldman Sachs — Analyst
Carlos De Alba — Morgan Stanley — Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all of our articles, The Motley Fool assumes no responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading files The company’s SEC. Please see our Terms and Conditions for additional details, including our Mandatory Limited Liability Disclaimers. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all of our articles, The Motley Fool assumes no responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading files The company’s SEC. Please see our Terms and Conditions for additional details, including our Mandatory Capitalized Liability Disclaimers.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
