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Good morning, everyone, and welcome to U.S. Steel’s Q1 2022 earnings conference call and webcast.As a reminder, today’s call is being recorded.I will now turn the call over to Kevin Lewis, Vice President of Investor Relations and Corporate FP&A.please continue.
OKThank you, Tommy.Good morning, and thank you for joining us on our first quarter 2022 earnings call.Joining me on today’s conference call is the United States
Dave Burritt, Steel President and CEO; Christine Breves, Senior Vice President and Chief Financial Officer; and Rich Fruehauf, Senior Vice President and Chief Strategy and Sustainability Officer.This morning, we posted slides to accompany today’s prepared remarks.Links and slides from today’s conference call can be found on the U.S. Steel investor page under Events and Presentations.
Before we begin, let me remind you that some of the information presented during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties described in our filings with the Securities and Exchange Commission effect, actual future results may differ materially.The forward-looking statements in our press release issued yesterday and our comments today are made as of today, and we undertake no duty to update them as actual events develop.I would now like to turn the call over to Dave Burritt, President and CEO of US Steel, who will start on slide 4.
Thank you, Kevin, and thank you for your interest in US Steel.Thank you for your time this morning.Thank you for your continued support of our company.
Each quarter, we show our progress and are pleased to provide an update on another quarter of record results.But most importantly, we set a safety performance record in the quarter.So far this year, our security is better than the 2021 record, better than the 2020 record, better than the 2019 record.The drumbeat of continuous improvement highlights our role as an industry leader, a position we take very seriously in the U.S.
Steel, safety always comes first.Thank you to the U.S. Steel team for continuing to work safely.We thank you.
We all know that operations work well when security is high.Your hard work and dedication are at the heart of our success.Let’s take a moment to recognize our colleagues at U.S. Steel Europe who are safety champions and embody our steel principles.
They embody our Code of Conduct.With the human tragedy in Ukraine happening close to home in eastern Slovakia, on behalf of the entire leadership team at U.S. Steel, we thank you for the support and help you have provided – the support and resilience you have provided to your neighbors over the past few months Here, you have proven to be able to overcome deeply disturbing and disruptive events.Looking across the enterprise, we expect 2022 to be another exceptionally strong year for the U.S.
steel.We delivered our best first quarter ever and hope to do it again by delivering our best second quarter ever, expected to surpass last year’s record second quarter EBITDA.US Steel delivered EBITDA of $6.4 billion and free cash flow of $3.7 billion over the trailing 12 months, driving our best-in-class strategy and balanced capital allocation framework.
Best for all, giving us the ability to continue our transition to a less capital and carbon-intensive business while being the best steel competitor.To be the best, we combine a powerful complex, low-cost and highly sophisticated small mills, and our unique low-cost iron ore to create an economic engine that provides the best service to our customers, To provide the best support for our employees, and of course the best return to our shareholders for our employees.To be the best of all, we need the best of all, including our colleagues, customers, communities and the countries in which we live and work.Specifically, we rely on continued strong support from the United States
The government ensures a level playing field.We need strong trade enforcement to respond to the government’s call to action on climate change.We know governments know the role steel plays in our national and economic security, and the opportunities we have to continue to advance actions that make steel more sustainable.We are satisfied with the work of our Secretary of Commerce and America
trade representative.We hope their strong leadership and enforcement will continue.Our customers, employees and shareholders all count on it.Our stakeholders also look to us to deliver the best possible service by extending our competitive advantage in North America’s lowest cost iron ore, small mill steelmaking and first-class finishing, while executing our balanced capital allocation strategy.
The work we have done on our balance sheet and our optimistic outlook for 2022 puts us in a strong position to provide solutions that expand our competitive advantage while maintaining a balanced capital allocation strategy, including a significant increase in direct returns to shareholders chance.We like to say that when we do well, you do well, and I’m glad we can continue to reward our customers by not only delivering great steel solutions for our customers, record profit sharing for our employees, but also better for our shareholders. Direct share repurchase returns. Now more than ever, delivering the best strategy for all is the way forward.Let’s turn to Slide 5, where I’ll present key messages from today’s conference call.
First, we delivered record first quarter results.As mentioned earlier, we expect record results for the second quarter as well.If we deliver our expected second quarter results, we’ll have the best 12-month financial performance in the company’s history.Next, as I mentioned earlier in my presentation, we have strong execution across the business and are integrating a portfolio of differentiated assets to deliver profitable steel solutions for people and the planet.
Finally, we return capital to shareholders in accordance with our capital allocation framework.Later, we will spend some time summarizing our competitive position and unique customer value proposition in each segment.Finally, demonstrate the resilience of our strategy and maintain the financial strength as we continue to execute the transformation of our business model, allowing us to complete our strategic investments on time and on budget.We continue to believe that the market is significantly devaluing our strategic position and valuation, making share buybacks an ongoing source of tremendous long-term value creation.
Go to financial performance on slide 6.The first quarter presented challenges for our industry and business, including normal seasonal effects amplified by volatility and supply chain disruptions.At US Steel, we see every challenge as an opportunity, and we delivered record Q1 net earnings, record Q1 Adjusted EBITDA and record liquidity.
Most importantly, we translated record earnings into strong free cash flow of over $400 million in the quarter.Our strong free cash flow left us with $2.9 billion in cash at the end of the quarter to support our best support for all investments and a balanced approach to capital allocation.Looking ahead to the second quarter, we expect each of our segments to contribute to higher EBITDA in the second quarter.Given the expected upward trajectory of our business, I will take a few minutes to introduce each operating segment outlined on Slide 7 to highlight how we differentiate our business segments by leveraging our unique capabilities and how we use U.S.
The advantages of steel meet the needs of our customers.Let’s start with the North American Flats sector on Slide 8.Our North American flat products segment is a key element of our best service to all strategies as we continue to leverage our low cost iron ore and our integrated steelmaking assets to serve a diverse customer mix across steel grade differences requirements are getting higher and higher.We supply our customers with steel that is mined, smelted and manufactured in the U.S. Our low-cost iron ore is a truly sustainable competitive advantage, the importance of which has been exacerbated by the recent disruptions to global metal supply chains.
Our structured long-term iron ore positions are a source of long-term value creation as we continue to expand our competitive advantage to increasingly benefit our small mill steelmaking operations.In February, we announced the first step in our metal strategy, building a pig machine at our Gary Works facility.Our investment in Gary’s pig iron capacity is a capital light investment that can deliver significant benefits across the business.First, it will use excess blast furnace capacity at the Gary plant to produce pig iron without sacrificing steelmaking capacity.
The Gary plant is long iron, which means the facility produces more liquid iron than the steel mill consumes to produce steel.By installing pig iron machines, we can increase blast furnace utilization and create efficiencies within our flat rolling division.Second, this pig iron investment, which is expected to start production in early 2023, will meet up to 50% of Big River Steel’s ore-based metal needs, meaning it can replace up to 50% of third-party sourced pig iron, DRI, HBI or plain scrap.us
Steel has a unique opportunity to convert ownership of low-cost iron ore into feedstock for a growing fleet of electric arc furnaces.We will continue to evaluate additional opportunities to further improve our self-sufficiency and free up more differentiated resources.Our integrated steelmaking footprint is also being reshaped.We made the difficult but necessary decision to reposition our complex by moving our blast furnace footprint down the cost curve and increasing our capacity.
Our enhanced capabilities include our state-of-the-art finishing lines to produce the high-end steels our customers, especially automotive and packaging customers, require only in the best of circumstances.Automotive OEMs have historically had the greatest demand for advanced high-strength steel, but our business and commercial development efforts are rapidly identifying other end markets that benefit from advanced high-strength steel.Our customers tell us time and time again that we are the leader in advanced high strength steel and our share continues to grow.Despite supply chain challenges last year, we shipped more advanced high-strength steel in the first quarter of 2022 than in the first quarter a year ago.
The progress we have made in our North American Flat Mill segment has improved profitability and resilience.In the first quarter, we achieved a relatively flat average selling price compared to the fourth quarter of last year, despite a 34% drop in spot prices.Our contract positioning allowed us to generate a first-quarter EBITDA that was more than triple that of last year’s first-quarter results and resulted in an EBITDA margin in excess of 20%.Our small mill division on slide 9, which includes Big River Steel, is an industry leader in electric arc furnace steel production.
Once again, Great River Steel delivered industry-leading financial results.The segment’s first-quarter EBITDA margin was 38%, or 900 basis points, higher than the best small mill competitors.Big River Steel’s unparalleled process and product innovation, coupled with its ability to produce sustainable steel with 75% less greenhouse gas emissions than traditional integrated steelmaking, makes Big River Steel a platform to grow with its customers.We listened to our customers on electrical steel more than a year ago and in this way we have demonstrated our commitment to serving the wider electrical steel market.
It is customers who drive our actions and inform our investments in non-grain oriented or NGO electrical steels.We have no doubts about going faster and without waiting for what car customers will do.Our close relationships with OEMs make us eager and confident that the thinner, wider NGO electrical steels to be produced at Big River Steel will meet our customers’ needs because we know where they are headed.Clients have set aside time on the new world-class NGO line, which is being constructed on time and within budget to start in the third quarter of 2023.
We are also expanding our value-added electroplating business in galvanizing capacity, again in line with our customer notices, to meet growing demand in the construction, electrical and automotive sectors.This investment is also within budget and on time for the launch in the second quarter of 2024.Given our timely acquisition of Big River Steel last year and the rapid success we have had together, we broke ground earlier in the last quarter on Small Mill 2, located on Big River Steel’s existing campus.
Combined, Big River Steel and Small Roller 2 are what we call Big River Steel Works, which is expected to deliver $1.3 billion in annual full-cycle EBITDA by 2026 and will be able to produce 6.3 million tons of steel.We keep saying it’s not about getting bigger, it’s about getting better.The ability to invest is what our clients need and the way to help us improve our full-cycle EBITDA performance, increase our free cash flow generation and reduce our capital and carbon intensity.
We know what our customers want to sustainably manufacture high-quality steel to help them achieve their decarbonization goals, which is why we were so happy when Big River Steel was certified as a responsible steel mill, which is North America The first and only steel mill to do so.Customers need rigorous, independently verified criteria to inform their choices on how to work with suppliers, and ResponsibleSteel provides a common platform across the steel value chain.The ResponsibleSteel Standard is based on 12 principles and covers a wide range of standards covering the core elements of environmental, social and governance or ESG responsibility.This designation affirms our leadership in delivering sustainable products and processes to our customers, as well as our commitment to ESG.
We plan to apply for Responsible Steel Facility certification for Small Mill 2, in time for its planned start-up in 2024.As an innovative steel producer, Big River Steel is setting new target standards for North America.Now, let’s talk about our European segment on slide 10, which is the gold standard for integrated steel production in Eastern Europe.
Over the past few months, our teams in Slovakia and the United States have worked very hard to mitigate the impact of the Russian invasion of Ukraine on our raw material supply chain.We are leveraging new and existing relationships to secure the supply of iron ore, coal and other raw materials, while continuing to meet customer demand profitably.Despite the ongoing conflict in Ukraine, our business continues to operate at high utilization rates and remains an important steel manufacturer and a trusted supplier to customers in Slovakia, Czech Republic, Poland, Hungary and Western Europe.We will continue to serve these communities and continue to support the Slovakian economy and community.
Throughout the cycle, our Slovakia operations have demonstrated solid earnings and free cash flow, with the first quarter being the third-best quarter in history.Finally, on slide 11 our tubular section.Our tubular section has been through a couple of tough market conditions, but I’m very pleased with their ability to persevere.The team worked hard during the downturn to improve their cost position, crack down on unfairly traded pipe imports, and enhance their product offerings to better position themselves when recovery arrives.
Well, the time has come, and our tubular segment is serving a lucrative service to the recovery of the U.S. energy market.Fairfield’s electric arc furnace, commissioned in 2020, increases production efficiency by controlling the entire process from start to finish.This provides customers with faster response times rather than relying on third parties to provide the substrates needed for seamless tube production.
Insourced rounds of production coupled with proprietary connectivity, including API, semi-advanced and advanced connectivity, create a comprehensive set of solutions for customers.In the first quarter, the EBITDA performance of the Tubes segment doubled from the previous quarter, and we expect continued improvement in the second quarter.I’ve said it, and I’ll say it again.This is not the America of your great great grandpa
steel.Go to capital allocation on slide 12.Our capital allocation priorities are clearly on track.The balance sheet remains strong and in line with our cyclically adjusted debt and EBITDA targets.
Our closing cash balance remains in excess of our capital expenditures for the next 12 months, ensuring that we are optimally funded for all strategic investments.We expect to significantly increase our share repurchases in the second quarter as our capital allocation goals are met.We currently expect to return more cash than we currently expect to generate free cash flow in the second quarter, and we will continue to take advantage of our misplaced valuation.Worth repeating.
When we do well, you do well, and we do very well.Our best days are coming.We know where we’re headed, and we’re integrating a low-cost, high-capacity portfolio and expanding our unique competitive advantage.Christie will now present our first quarter results and expectations for the second quarter.
Thank you, Dave.I’ll start with slide 13.Revenue in the first quarter was $5.2 billion, which supported adjusted EBITDA of $1.337 billion in the first quarter, our most profitable first quarter ever.Enterprise EBITDA margin was 26% and adjusted earnings per diluted share were $3.05.
Free cash flow for the first quarter was $406 million, including $462 million in working capital investments, primarily related to inventory.At the segment level, Flat reported EBITDA of $636 million and an EBITDA margin of 21%.Fixed-price contract resets in 2022 were significantly higher, reflected in our year-over-year ASP growth, more than offsetting the seasonal headwinds typical of our iron ore business in the first quarter.For the remainder of the year, our own low-cost iron ore and annual contract coal position us well in today’s environment of rising raw material costs.
Our flat rolling business continues to perform well and is on track for another all-time high in 2022.In the small mill segment, we reported EBITDA of $318 million and an EBITDA margin of 38%, representing another quarter of the industry – leading small mill margin performance.In Europe, our business in Slovakia delivered an EBITDA of $287 million, more than double last year’s first quarter performance and, as Dave said, the third best quarter ever.In tubing, we more than doubled our performance last quarter, generating EBITDA of $89 million, primarily due to higher prices in the OCTG market, new trade cases for OCTG imports, and efforts to improve our cost structure and expand over the past few years. Highly profitable connected business.
Our first quarter results are just the start of what U.S. Steel expects to be another exceptional year.In the second quarter, our Flat Rolling segment had the largest increase in portfolio and EBITDA compared to the first quarter.Higher spot selling prices and increased demand, fixed costs for iron ore and coal, and lack of seasonality in iron ore mining should all contribute to a significant improvement in quarter-over-quarter EBITDA.
Our small mill division is also expected to achieve higher production and higher selling prices.We expect higher raw material costs to largely offset the expected commercial tailwind.In Europe, continued healthy demand and higher prices are expected to offset higher raw material costs, especially iron ore and coal from alternative supply routes.We currently expect Q2 EBITDA to be the second-best quarter on record for our Slovak business.
In our pipe segment, we expect continued financial improvement, primarily from higher selling prices, stronger trade enforcement, and continued benefits from structural cost improvements.This is only partially offset by the higher scrap costs for our EAFs.Overall, we currently expect adjusted EBITDA in the second quarter to be higher than the first and the best result for the second quarter.Dave, back to you.
Thanks, Christy.Before we start asking questions, let me take a few minutes to understand slide 14.We are executing to reposition our future business and executing our best strategy is key to providing this opportunity for our clients and our colleagues, for our shareholders and for the communities in which we live and work.We are advancing key elements of our strategy on time and on budget, including expanding our competitive advantage in low-cost iron ore, small-scale steelmaking and best-in-class finishing capabilities.
As we execute on our announced strategic investments, we will deliver approximately $880 million in additional annual EBITDA and earnings when our pig iron investment in Gary Works comes online in 2023.We seize the moment every day, build momentum and have a strong team to achieve our goals.Our strategy is right, and 2021 is just the first step in our quest for the best.With that out of the way, let’s get to the Q&A.
OKThank you, Dave.Over the past two years, the global pandemic has had a profound impact on the way we interact with our key stakeholders.In the U.S
Steel, we’ve embraced distributed work to be closer to our customers and increase the productivity, satisfaction and retention of our employees.We’ve never been more connected as an organization, engaging more deeply with our customers, or more focused on finding a new talent pool to join our organization.It is in that spirit, and to ensure we create new ways to engage with our shareholders, that we partnered with Say Technologies to take questions directly from investors on today’s conference call.Using the Say Technologies platform, investors were able to submit and vote on issues over the past week.