United States Steel Corp

NYSE:X

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone and welcome to United States Steel Corporation’s First Quarter 2020 Earnings Conference Call and Webcast. As a reminder, today’s call is being recorded.

I will now hand the call over to Kevin Lewis, Vice President of Investor Relations and Corporate FPNA.

[Kevin Lewis]

Thank you and good morning. We appreciate your continued interest in U. S. Steel and welcome you to our first quarter earnings call. On the call with me this morning will be U. S. Steel President and CEO, Dave Burritt; Senior Vice President and CFO, Christie Breves and Senior Vice President and Chief Strategy and Development Officer, Rich Fruehauf.

After the close of business yesterday, we posted our earnings release and earnings presentation under the Investors section of our website. On today’s call, we will walk through via webcast plus slides, and our first quarter results. The link and slides for today’s call can be found on our website.

Before we start, let me remind you that some information provided during today’s 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 out of today and we undertake no duty to update them as actual events unfold.

I would now like to turn the conference call over to U. S. Steel, President and CEO, Dave Burritt, who will begin today’s presentation on Slide 4.

[David Burritt, President and Chief Executive Officer]

Thank you, Kevin. Good morning, everyone and thank you for joining us today and for your interest in U. S. Steel. We hope everyone is safe and healthy. We are navigating unique situation in today’s market, so we are going to structure this morning’s call a little differently. We will discuss our better than expected first quarter earnings in a bit, however it is more important to walk you through our comprehensive response to COVID-19.

First I will talk about protecting lives and livelihoods, how we are guided by our steel principles to keep our employees and communities safe and the business resilient. Second, I will discuss our top financial priority, cash and liquidity. A strong balance sheet ensures we can navigate the current environment.

Third, our best of both integrated in mini mill technology strategy remains our future and will remain flexible to make sure we execute and fourth, I will highlight the swift and meaningful short-term actions we are taking now that ensure long-term strategy execution. The cumulative effect of these actions taken to-date is expected to conserve $500 million of cash in 2020.

Let’s turn to Slide 5. Uncertainty seems to be the only certainty in today’s environment. That is why it is so important to stay true to our core values, what we call our steel principles, to guide us as we navigate this unprecedented situation.

Our top priority remains protecting the lives and livelihoods of our employees. Steel is an essential part of our country’s critical infrastructure and our employees have answered the call to continue making the steel that society needs.

This situation has reinforced that having steel that is mined, melted and made in the United States is critical to the safety and economic wellbeing of our country and U.S. Steel is foundational to our country’s regional supply chain.

Thank you to our employees for your continued hard work and commitment to U.S. Steel and for keeping each other safe. You are making a difference not only for U.S. Steel but also for the communities where you live and work. Thank you.

You continue to break safety records exceeding last year’s record days away from work of 0.10 with now 0.06, a clear industry leader. Special thanks to the USW leadership. We appreciate the way we are working together.

We are taking actions to provide a safe work environment that goes above and beyond the health and government agency recommendations for cleaning, physical distancing and managing exposure.

For example, we are distributing additional cleaning supplies throughout our plant and regularly clean high traffic and frequently used spaces. We have installed additional wash stations and have added hand sanitizers to entrances and exits and are limiting outside visitors to our facilities.

We are actively managing physical distancing at our facilities and we have implemented work-from-home for those who are able, and have added weekly communications on COVID-19 for employees and their families. These are just a few examples of steps taken to ensure a safe working environment for our employees.

We also have a COVID-19 taskforce in place to ensure we are responding in real-time to the impacts from the pandemic. We have dedicated response teams focused on health and safety, crisis management response, employee impacts, commercial impacts and operational impacts.

Protecting lives and livelihoods means keeping our employees and community safe and the business resilient. This includes a critical focus on cash and liquidity. Slide 6 outlines are sufficient liquidity heading into this market downturn.

There is no doubt in that difficult months lie ahead for us. That is why on March 27th we announced plans to fortify our balance sheet. This included an $800 million proactive draw on our $2 billion U.S. ABL, which gives us nearly $1.4 billion of cash on our balance sheet. In all, we have over 1.8 billion of liquidity.

No doubt we are entering this downturn from a stronger position than those prior. We had a similar amount of liquidity heading into the global financial crisis, but we now have a much more streamlined and efficient footprint.

Let me spend a minute on this last point on Slide 7. We have purposely changed this Company over the past six plus years, we have reshaped our footprint to shed assets that had limited costs or capability advantages.

Most recently we indefinitely idled and steel making assets at Great Lakes to move towards our best of both future faster. We have also been purposeful to improve our balance sheet. We have reduced near term maturities and extended our maturity profile. We have no significant notes maturities until 2025. We also recover our unsecured debt capacity 1.4 billion at quarter end and we reduced our annual interest rate and costs.

We have made significant progress over the past several years to improve our unfunded pension and OPEB position. At the end of 2019 our funded status for pension and OPEB obligations was 93% and 110% respectively and we have no mandatory cash contributions expected for the next several years.

We have also invested significantly in our existing facilities to improve reliability, increase efficiencies and remove costs. And thanks to the hard work of many under Christie Breves’ leadership, we have significantly improved our cash conversion cycle to industry leading levels.

Sufficient liquidity not only safeguards the business, but also protects our customers, suppliers, workforce and investors. Safeguarding these key stakeholders includes making decisions about the business to ensure we execute our best of both strategy.

This brings me to our third topic on Slide 8. Our best of both strategy remains the future. Make no mistake, our best of both strategy is our future and acquiring the remaining 50.1% stake in Big River Steel remains our number one strategic priority.

Well, our best of both U.S. Steel will be world competitive and strategic high margin end markets delivering unparalleled product platform to serve customers and transform the business to drive long-term cash flow through industry cycles.

We are already the industry leader in generation three advanced high strength steels and our decentralized salesforce and application engineers are focused on designing solutions for our customers. We are the first-to-market in the [Gen3] (Ph) grades of steel and will be added to additional auto platforms later this year and in 2021.

These investments move us to the high end value added steel solutions so that we can deliver the performance our customers need to be successful. And we have known all along that we have to be flexible to execute this transformative strategy and we have purposely built optionality and flexibility into our execution to ensure we deliver even as the market dynamics change.

Today’s market confirms our strategy and our need to change to make our business more resilient and to improve our through cycle performance so that we continue to build our capabilities to serve our customers with the sustainable steel solutions they need today and into the future.

The fourth topic on Slide 9, outlines how we are being flexible, including actions we are taking now to ensure long-term best of both strategy execution. As I mentioned earlier, we expect actions taken today to conserve $500 million of cash in 2020.

As the impacts from COVID-19 became apparent, we took quick action. We took action to fortify our balance sheet as previously discussed, we took action to align our operating footprint with the developing situation and we took action to defer strategic capital and remain flexible.

Yesterday we announced additional operating footprint actions. We are aligning our operating footprint with our order book to meet the needs of our customers.

Slide 10 illustrates the footprint actions taken to-date. And during works we are temporarily idle number six blast furnace. This is an addition to the temporary idling of number four and number eight furnaces that were previously announced. Number 14 furnace our largest blast furnace in the Company will continue operating.

At Mon Valley works we are temporarily idling number one furnace. We are also extending coking times at Clairton coke making operations. This will better align our coke production with expected iron making across our flat rolled segment.

And Granite City blast furnace A remains temporarily idled and there are no further actions to announce at this time. At Great Lakes, we successfully completed a safe and structured indefinite idling of iron and steel making as previously disclosed.

We are also indefinitely idling our Keetac iron ore mines. This will better align our ore pellet production with expected iron making from our blast furnaces. Our tubular segment production will now be primarily consolidated to our seamless pipe mill in Fairfield, Alabama.

This is where our new electric arc furnace will be located and remains on-track to be completed in the second half of 2020. Despite our aggressive tubular operating adjustments, we believe we can still serve a majority of our customers’ needs from our remaining tubular footprint.

These operating adjustments are expected to result in approximately 2,700 employee layoffs. In Europe we continue to operate two of three blast furnaces at our Slovakian operations. We are continually assessing the footprint required to support customers’ needs.

These are unprecedented market conditions that require extraordinary action to preserve cash. That is why we have also taken a series of compensation related adjustments including reductions to the Board and Executive Leadership’s compensation. We also delayed merit increases and are suspending 401k matching and retirement contributions.

We continue to evaluate opportunities to further accelerate our fixed cost reduction objective of $200 million by 2021 and plan to deliver these run rate savings a year earlier than previously committed.

In addition to balance sheet, operating footprint and corporate actions on March 27th, we also revised our 2020 capital spending forecast from $875 million to $750 million to better align with expected market conditions.

Slide 11 provides an update on our strategic projects. As part of this decision, we announced on March 27 we are delaying both the Mon Valley endless casting and rolling investment and capability upgrades to the Gary hot strip mill.

On the Mon Valley investment it remains a critical piece of the strategy, something we need to get done, but we are taking a pause at the moment. Again, we maintain flexibility on when we resume this project.

At Gary Works we have flexibility to execute the remaining investments at the hot strip mill. We will continue to evaluate the pace and timeline of remaining investments for these projects. $750 million remains our expected in 2020 capital spending forecasts and we will continue to manage capital spending entering 2021.

Before I hand it over to Christie, I will provide an update on some select end markets and a key milestone in our best of both strategy. First on what we are seeing in the markets. Our commercial teams are speaking daily with customers to closely monitor market conditions and we are doing our best to distinguish between signals and noise.

We do our best as Gretzky famously said escape where the buck is headed. For now, customer insights are challenged as everyone tries to find the invisible pot, but no one knows when the market will recover. For now, we believe the market is in search of bottom in the second quarter, and when it does recover and no doubt it will, we plan to be well positioned to serve customers’ needs.

Here is what we do know. Automotive production shutdowns are having a significant impact on demand. Approximately 25% of our flat rolled shipments serve this strategic end markets much depends on when the automotive OEMs planning to resume production and at what pace production resumes.

Construction market activity has been supported by longer lead times into May and still healthy activity levels in the South. Our packaging business has seen strong volumes in today’s environment. Increased demand for can products is supporting tin product demands.

In Europe similar market dynamics are weighing on this segment’s performance. Government mandated shutdowns across key customer bases are negatively impacting steel consumption and in tubular COVID-19’s impact is amplifying already difficult oil and gas markets. Oil prices are down significantly since the beginning of March and operating rigs in the U.S. are off over 40%.

Lastly, yesterday we announced continue execution of our best of both strategy and delivered on our commitment to extract incremental value from our iron ore assets. We have granted Stelco an option to purchase a 25% interest in our Mintek iron ore mining operations for an option payment of a $100 million.

Under the agreement, $20 million was paid to U.S. Steel upon signing the option agreement and the remaining $80 million will be paid relatable over the remainder of the 2020 calendar year. Once Stelco has completed paying the remaining $80 million the option can be exercised at any time before January 31, 2027 for an additional payment of $500 million.

Slide 12 has more details. We are structurally long iron ore pellets based on our iron making capacity. In October, 2019 we outlined plans to create incremental value from these strategic and highly valuable assets.

Again, we will receive a $100 million in 2020 from Stelco’s option to buy 25% interest in Mintek. If they do exercise the option, we receive an additional $500 million. This deal implies a $2.4 billion value for the Mintek operation validating the unique competitive advantage of our largest iron ore mine.

I will hand it over to Christine now for detail on the first quarter performance and our outlook going forward.

[Christie Breves]

Alright. Thank you, Dave. Good morning everyone. I will begin on Slide 13. We are a fundamentally different Company today than we were heading into the global financial crisis or the energy downturn. We have streamlined our footprint and have shifted production to lower cost facilities to continue serving our customers while increasing utilization at our best assets to absorb fixed costs.

The results of these efforts combined with the investments in our facilities and our cost reduction and efficiency improvement initiatives have resulted in higher profitability over the last three years than during the same time period preceding the last two recessions. Our adjusted EBITDA margin over that past three years is approximately 9% compared to roughly 5% preceding both the global financial crisis and the energy downturn.

As Dave mentioned, our cash conversion cycle is significantly improved since the global financial crisis. We have averaged the cash conversion cycle of 32-days compared to nearly 60-days in the comparable global financial crisis period.

We expect to generate incremental capital in 2020 from the core business through working capital release primarily through inventory reduction. This will help offset some of the impacts to price and volume erosion in the markets.

We have also extended debt maturities, reduced borrowing costs and increased flexibility. We have no material notes maturities before 2025. Prior to the past two recessions; we had approximately 0.5 billion coming due within 24 months of those downturns.

We have also materially improved the funded status of our pension and OPEB obligations. At the end of 2019 our pension and OPEB plans are underfunded by less than 300 million compared to an underfunding of more than 4.5 billion heading into the global financial crisis. And also very noteworthy, we are entering this recession with liquidity similar to what we had heading into the global financial crisis, but with a much more streamlined and efficient footprint.

So let’s now turn to Slide 14. As Dave mentioned, our mantra during this COVID-19 situation is protect lives and livelihoods, which means ensuring the safety and health of our employees and focusing on cash and liquidity to ensure the resiliency of our business.

So let me provide a few details on the additional actions we have taken to preserve cash and liquidity. We have built an enhanced focus on cash into our business rhythm. We have established the daily cash calls to coordinate all of our actions to improve cash.

We have enhanced our plant spending control tower process and have added new spin control towers at headquarters and at TranStar railroad. We have expanded our internal cost and cash improvement programs.

The cost savings from these cumulative efforts outlined today are substantial, $500 million in expected cash savings during 2020 from footprint, realignment and the other cost control initiatives since the COVID-19 outbreak.

Turning to Slide 15. With limited obligations on the horizon, either through notes, maturities or mandatory pension contributions, we believe we are well positioned for this crisis. In addition to our liquidity balance, we also have approximately 1.4 billion of secured debt capacity.

Even before the emergence of COVID-19 we were prioritizing cash to ensure we ultimately executed our best of both strategy. Slide 16 lists several areas where we have taken action in the past. In the second half of 2019, we announced a reduction to our quarterly dividend, canceled our share repurchase program and reduced 2020 CapEx.

We expect 2020 capital spending to total $750 million of which $282 million or nearly 40% of this year’s expected total has already been spent in the first quarter. So this means that the remaining three quarters of CapEx should be meaningfully lower than the first quarter. Looking ahead to 2021, we continue to have flexibility on our strategic project capital spending, particularly with our Mon Valley investment.

Before I turn it back to Dave, I wanted to touch on our first quarter performance on Slide 17 and our current view of the second quarter. First quarter adjusted EBITDA was $64 million or approximately $34 million above our guidance that was issued on March 20th.

Market activity in January and February was improving from the fourth quarter before the oil and gas and COVID-19 impacts began to take hold. In March as the potential impacts of COVID-19 emerged, we responded quickly to adjust our footprint, fortify our balance sheet, and aggressively cut costs.

Strong cost management and March contributed to better than expected performance. Our flat rolled operations performed better than expected in the quarter. We continue to see the benefits from the investments we have made in our operations through improved reliability and operating performance.

We also achieve lower costs from postponing discretionary maintenance and outage spend at the mines and from lower natural gas prices. Our order book in Europe was also beginning to improve early in the year before the COVID-19 impacts too come.

We were seeing increased customer activity and European steel prices were beginning to move higher. Our first quarter performance reflects these dynamics, as the downturn became apparent, [indiscernible] team was quick to cut costs in anticipation of the market downturn.

Also lower iron ore prices flowing through in the first quarter was a tailwind for the European business. The tubular segment is being negatively impacted by both the sharp decline in oil and gas markets as well as from the global COVID-19 pandemic.

We made the difficult decision to indefinitely idle all or most of Lorain and Lone Star tubular operations and streamlined production to Fairfield Tubular. This decision better aligns our tubular operating footprint with the needs of our customers.

As Dave described earlier, we have limited full-year visibility based on uncertain market conditions. Our full-year shipment guidance issued as part of the January, 2020 earnings calls should no longer be relied upon. We expect a favorable working capital impact in the second quarter as we draw down inventory across the footprint.

Regarding our operating segments we expect flat roles EBITDA to be negatively impacted by fewer shipments, lower prices and reduced pellet shipments to third-parties. We expect this will only partially be offset by raw material and energy tailwinds expected from lower scrap and natural gas inputs.

In Europe, commercial headwinds are expected to be the primary driver for reduced EBITDA compared to the first quarter. Our tubular segment faces severe headwinds. The effects of lower demand caused by COVID-19 are being amplified by oversupply in the global oil and gas markets.

As a result, both oil prices and the domestic rig count are down significantly since the beginning of March. Based on what we know today, we expect second quarter results to mark a trough for the year and be meaningfully lower than the first quarter.

Now, I will turn it back over to Dave.

[David Burritt, President and Chief Executive Officer]

Thank you, Christine. And let’s turn to Slide 18. Before we begin the Q&A, let me summarize the key takeaways from today’s call. We are protecting lives and livelihoods, which means safety and environmental stewardship and cash and liquidity to ensure the resilience of the business are our top priorities.

Our best of both strategy remains the future, including our top strategic priority to acquire the remaining 50.1% of Big River Steel. And we are taking swift and meaningful actions today to better position us to invest in the recovery and execute our strategy.

Kevin, let’s move to Q&A. Thank you, Dave.

[Kevin Lewis]

Thank you, Dave. We ask that you each please limit yourselves to one question and a follow-up, so everyone has the opportunity to ask a question. Operator, can you please queue the line for questions.

[Operator]

Thank you. [Operator Instructions] Our first question on the line of Seth Rosenfeld of Exane BNP. Please proceed with your question.

[Seth Rosenfeld, Exane BNP Paribas]

Good morning. Thank you for taking my questions today. If I may, I would like to better understand the announcement regarding, the Stelco, Mintek deal and also the pallet supply agreement. And also congrats and beginning to exceed your goal of monetizing these assets, but just to understand better, can you please explain what impact revised pellet agreement - the supply agreement with Stelco will have on profitability of your mining operations? The releases that we got from you and Stelco overnight basically emphasize there was an improvement in their cost structure potentially. Is this transition something of a cost plus model? And if so, what aggregate impact on EBITDA would be expect for yourself. Thank you.

[David Burritt, President and Chief Executive Officer]

Yes, thanks for the question Seth. This is Dave. I really appreciate that because your call back in October when we announced the Big River Steel deal. We also highlighted that this was something that we are really focused on making sure that we would monetize these iron or assets and this is a start.

So the idea that we get a $100 million and it validates the $2.4 billion valuation of this asset I think was helpful to us at this time in a very difficult market environment. Rich Fruehauf was the leader of that transaction. So I ask Rich to maybe provide a little more color.

[Richard Fruehauf]

Sure. Dave. Thank you. Well we don’t typically comment and we won’t hear on the pricing of the contract with the customer but we were very pleased with how the pellet agreement worked out. We think it is a win-win for everyone.

There will be some uplift for our EBITDA as a result. And we see this as a beneficial contract both with respect to keeping Mintek fully running and also in terms of EBITDA improvements we will see over the life of the contract.

[Seth Rosenfeld, Exane BNP Paribas]

Thank you. Just one follow-up with regards to your comment for EBITDA up over the life of the contract. Is that more tied to an improvement in volumes or a change in pricing versus the prior agreements?

[David Burritt, President and Chief Executive Officer]

Well, as we said in material it does have a four million ton off take. So we look at that as not really a significant change in terms of the volumes, but overall it is going to be beneficial across the terms of the contract.

[Seth Rosenfeld, Exane BNP Paribas]

Great. Thank you very much.

[Operator]

And our next question comes from the line of Chris Terry of Deutsche Bank. Please proceed.

[Chris Terry, Deutsche Bank]

Hi Dave and Christie, thanks for taking my question. I just wondered if you could just dig into the deal with Stelco a little bit more just in terms of whether you have structured it and the, likelihood, I guess it all comes down to getting that additional $500 million. So just wondered if you could comment on that and then just in the context of getting additional cash flow, just wondered if you could also as part of that talk about other non-core asset opportunities within the portfolio. Thank you.

[David Burritt, President and Chief Executive Officer]

Okay, so Chris, Rich will handle the question about the deal. And then Christie will talk a little bit more about cash flow.

[Richard Fruehauf]

Yes. So as I think you know, the contract that we signed with Stelco gives them the option to acquire a 25% equity position in the Mintek mine. We certainly hope they do exercise the option, the way the contract is structured.

So the option itself is worth a $100 million, which will be creditable if they do exercise the option towards a $600 million aggregate purchase price for that 25% position in the mine. So, we are optimistic, we would love to welcome Stelco as our partner in the JV for the mine and hope that they do exercise that option for the incremental $500 million. Christie.

[David Burritt, President and Chief Executive Officer]

Christie.

[Christie Breves]

Okay. I think you were asking also about real estate cash flow. We do have, even prior to COVID-19, we were already working to monetize our real estate assets and had started processes on several of our assets. So we are expecting that to come to fruition in 2020 and the benefit and the cash flow from that, probably a couple hundred million.

[Chris Terry, Deutsche Bank]

Okay, thank you. And then just other non-core asset opportunities, Keetac, anything else you would want to highlight within the portfolio where you might be able to get some cash during the next 12-months? Thanks.

[David Burritt, President and Chief Executive Officer]

No, I think those are the areas of our primary focus right now. We do have opportunities with working capital. We are being flexible with optionality related to CapEx and other types of spend in the fixed cost takeout continues, but we are obviously looking at as we said many times before, how we are looking for opportunities to create value for our stockholders and if we can monetize an asset that is of interest to someone that adds value, we are certainly going to take a look at it.

[Christie Breves]

You want me to add on cash flow improvements?

[Chris Terry, Deutsche Bank]

Sure.

[Christie Breves]

Okay. We are constantly doing scenario planning modeling so that we are identifying what we need and what our cash flow looks like. We are working to remove costs and preserve cash. As we mentioned in the opening comments, we have put together more than $500 million expected cash improvement. And some of that will come from cap CapEx reduction working capital.

We have a lot of footprint adjustments. There are some headquarters cost improvement and it is coming from that. So a bunch of different sources, we felt confident in that cash improvement number. Our organization has responded very quickly to develop a cash mindset and we are continuing to build on that cost and cash improvement pipeline.

[Operator]

Thank you. Our next question comes from the line of Karl Blunden of Goldman Sachs. Please proceed with your question.

[Karl Blunden, Goldman Sachs & Co.]

Thanks very much for taking the time. Just wanted to ask a question on the options that you have yourself. In other words, to expand your stake in Big River Steel, and I know it is a couple of years that you had that option for, but when you think market conditions now and the price of those Big River bonds are well below par. It seems to imply that if you were to proceed with the strategy, you need to pay [indiscernible] control premium for bond holders that decide to exercise that option that they have. Could you just talk a little bit more about the different financing leverage that you would have overtime for that and just get us comfortable with the continued pursuit of the strategy.

[David Burritt, President and Chief Executive Officer]

Yes. Karl, thanks for that question. You know, Big River Steel is absolutely critical to the success here. It is our number one strategic priority and we are ensuring that we are moving ahead purposely deliberately with that investment.

Really good news the operations are running incredibly well and they have an excellent operating team there. And they are performing at extraordinarily high levels. Providing EBITDA that are comparable, even though they are relatively new they are providing EBITDA levels comparable to many mills that have been around for a very long time. So it is clearly something that we want to have in our portfolio.

The thing to remember is we don’t have to do it tomorrow. I would like to do it tomorrow, but we don’t have to do it tomorrow. We have, four years or more, like three and a half years to execute this, and we are well aware of what the requirements are in order to get that done. But we fully intend to find the right opportunity at the right time to be able to create the value for our stockholders and consolidate a 100% of Big River Steel.

[Richard Fruehauf]

That is right. This is Rich, I will just add that we were very purposeful in negotiating the four-year life of that option agreement, because we are mindful of as we all see now the cyclicality of our industry. So we wanted to have at least a full cycle if not more to be able to pick the optimal time to exercise that option. So we have built that in and I guess good thing we did.

[Karl Blunden, Goldman Sachs & Co.]

And I appreciate that you disclosed those to the secured capacity, which is a lot more than many in the industry have today, so it would add flexibility. Just a follow-up on cash and cash positioning. I didn’t see a lot of detail on what you expect the timing or the cash cost of the idling and reduction in employee count to be. Is there any color you can add to that in terms of what might be added back to EBITDA?

[Kevin Lewis]

So this is Kevin. Thanks for that question Karl. So obviously I think as we progressed into the second quarter, we expect to as Christie alluded to didn’t have the market reach a trough. So we do expect to have demand and price headwinds in the second quarter.

But what we are seeing in the marketplace right now is if you look more broadly is that the spread between scrap and HRC selling prices is significantly narrowed, which supports our thesis that the market should try to find the bottom here in the second quarter.

But we are not standing still. We are taking quick and meaningful action and we expect that to start to materialize itself in the second quarter, specifically around working capital. If you recall the seasonality of mining typically results in a use of cash and working capital as the locks are closed for the winter.

In addition, we had flat inventory build underway to prepare for a planned 48-day blast furnace outage at Gary Works. So we had a significant inventory build in the first quarter, purposeful but significant.

And we enter the second quarter, we expect to ship out of inventory, draw down inventory, and quickly turn that use of cash into a source of cash looking through the rest of the year. But that should start in the second quarter.

The actions around the footprint were swift and meaningful and we do our best to increase utilization of the assets that we will run. Obviously in totality we have three blast furnaces running, but we expect those three furnaces to run at over 80% utilization.

There will indeed be frictional costs of inefficiencies of having like three of 10 blast furnaces running. But we are doing our best to mitigate as much of that as we can. So we expect the cost savings to build in with the number 2,700 or so lay off that we unfortunately have to make as a result. We will see that impact the cost structure as well.

So well underway, we expect to really gain momentum in the second quarter, especially on working capital and we will stay vigilant to monitor the cost structure and continue to find opportunities to reduce cost and increase cash.

[Operator]

Thank you. And our next comes from the line of Andreas Bokkenheuser of UBS. Please proceed with your question.

[Andreas Bokkenheuser, UBS]

Thank you very much. Hope everybody is well. Just two quick question from me. Effectively number one, how should we think about production this year and maybe next year, obviously you know some capacity is being idled. But I’m also thinking does that give you the opportunity to kind of increase utilization amongst on the capacity that is not being idled like you are saying with Fairfield you might consolidate some volumes. So could we see that in other the parts of the business as well? Could we see like utilization that carry the blast furnace 14 or blast furnace be it granted.

Could we see that basically going up? So basically how should we think about production and shipments maybe this year versus last year? And a similar question on costs again, I would imagine that maybe lower fixed cost dilution could be a little bit of a headwind on the unit cost side. But then of course we are in an environment with very low energy costs. So I’m just wondering that it could be an offset there may be on your iron ore business to the benefit of lower costs there. So just how do we think about production and cost given what is being idled and given what continues to operate.

[Kevin Lewis]

Alright. Thank you very much Bokk this is Kevin. A lot there so let me try to tackle a few individual items here. So first and foremost on kind of full-year production and 2021 production expectations, just given the uncertainty. I don’t think we are going to opine on what we think is going to happen for the full-year.

But what I will say is that we have the ability to respond to recovery very quickly. The way we have idled the furnaces and the way we have managed the footprint, we can respond very quickly to the extent that orders accelerate and the market recovers.

And we will run the assets that we need to serve our customers. And our goal is always to run the assets that are online at the highest level of utilization possible. So that will continue to be our guiding principle.

On costs, I think you had touched on a few key ones. Energy to the extent range depress will be a tailwind for us that was in the first quarter, and could be going forward as well especially on the natural gas side.

So, that is we are looking at things right now. We continue to be agile and flexible. I think those are words you have heard from us frequently today and we will continue to reinforce and we will make sure that we have the footprint and the operating configuration that is needed to serve our customers and respond quickly in efficient way to an increasing demand.

But maybe I will ask Christie to comment a little bit further on that.

[Christie Breves]

Yes. I would just add, we have reduced the number of blast furnaces that are running, so that definitely increases the efficiency of the ones that are running much more cost effective. And also the way we have reduced blast furnace capacity, we have several furnaces that are banked, which means they could be restarted quickly if customer demand recovers and indicates that we need that capacity.

We are just being very prudent on our cost management jack quickly where those furnaces can be restarted fairly quickly. And you have seen in the tubular business the consolidation of all that production out to Fairfield, Alabama.

[Andreas Bokkenheuser, UBS]

Alright. Thank you very much. I appreciate you taking my question.

[David Burritt, President and Chief Executive Officer]

Yes. Maybe just one last comment on that. You know if you think about our strategy and what we are trying to do with the best of both of what we are doing with the best way, it is Big River, it is Endless Caster, it is the hot strip mill at Gary. And making sure that we are getting to this best of the integrated, best of a mini mill and with the electric arc furnace that will come on with the tubular business later this year that fits nicely into the future that we have.

So we are very focused on the steps that we take now fitting into the longer term type strategy. And, and what we are doing is and I think most people are doing this, we see a bottom emerging here in the second quarter, we have modeled a V-shaped recovery a U and extended U and even an L.

And it is anybody’s guess as to how this has going to come back and does seem like people will be cautious at first. But like we saw back in 2008, 2009 with the recovery there, we got to be ready for the bull effect. And that is why the way we have banked these furnaces, we can be nimble, we can be responsive and we can make sure that we continue to make purposeful steps to getting best of both done with our number one strategic priority being Big River.

[Operator]

Thank you. Our next question comes from the line of Nick Jarmoszuk of Stifel. Please proceed with your question.

[Nicholas Jarmoszuk, Stifel, Nicolaus & Company]

Hi. Good morning. Question on this Stelco contract. If they exercise the option, does that cancel the current purchase agreement and are they then able to start buying pellets at cost or do they still need to maintain a arms length contract even after they are a 25% partner?

[Richard Fruehauf]

Yes, this is Rich. So effectively the option allows them to become a 25% equity owner in Mintek. And at that point we would form a cost sharing JV. So it would become a cost sharing operation for them to acquire their four million tons per annum rather than the pellet agreement.

[Nicholas Jarmoszuk, Stifel, Nicolaus & Company]

Okay. And then a question on liquidity, what is the minimum cash that the Company is comfortable with and at what point would you consider coming to the secured bond market?

[David Burritt, President and Chief Executive Officer]

Yes, well I think we have said before it is around $500 million. As you adjust your footprint, obviously you can even get by with us a little bit less. I will turn this to Christine, but you know what we have to be is ready and able to go when the markets are ready and able to go.

And as we said before cash is just not King. It is a queen, Prince, princess, the whole loyal court. So we are taking this very seriously and making sure that we have adequate cash when we need it to get the transactions done that we need to get done as well as making sure we get through this difficult cycle.

[Christie Breves]

And what I would add to Dave’s comments, we are constantly doing scenario planning. We were doing business resiliency planning even before the COVID-19 started. So, we are constantly looking at the different scenarios especially in the financial performance of our business around various demand and pricing scenarios. And we also are continuously monitoring the markets and prioritizing cash and liquidity.

So, we believe we have sufficient cash to guide us through this market. We have taken very swift actions, but I can tell you we do continue to consider all options and are monitoring the capital markets.

And if we did raise additional capital, it would be to bolster liquidity to further strengthen our business and then to position our Company to invest in the eventual recovery. So it is something that we are constantly monitoring, but we feel pretty comfortable with what our scenarios are telling us about our cash.

[Operator]

Thank you. And our next question comes from the line of Timna Tanners of Bank of America. Please proceed with your question.

[Timna Tanners, Bank of America Merrill Lynch]

Yes. Hey, good morning everyone and hope you are out safe and healthy. Wanted to ask if I could, for a little bit more color on some of the costs you talked about or trying to pinpoint a little bit better, how to think about the cost of furlough or to let people go, the cost to keep the furnaces that you have taken offline, offline and to start and restart. And how to think about also what prompts you to restart, you know the auto industry for example, is coming back online in the middle of May. What lag might we expect for some of your furnaces that service the auto industry.

[David Burritt, President and Chief Executive Officer]

So Timna to answer the cost to idle and restart, it is not that significant from an actual cost perspective. You do obviously have inefficiencies throughout the footprint as you reduce utilization rates, but as we mentioned for the assets we do run, our goal is to run those high levels of utilization.

There will be some additional details in our queue related to frictional costs on the employee impacts that you should be able to see and if those don’t answer your questions, please follow-up and let us know.

But, as I mentioned earlier in one of the responses, we are getting after the cost now, taking the costs out of the business, the biggest near-term lever is the release of working capital, which will either start to manifest itself in the second quarter.

And we are after all the other levers that are available to us as Christie described around, fixed costs reduction, plant cost reduction, material usage at our furnaces, so overtime reduction, et cetera.

So every lever is being pulled and everything is on the table. And just because this is the opportunity that we saw thus far doesn’t mean this is the end. We will continue to extract every cost savings and dollar out of the business we can to make sure the business remains resilient through this downturn.

[Timna Tanners, Bank of America Merrill Lynch]

Okay. And then the timing question.

[David Burritt, President and Chief Executive Officer]

Can you repeat your timing question Timna?

[Timna Tanners, Bank of America Merrill Lynch]

Okay sure. I have a follow-up and I will repeat the timing of question. So it is just really to understand how we think about the succession of when you would expect to restart once we know when the auto industry is going to be coming back. And I appreciate that it will depend on how much utilization the auto industry runs at, but just trying to think about inventory on the ground if that is relevant or if you can start up quickly.

But my follow-up was to understand, if we listened to the other sheet producers, other mini mills, they characterize the current market as short-term, it sounded like a short-term hit and an opportunity to take market share. You know, they don’t take capacity offline because they can just run at lower utilization more flexibly.

But contrasts with U.S. Steel is really sharp cut to production. So I’m just wondering why the very sharp cut to your production when your auto and transport exposure is 25% or so last I saw. Why did they cut less and do you concern yourself with them since planning to take market share?

[Richard Fruehauf]

So on the timing and restart, I will start there and apologies for not mentioning that first time through. The customer tells us, right, when we have the order book and we have the volume and we feel comfortable with the level of inventory we have, we will restart production to support our customers. That is our goal to be here for our customers in the event, when the market recovers.

I think we have exposure to some markets that are being negatively impacted the autos, the energy markets, constructions and we are doing what is required to position this business to mass production with the order book. And when the auto and these other industries ultimately recover, which they will, we will be here for our customers.

But I think about we did have some inventory build as I mentioned in the first quarter that we have to make sure that we worked through, working capital release, extremely valuable in today’s environment. So that did certainly play a role or play a factor in the decisions we made to temporarily idle some production. As Christie mentioned, we have done it in a way where we could quickly resume to the extent the order book justifies it and the inventory levels are appropriate.

But to your point about the mini mills, I guess the one I will make is, and this goes back to Dave, comments, if you look at what we said about Big River’s performance. The mini mill margin profile through this cycle is highly attractive. Their ability to produce cash through the cycle is highly attractive.

We need that in the U.S. Steel portfolio. That is why Big River is our number one strategic priority and that is why we are going to get it done over the time period we have to do it. So what you recognize in the market is what is it the cornerstone of our strategy and is the catalyst for the things that we are doing.

[David Burritt, President and Chief Executive Officer]

And that is why we think that we know that when you combine the best of integrated with the best of mini mills, you do have a winning strategy. And what we have to do is prove that we can afford them.

And when we show you that we can get the money to invest and finalize a transaction with Big River, finish the endless castor, we will have with the endless caster, the best mill in North America and the mini mills that Big River runs it is the only lead certified, it is loaded with artificial intelligence and already it is running at a very good level.

So when we combine these two together, it does start to fix the problems that we have had and certainly we are going to have a footprint that will be more nimble and we are going to be more responsive. In fact that we bank furnaces gives us an opportunity to come back faster than that we have in the past and the balance sheet better than we have in the past.

Frankly we are pretty optimistic about our ability to get the strategy done, and just we are working hard on it every day and we will have to see how long this COVID-19 lasts, but we are on it. We got it and we are optimistic about the future of U.S. Steel.

[Operator]

Thank you. And I will now turn the call back to U.S. Steel President and CEO, Dave Burritt for any closing remarks.

[David Burritt, President and Chief Executive Officer]

Thanks everyone and thanks for your interest in U.S. Steel. For our employees thank you for being on our front line, continuing to serve our customers and support the communities where we live and work.

You have shown unwavering commitment to the Company and have demonstrated significant generosity for those impacted by COVID-19 I’m pleased to be on your team. Now let’s get back to work safely knowing U.S. Steel’s strategy is sound as we take deliberate steps with actions now that get us to the future faster.

[Operator]

And that does conclude today’s presentation. We thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day everyone.