United States Steel Corporation (NYSE:X) Q3 2020 Earnings Conference Call October

30, 2020 8:30 AM ET

Company Participants

Kevin Lewis – Vice President-Investor Relations and Corporate FP&A

Dave Burritt – President and Chief Executive Officer

Christie Breves – Senior Vice President and Chief Financial Officer

Rich Fruehauf – Senior Vice President and Chief Strategy and Development Officer

Conference Call Participants

Karl Blunden – Goldman Sachs

Seth Rosenfeld – Exane BNP

Chris Terry – Deutsche Bank

David Gagliano – BMO Capital Markets

Nick Jarmoszuk – Stifel

Timna Tanners – Bank of America

John Tumazos – John Tumazos

Matthew Fields – Bank of America

Andreas Bokkenheuser – UBS

Operator

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

I'll now hand the call over to Kevin Lewis, Vice President of Investor Relations
and Corporate FP&A. Please go ahead.

Kevin Lewis

Great. Thank you, and good morning. We appreciate your continued interest in U.S.
Steel and welcome you to our third 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 select slides and our third quarter results. The link and
slides for today's call can also be found on our website.

But before we start, let me remind you that some information provided during this
call may include forward-looking statements that are based on certain assumptions
and are subject to a number of risks and uncertainties as described in our SEC
filings, and actual future results may vary materially. Forward-looking statements
in the press release that we issued yesterday, along with our remarks today, are
made as of today, and we undertake no duty to update them as actual events unfold.

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

Dave Burritt

Thank you, Kevin. Good morning, everyone, thank you for being a part of today's
call and for your interest in U.S. Steel. The third quarter has improved to be a
quarter of continued optimism. We have a lot to update you on about our optimism
and progress before we open the line to your questions. Today also marks the one-
year anniversary of our initial investment in Big River Steel with tremendous
progress to report.

We'll get into more detail about that tremendous progress we've made together. But
I want to take a moment now to thank the U.S. Steel and Big River teams for their
collaboration, for making the first Generation 3 advanced high-strength steel at a
mini mill and for creating an unmatched customer value proposition. The Best of
Both teams have been through an unpredictable and unprecedented year, making their
accomplishments that much more impressive.

So thank you to the U.S. Steel and Big River Steel teams of innovators for making
the first GEN3 advanced high-strength steel at a mini mill and for creating an
unmatched customer value proposition, we can't get to the future fast enough to
deliver the value, our Best of Both customers demand and our stockholders deserve.
There are three main messages I'd like you to take away from our prepared remarks.

Let's get started with number one. First, we are optimistic as the market recovery
has continued into the fourth quarter. We believe market strength will continue
through the first quarter of 2021 based on our stronger order book and customer
collaborations. We believe market conditions can last and are confident about our
performance for the rest of the year.

Second, we are seeing the significant improvements from the rapid response to
COVID-19 in Flat-Rolled and U.S. Steel Europe, as we generated free cash flow in
the third quarter. We're optimistic we will generate further improvements in the
fourth quarter, which Christie will talk about later. And third, we're optimistic
about the continued execution of our world competitive Best of Both strategy.
Throughout 2020, we have been not only able to complete significant milestones of
our Best of Both strategy but also reaffirm our optimism about the future by
delivering unmatched process and product innovation for our customers.

Let's start with more about our Best of Both strategy execution on Slide 5. We
continue to operate at industry-leading Days Away from Work safety performance, and
are on track to improve on last year's record setting performance. We remain
vigilant in our COVID-19 protocol, including emphasizing face coverings, physical
distancing, and good personal hygiene to stop the spread of the virus.

Next, in addition, the actions we took earlier this year to fortify the balance
sheet, we have delivered significant cash improvement in the third quarter. We
generated cash from operations of $210 million, primarily from the release of
working capital. We generated free cash flow of $76 million and we've increased
liquidity by over $200 million in the third quarter and ended the quarter with
nearly $1.7 billion of cash after reducing our ABL borrowing by about $900 million.

While navigating 2020, we also executed critical agreements related to the

monetization of our iron ore of about $100 million before year-end. We also remain
focused on delivering on our $200 million fixed costs reduction goal, which is
ahead of schedule. I want to spend the last few minutes on this slide, celebrating
our most recent Best of Both accomplishments.

Earlier this month, we completed a major milestone of our Best of Both strategy,
the successful startup of our electric arc furnace at Fairfield, Alabama. As part
of the startup process, the U.S. Steel EAF team at our Fairfield operation spent
time with the Big River Steel team to learn EAF best practices to ensure a safe and
efficient startup.

The new EAF and collaboration with Big River Steel are two proof points of our Best
of Both strategy and ways we can provide value to our customers. The completion of
our EAF delivers on our commitment to add sustainable steel making capability to
our footprint while driving significant cost reductions.

For our customers, we will be more agile and nimble to deliver the steel they
require to meet their specific needs. When you combine the EAF with our proprietary
grades of premium connections, we are confident that U.S. Steel offers a unique
value proposition to our customers. Congratulations to the Fairfield team on this
important achievement. And thank you for completing the project safely in a truly
extraordinary environment. And thank you to the Big River team for your support
with EAF number one.

This month also marks another major milestone. The one-year anniversary of our
initial investment in Big River Steel, which we will discuss starting on Slide 6.
We couldn't be more excited about the progress made to-date, but this shouldn't
surprise anyone. We are combining Big River Steel, which has the most advanced mini
mill technology in the country with U.S. Steel’s outstanding R&D team. And the
results have been remarkable.

We have successfully trialed and are beginning the qualification process on 11 U.S.
Steel proprietary steel grades made at Big River. Take for an instance, for
instance, our proprietary grades at Generation 3 advanced high-strength steel, not
only have we successfully trialed these grades of steel, but we are in the
qualification stage with OEMs to produce the GEN3 substrate for some of our most
demanding applications.

We are producing grades of steel, many didn't think possible at all through a mini
mill, let alone in the first year of a partnership. This makes for a winning
solution for our customers. We can provide grades of steel once thought possible
only from the integrated process. Now Big River is doing it with U.S. Steel through
an EAF. This will create unmatched value and differentiation for our customers
while ultimately providing the green steels our customers demand to achieve through
their low carbon goals.

Let me repeat this, in case I wasn't clear enough. Generation 3 grades of steel
substrate made at a mini mill, possible today. That's right a mini mill working
with an integrated mill has GEN3 steel capability. This isn't a hypothetical or a
long-term goal. This is a fact, and we're moving ahead with qualification so that
our highly valued auto OEMs can use XG3 sourced at Big River in their next-
generation of vehicles.

As Slide 7 shows, we are delivering on the Big River value proposition, including
collaborating on 11 different steel grades that are going through the qualification
process. Not bad for one year of working together. At the completion of Big River’s
Phase 2 expansion, Big River will produce over 3 million tons of sustainable steel
at the only lead gold certified steel making facility. This offering of green
steels will meet the growing customer demand for sustainable steel in pursuit of
climate change and decarbonisation targets. The Phase 2 expansion is also two
months ahead of schedule, thanks to superior project management from the Big River
team.

Slide 8. Just a few of the benefits of the expansion underway. Big River is near
completion of the Phase 2 expansion and will unlock significant value as they reach
full production. This will drive substantial operating leverage and efficiency that
should go straight to the bottom line. We are confident that exceptional management
and operating team at Big River Steel will ramp production efficiently and safely,
so that we can continue to leverage significant progress we are making together.
This brings me to my second point I mentioned earlier. We are optimistic about the
recovery that has been underway for the past several months.

Slide 9, summarizes why we are confident. We believe today's market demand is

sustainable and will continue into next year. As vacations, movies, concerts and
dining out have been replaced by vehicle and appliance sales and home improvement
projects, we have continued to see a noticeable increase in steel demand. This is
supported by the September durable goods report released on Tuesday, which
increased by 1.9%, compared with August report, while exceeding expectations of up
to 0.5%.

Steel customers across our end markets are reporting both strong demand and low
inventories. Take automotive OEMs, for example, low interest rates and the COVID
induce change in spending patterns has led to more vehicle purchases and improved
forecast in demand in 2021. Meanwhile, strong demand today will limit restocking
opportunities which will support future steel production. We are seeing this across
other U.S. steel end markets such as appliance and packaging. Additionally service
center industry data suggests today's inventories are unsustainably low. Service
centers are likely to prioritize restocking inventories while they balance
increased customer demand.

Improved demand is also supported by current steel industry statistics, utilization

rates in the industry are back to 70% in the U.S. after bottoming near 50% in the
spring. Flat-Rolled utilization is likely even higher, near 80%, as demand for
these products has exceeded long products and plate demand. These stats are further
reinforced in current industry lead times for hot-rolled coil now extended past
eight weeks.

These industry statistics plus our current order book and customer collaborations
give us confidence that today's customer activity should continue into next year.
To be sure we are prepared for the continued strong demand expected this winter. We
are analyzing timing around restarting our Keetac iron ore pellet facility. The
incremental iron ore production will de-risk our current blast furnace
configuration, so we have the right inventory to meet customer demand while the
locks are closed on the Great Lakes.

Before I pass it to Christie to talk about how the actions we've taken this year
generated better than expected results. Let me provide an update on our capital
spending and strategic projects on Slide 10. First our CapEx budget for 2020
remains unchanged at about $750 million. For 2021, we currently expect capital
spending to be approximately $675 million. We believe this is right portfolio of
projects for 2021, as we continue to execute our best of both strategy. The growing
confidence in the sustainability of customer activity gives us the confidence to
resume key strategic investments in our best of both strategy in a cash smart way.

Now I'll hand it over to Christie to discuss our third quarter performance and
additional color for the rest of the year.
Christie Breves

Thanks, Dave. Good morning, everyone. Thank you for joining us. I'll begin on Slide
11. Our quarter-over-quarter performance highlights the improvement we're seeing
across the business, as we significantly improved our Flat-Rolled EBITDA and turned
EBITDA positive in U.S. Steel in Europe. Our ability to respond quickly and cost
effectively to customer demand created significant operating leverage.

Adjusted EBITDA for the third quarter was a loss of $49 million compared to the
second quarter loss of $264 million. We outperformed our third quarter guidance of
adjusted EBITDA loss of $100 million, as a result of better than expected Flat-
Rolled segment performance. Strong operational performance, cost management and
higher shipments were tailwinds in our Flat-Rolled segment. This helped to offset
the lower prices flowing through our Flat-Rolled results, primarily from quarterly
and monthly contracts that still reflected lower index prices. Prices that have
cents increased nearly $250 per ton from August lows.

In Europe, we returned to positive EBITDA and generated 8% EBITDA margin. Lower

costs across all major spend categories drove positive EBITDA in the third quarter.
Tubular results continue to be impacted by a difficult commercial environment. We
have streamlined operations to our Fairfield facility, as we center our operations
around our recently completed EAF at Fairfield.

Looking at cash, we delivered on our commitment to keep the business resilient by

releasing over $250 million of working capital. We are also executing on our 2020
CapEx. For the quarter, we generated $76 million of free cash flow, a dramatic
improvement and clear result of our continued enterprise focus on cash and cost
management. We ended the quarter with nearly $2.9 billion of liquidity, including
approximately $1.7 billion of cash.

Looking ahead, we expect higher steel selling prices to flow-through our monthly
and quarterly Flat-Rolled contracts and expect volumes to be similar to the third
quarter. As a reminder historically, approximately 40% of our Flat-Rolled order
book is on annual contracts and is not subject to fluctuations in spot selling
prices. We are pleased with the continued focus on cost and cash management at our
European operations and the ramp of our tubular EAF will provide further
opportunities for cost reduction in that segment.

To summarize, we reported better than expected third quarter results and are
optimistic about our future performance. As we looked at 2021, we will maintain a
clear focus on liquidity, as we resemble key investments in our best of both
strategy.

Dave, back to you.

Dave Burritt

Thank you, Christie. Let's turn to Slide 12. Before we move to Q&A, let me
summarize the key takeaways from today's call. We are optimistic about the recovery
that has continued into the fourth quarter. We are optimistic that the actions
we've taken are translating into improved results. And we are optimistic about the
continued execution of our world competitive best of both strategy.

Kevin, let's move to Q&A.

Kevin Lewis

Thank you, Dave. We ask that you each please limit yourself 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?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from the line of Karl
Blunden with Goldman Sachs. Please proceed with your question.

Karl Blunden

Good morning and thanks for the time. Just wanted to speak first a bit about the
CapEx control, I think the 2021 number was significantly lower than what many had
expected, including ourselves. Is there a way to quantify how much incremental
earnings power is being pushed back a bit with that CapEx coming down? How much of
that is deferral versus efficiencies that you've found?

Dave Burritt

Thanks, Karl. And I'm sure that question or type of question like that is on
everybody's mind. I'm going to make a few comments and then Christie, I'll ask you
to further the dialogue here. And just want to make sure everybody understands what
we're doing with this CapEx. We're allocating capital to our best assets and
building in the optionality and the flexibility, so that we can deliver the most
value on that CapEx spend. And I think you all know this, but it's safety and the
environment first, and then the second thing is transitioning to the best of both
strategy and we'll pull the trigger on that, when we can, I’d like to say – I'd
like to do that yesterday on Big River, but we'll have to see how things unfold. We
have quite a bit of time before we actually have to make that decision, but we feel
good about the relationship with Big River.

And then lastly, it's about managing the cash and liquidity and making sure that we
stage gate this capital for optimum value creation. Now, obviously in this last
pandemic year, we did a lot of raising cash and we had some in-determinant delays
and other priorities, like the endless caster on the hot strip mill and things like
that. But as we get this upturn, we should be able to start pulling those things
into 2021 and stage that – gate that appropriately and we built some of that into
the $675 million that we talked about.

So Christie, maybe a little bit more.

Christie Breves

Okay, Dave. I'll make a few more comments on our 2021 CapEx plan. As we said
earlier, our 2021 CapEx forecast is approximately $675 million in total. And it
does include some resumed spending on our strategic projects. For the base
business, we're currently expecting to allocate $415 million of capital and the
rest will be on our strategic projects. So on those strategic projects, let me give
you a few details on that. The endless casting and rolling project, we plan to
resume equipment purchases and expect to draw on our export credit agency agreement
for that.

So this will allow us to continue building the equipment as we monitor the right
time to fully resume the project. The endless casting and rolling project delivers
differentiated steel solutions for our customers, including advanced high strength
substrate. And so it's really important that we continue to progress, but at a cash
smart pace. And for this project, we're looking to spend approximately $150 million
of capital next year on this project. At Gary Works, we plan to leverage the
flexibility that we built in to our execution plan to invest about $80 million on
the hot strip mill capability upgrades in conjunction with some of the planned
outages that we have for next year.

So these investments will further differentiate this highly capable asset and it'll
ensure that we meet our customer demands for high quality steels and that includes
heavy-gauge line pipe and the substrate for advanced high strength steels. The
remaining strategic spin is carry over from 2020. So looking at next year, we
believe the 2021 capital budget supports our customers today with both safe and
reliable operations and it supports the continued execution of our best of both
strategy.

Dave Burritt

Thanks, Christie. So Karl, in a nutshell here, what we're doing is, we are
allocating towards the best of both transitioning in that process as we get into
next year and we talk with you next time at the end of January, we'll have more
color on that as we transition to the future, but we are building in a lot of
optionality and flexibility.

Karl Blunden

That's very helpful. I think it sounds like it aligns with Big River being the
number one priority for the business. Just – probably more granular item on the
$150 million of Mon Valley CapEx, you do indicate that it'll come from the export
credit agreement to some extent, is there a way to kind of give us a frame how much
can be funded that way versus coming from cash? I think that's important for the
liquidity picture.

Kevin Lewis

Sure, Karl; this is Kevin. I would expect us to be able to leverage the export
credit agency financing we have in place for immaterial amounts of the $150 million
that we just described as Christie just walked through. So I think order of
magnitude, call it somewhere between a little bit – more than $150 million of
availability on that facility.

Karl Blunden

Okay. Thanks very much.

Operator

Thank you. Our next question is from the line of Seth Rosenfeld with Exane BNP.
Please proceed with your question.

Seth Rosenfeld

Good morning. Thank you for taking our questions today. If I can ask a question on
balance sheet and cash generation fees, obviously the very strong cash generation
in Q3 with driven principally by working capital. I remember at the time of Q2
results, you've guided to a second half release of 250 and have achieved all of
that in the third quarter. What should we expect for the fourth quarter in terms of
working capital performance? Is there need for transaction reinvestment going
forward as volumes continue to recover? I'll start there please.

Dave Burritt
Yes, thanks for that. And I think you all know that we spend a lot of time on this
cash management, in fact, reward structures are based upon the cash conversion
cycle time. So Christie and her team actually look at cash each and every day. And
again, as I said the incentives for our employees, a short-term incentive pay
across the whole company is focused on this portion. And we'll continue to make
sure that we keep pushing on cash, but I think Kevin, you had some more on that.

Kevin Lewis

Sure, Dave. A really great point, and Seth, to your question, I think we are going
to continue to be hypervigilant, when it comes to managing all things related to
cash, but especially working capital and inventory levels that are respected
facilities. The first goal is obviously always to be able to support our customers
in an increasing demand environment, obviously that is ever more important. So
we'll continue to look at the order book, see how orders are coming in. I wouldn't
expect us to have to build a material amount of inventory that flows through
working capital. So I think for purposes of the fourth quarter, we're going to make
sure we're well positioned to support what we believe will be a strong year into
2021. But don't expect any significant need for cash in the fourth quarter to build
inventory, to support that expected increased demand.

Seth Rosenfeld

Okay. Thank you very much. So I suppose that's guiding from being more neutral on a
quarterly basis, is that correct?

Kevin Lewis

I think that's a good approximation.

Seth Rosenfeld

Fine. And a separate question please on Europe. Obviously in Q3, you've benefited
from – it looks like an FX translation of benefit and also electricity compensation
rebate. Can you quantify those and comment on the recurrence of those? Thank you
very much.

Kevin Lewis

Sure, Seth. On the electricity rebate, that's something that came in specifically
for the third quarter, so you're absolutely correct in calling that out as a non-
recurring event moving forward. That's about a $10 million impact in the third
quarter that we wouldn't expect to occur into the fourth quarter. And then if you
look at the bridge chart 2Q over 3Q that we provided in our summary earnings
materials. The other category is largely reflective of the FX benefits that we had
in the third quarter. So that should help you to think about the size of the one-
time impacts or FX driven impacts in the quarter. But I would say looking forward
for Europe as Christie described in her remarks, we continue to be extremely
impressed with the cost and cash management of that business. So we'll look to
continue to build, the positive momentum and expect that segment to continue to
perform well in the near future.

Operator

Thank you. Our next question is from the line of Chris Terry with Deutsche Bank.
Please proceed with your question.

Chris Terry
Hi, David and Christie. I just wanted to ask a little bit more about key tech. So
you’re restarting just wanted to be clear that's really to do with managing your
raw material inventory through the winter period, as I understand it. Just wanted
to check that's not related to HSE now at 700 and anything that might restart on
the block Venice side? Thank you.

Dave Burritt

Thanks for the question, Chris. Yes, what we're doing is making sure we have the
inventory levels through the winter months, how the locks close up. So this is
clearly an inventory related, we've had some good success with the seaborne market
in terms of selling the pellets and things like this, but this decision that if we
make it, we’ll be to make sure that we get through the winter months, it's clearly
inventory related – tied with our customers.

Chris Terry

Okay. And then my second question on Big River. I wondered if you could give an
update on how long you think ramp up of size two might take and what the product
qualification of the substrates, the auto sector? How long that might take as well?
And then just any lightest thoughts on how you're thinking about the potential
reminder of that asset that you tied on? Thank you.

Dave Burritt

Yes. Thanks for that question as well, and Rich, I'll turn it to you in a moment
here. But as I said before, Big River Steel, they clearly exceeded our
expectations. And when we talk with Dave Stickler and his team, one of the things
they say about the Phase 2 ramp up, and their favorite words are on budget and
ahead of schedule. And they're certainly demonstrating that going a couple months
faster than I think even they expected they could do it. So we're very pleased with
the progress that they're having there. And as I said in my opening remarks the
work on GEN3 is clearly impressive.

And answering an earlier question, as far as the timing of getting to the future
faster, as I said, I'd like to have done that yesterday. And I think I said that on
the last call, but we have to see how things go and as long as we're making
progress, we feel very, very optimistic that we're going to be able to exercise
that option at the appropriate time in the future. Rich, maybe something else here.

Rich Fruehauf

Sure, Dave, thanks. And I think Chris asked, how long will it take for them to ramp
up Phase 2. My – our expectation would be that they're very experienced in startup,
they did on Phase 1, so we would expect Phase 2 as well to be ramped up relatively
quickly. Obviously they're finishing ahead of schedule, the completion of the
construction. So I think everything is, excuse me, pointing to a positive direction
as far as Phase 2a coming online as soon as possible. I mean, this is a very
experienced team, this is their core competency building and starting and running
mini mills. So we have a lot of faith that they'll get that done as quickly as
possible. As far as the qualifications, those are processes that can vary from
customer-to-customer, from OEM-to-OEM, but we're very optimistic that we should
hopefully have some results in 2021 for 2021 platforms.

Dave Burritt

They're really extraordinary of course building mini mills and then – as well as
operating mini mills and we saw that firsthand with our EAF number one in Alabama,
where they were generous with their training and, help as we launched first arc
here recently. So we had their folks come in and provide some coaching and
guidance, and our folks went to visit them. So, it's really been a great
collaborative effort. So we expect them to stay at their word as the way they work,
which is on budget and ahead of schedule and I expect that to be the same, ramping
up safely and making sure that, we get the volumes necessary to run that facility
extraordinary well, they've demonstrated they can do it so far, I don't know why
that would change.

Operator

Thank you. Our next question is from the line of David Gagliano with BMO Capital
Markets. Please proceed with your question.

David Gagliano

Great. Thanks for taking my questions. Just one quick follow-up from the previous
commentary on the Mon Valley project, after that $150 million spend in 2021, how
much is left – how much CapEx is left to complete that project beyond 2021. And
what's the timing on that incremental CapEx?

Kevin Lewis

So David, I’ll address your first question around remaining capital, and then maybe
we can let Rich talk a little bit about how we think about we proceed from here,
given some of the other considerations with that project. But first and foremost,
we think about what's been spent so far, including the $150 million that we plan to
spend next year. I would think order of magnitude, the remaining spend would be
somewhere between $1 billion and $1.2 billion for the remainder of the project.

But as Dave and Christie both talked about in their remarks, we feel comfortable
and confident that if we can proceed with the equipment purchases, especially given
we have financing to support the vast majority of that in 2021, that'll put us in a
good position to have the equipment in hand and give us some optionality and
flexibility, but maybe I'll let Rich talk about the optionality and flexibility and
how we think about proceeding from there.

Rich Fruehauf

Yes, sure. Thanks Kevin. So with respect to Mon Valley and project icon, there are
a number of permits that are required to proceed. We're pursuing those as fast as
we can, obviously there've been some impacts from COVID on some of the critical
path permits. So we continue to try to work and get those in place, but that's
obviously a stage gating item as we think about the CapEx spend for Mon Valley and
why we need to be nimble and maintain optionality.

David Gagliano

Okay. Is it – from a modeling perspective, should we assume that the majority of

that incremental spend is in 2022 or spread evenly between 2022 and 2023?

Kevin Lewis

I think what I would say David is that for 2021, $150 million is the right number
we're going to leverage the ECA financing that we have, and we will choose the
appropriate time what market conditions support it when the cash flow generation of
the business support it, when cash and liquidity support it to move forward with
the resumed groundbreaking and construction of the facility. But for now we're
focusing our attention on the equipment, getting it continue to be built out and
leveraging the ECA to make as a cash smart approach to proceeding with endless
casting and rolling.

Dave Burritt

I think that's well said, Kevin, the key word in all of this is really the
optionality. So we can decide to put it in Mon Valley, we can decide to put it
somewhere else. We have a lot of flexibility to decide where this goes and when we
pull the trigger on all of these things. So we'll have to see how COVID-19 moves
forward. And we have to see how the permitting process works. We're going to make
sure that we take care of our customers, and we're going to put the equipment in
place to make sure we deliver the most value keeping – making sure the employees
are taken care of, as well as the stockholder. So again, the key word here is
optionality. We're going to keep the flexibility and we're going to make sure that
we have this endless casting and rolling put in place at the appropriate time.

David Gagliano

Okay, great. And then just switching gears, my other follow-up question on the 40%
of annual contracts for 2021. I was wondering if you could provide an update on the
negotiations, the auto producers for 2021, and also if you can speak about your
2021 met coal contracts and costs there as well. And then the third part of that
question the $51 million improvement in overall maintenance and outage costs in
this quarter, obviously, I'm guessing a big chunk of that was with a ramped up
production rates, but should we expect outage costs to hold that lower level moving
forward, given these restarts or is there anything upcoming on the maintenance side
that we need to be thinking about that would move that quarterly bridge in one
direction or the other over the next few quarters? That was my last question.

Kevin Lewis

Yes. Sure David. Let me work backwards on your questions here. And I'll let Dave
speak a little bit about negotiations with customers here at the end. But related
to maintenance and outage, I think that from a maintenance and sustaining CapEx
perspective, we continue to be extremely diligent to understand the maintenance and
outages that are required in a given year to support our customers. So as you heard
from Dave, our focus remains on safety, environmental and reliability related
projects. So we'll put those at the top of the list from a priority perspective.
And we'll be disappointed and prudent how we proceed and other types of
investments, but nothing probably material in the fourth quarter or for next year,
if we think about big maintenance and outage costs.

On the coal side of things, we'll have some more information for you probably on
our next call, probably a little bit too early to get into the details now. But
maybe I'll let Dave then conclude with where we are with customers.

Dave Burritt

Yes. Thanks. I guess the annual contract negotiations in this market environment,
frankly, they're going very well. I think the most important thing that we need to
keep in mind is when it comes to discussions with our customers, we make sure that
we present them with the U.S. deal value proposition, and we're actively engaged
with those customers on the critical issues that are most important to them. And of
course, there's always the price, but there's the quality. And for us now, it's the
innovation with certainly our Best of Both strategy and the successes that we're
having early on with Big River steel. And the core service really matters a lot,
just to name a few of those things.
For us, we're moving up the food chain and so we're having – we're showing very
good win rates with the new platforms and in the strategic markets where we want to
compete and compete well. We're able to show that we have a differentiated value
proposition. And of course, I think everybody knows this when you're dealing with
customers. The most important thing is to listen to them, have the dialogues with
them, understand their goals and their targets and how you fit into their future.

And the closer you get to the customer and the better you understand where they're
headed. I think it's better for everybody. And I think you probably saw our
announcement, we have now clear irrefutable focus with Chief Commercial Officer
that we got from outside the steel industry, and we feel greatly, Ken Jaycox is off
to a great start and understanding the customer base and we're expecting to bring
some greater customer intimacy and focus, making us more customer-centric
organization moving forward.

Operator

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

Nick Jarmoszuk

Hi, good morning. Question on the Fairfield, EAF. In the earnings presentation, it
says savings on seamless are $90 per ton. Can you give us a sense for what the
gross cost savings are from that?

Dave Burritt

Yes, Nick. So, I mean, that's obviously going to have some volume dependency to it,
but let me unpack the $90 per ton a bit for you so you’ll have some context. And
then when we size the opportunity to reduce in-sourced rounds cost compared to
externally sourced rounds, I mean, we're one of the big drivers was kind of just a
transportation and logistics component to the cost structure of having externally
sourced rounds.

So our belief is that obviously the energy market is challenged, which may lead to
lower levels of utilization at that EAF initially, but we think we can be cost
competitive on a per unit rounds costs, which would be much lower than our
externally sourced pellet, especially taking into consideration the freight savings
we would have getting what was once a third-party supply round to our facility
versus having that on campus at Fairfield. So, probably more to come, we'll see how
the EAF ramps, how the tubular business boost forward. But we're pretty confident
that $90 per ton is achievable across a pretty wide range of utilization level at
the electric arc furnace. So a good opportunity for our tubular business to achieve
some significant structural cost savings.

Nick Jarmoszuk

So in terms of the savings is going to be flowing through the Tubular segment?

Dave Burritt

That's correct.

Nick Jarmoszuk

And of the shipments, can you give us a sense for how much of that business is
seamless?

Dave Burritt

Sure. So as we discussed on previous calls, we had indefinitely idled our Lone Star
operations with our sole welded pipe facility. So as we look at the third quarter
shipment volumes, we're about a 92% mix of seamless in the third quarter. And we
would expect that to continue to increase to a higher percentage of seamless mix as
we focus and consolidate our operations in the Fairfield.

Operator

Thank you. Our next question is from the line of Timna Tanners with Bank of
America. Please proceed with your question.

Timna Tanners

Yes. Hey, good morning and happy Friday. Wanted to first off, congratulate you on
starting up the new EAF and ask you about that. Second, but my first question was
regarding the Flat-Rolled market into the fourth quarter. And if we think about the
mix, given that hot-rolled is up to almost $700 a ton, it's had a big move, but
with automotive recovering so sharply, I've heard that you're really busy with
automotive contracts, which aren't as tied to the spot market. So just trying to
get the sense of your mix in the short-term, keeping in mind, of course, your long-
term, you've laid out.

And along the same lines, can you just tell us why the configuration remains as it
is given the very strong demand and Gary Works with the blast furnace there, what
you would think that that might be a target to restart soon. So I just wanted to
ask about that again. Thanks.

Dave Burritt

Okay. Thanks Timna. I think as we look forward into the fourth quarter, we would
certainly expect average proceeds to increase. We continue to believe the
automotive book of business will remain strong, and we're certainly seeing that. So
we'll look to really optimize on mix and pricing outcomes as we balance contractual
obligations and fixed price contracts with participating in the spot market.

When it comes to the blast furnace at Gary, I mean, I think we've said it many
times before we continue to evaluate the order book. We continue to configure the
operations to best meet the order book and the needs of our customers. At this
point in time, we don't we haven’t made a decision on Gary number four. That's
currently not in our restart plans, but we'll continue to evaluate it moving
forward. But first and foremost, we're going to take care of our customers. And
we'll keep a close eye on the order book and sure we have the melt, we need to
support their demand moving forward.

Timna Tanners

Okay. And then back to tubular again on the new mill. So great startup but I have
heard that utilization is pretty low, again, pointing to the weakness in the energy
markets you point out. So what is the utilization across tubular if you could just
remind us of that. And like you said, the $90 per ton depends on your utilization.
So can that EAF be profitable at these levels? And are there other uses of those
rounds that you produce perhaps to optimize the facility?

Dave Burritt
Sure. In the third quarter, we shipped about 60,000 tons of seamless pipe out of
the Tubular segment. And as I mentioned, I'd expect that to continue to be an
increasingly higher percentage of our total mix in tubular since Fairfield will be
our sole operations. So looking forward, we won't comment specifically on where we
expect tubular volumes to go, but I would expect us to be able to more fully
leverage that EAF, given that we'll be moving towards pretty much 100% mix of
seamless pipe in the tubular business.

And when it comes to utilization, I mean, I think your question, Timna, really
validates why having an electric arc furnace in your footprint is so important. We
know that you can run an electric arc furnace at lower levels of utilization. You
don't have the inherent inefficiencies or frictional costs of operating some of the
integrated assets.

So we are confident that we can operate the electric arc furnace at a level of
utilization that's cost-effective and expect to see other cost savings related to
the in-sourcing of rounds like transportation, which should provide a tailwind for
that segment moving forward. So that's where we are currently, we'll keep you
updated if our views change, but the current business case is to leverage that
furnace for rounds production for internal consumption.

Operator

Thank you. Our next question is from the line of John Tumazos with John Tumazos.
Please proceed with your question.

John Tumazos

Thank you. With the lower CapEx target for next year, do you have a specific target
in mind for debt reduction next year with improving steel prices in markets? Or are
you teeing off to buy the remaining half of Big River Steel next year? And that's
why the CapEx is so restraint.

Dave Burritt

Well, thanks for that question. Obviously, we have a lot to think about here. And
as we think about our balance sheet, what we tried to do, we look in terms of
liquidity, the fixed charge ratio and making sure that we have 1.5 times that
amount. So we think of liquidity about 1.5 million is the way we think about
managing our cash through this next year. And depending upon what we see in terms
of customer demand, what we see in terms of cash flows and what we see about the
future, we can make the determinations of how much we'll pay off in terms of debt
or an effect exercise the option on Big River Steel is a possibility or pursue
other capital expenditures.

Typically we don't spend a lot of time talking about 2021, but I know in this time,
it is very uncertain about what happens with COVID-19 and while it does seem like
uncertainty is the word of the day. We go back to the optionality that we have with
all this cash that we're carrying. So we can decide what are the best moves that we
can make with, again, our top priority of course, be in Big River Steel than the
endless caster than the Gary hot strip mill. And then frankly, the Dynamo line in
USSK. So those are the priorities in terms of our CapEx and I think Christie is
going to add something.

Christie Breves

Yes, I'd just say, our top financial priority remains cash and liquidity. And we
think strong liquidity and cash flow are extremely important as we continue, not
just to make sure we're going to make it through COVID, but also to execute the
strategy. As Dave said, we have $2.9 billion of liquidity, $1.7 billion of cash. So
we're increasingly optimistic about the improving market conditions. As you know,
our debt maturity profile has been extended.

We continue to work on our business resiliency planning so that we're prepared and
do scenario analysis around the future and what it might hope. So as we move into
2021, we're trying to take a cash model approach to capital as we already talked
about. So that we're well positioned to continue to execute our strategy because
our strategy is all about delivering more resilient earnings, long-term cash flows
through cycle and differentiation on the basis of both cost and capability and as
you know, we have several of these strategic projects that are coming online. Our
PRO-TEC JV coating line has started. We have the new EAF. So all of this is a line
of sight to improve profitability and cash flow, which will help us deleverage in
the future.

John Tumazos

Thanks. I'm still wondering if you have a debt reduction target, or you're going to
buy Big River or you just want to have a big cash balance on hand is a precaution?

Dave Burritt

Well, I'm going to continue to let you wonder. We've got a lot of work to do here,
we’re going to get through this year and we're going to make sure we make those
important strategic choices at the appropriate time.

John Tumazos

Thank you.

Operator

Thank you. Our next question is from the line of Matthew Fields with Bank of
America. Please proceed with your question.

Matthew Fields

Hey, everyone, just going back to some earlier comments about your Big River
starting to roll some of your proprietary grades. Is the Big River substrates
starting to rent time, essentially on your rolling lines and some of your JV
rolling facilities and finishing facilities like PRO-TEC or anything else?

Dave Burritt

Yes, we're not going to get into a lot of the details related to that, but if you
think about what we're doing with Big River Steel is actually a proprietary process
that has a few elements to it. It's the research and development that we have here
at U.S. Steel, which frankly, I think it's second to none. We had an incredible
team here that's been doing some great work with our customers. And then you marry
that up with Big River Steel’s technologically advanced LEED certified flex mill.

And then also marry that up with our proprietary finishing processes. So it's
basically R&D plus Big River advanced technology LEED certified with our finishing
process, with our PRO-TEC operation where we're just actually going through the
finishing up on the CGL3. The combination of all of those things position us very
well for – and continued development of this Generation 3.
And as we said, we had the 11 grades of steel that are well underway. And frankly,
I can't believe that the team has been able to move this fast in such a short
period of time. So we're not going to tell you what the proprietary process is for
all of these things, but there's a whole lot of technical elements that our team
has been working very closely together to make it possible.

Rich Fruehauf

Yes, this is Rich. I just had one thing to what Dave said, which I think is going
to be important as we move forward. Not only can they make those proprietary grades
of advanced high-strength steel GEN3 steels at Big River, that's a low carbon
footprint facility. So not only is it LEED certified, but when you think about the
world we're in today and moving into where carbon emissions, greenhouse gas
emissions are increasingly important to our customers, the ability to make those
steels at a low carbon footprint facility is going to be an additional value that
we can offer to our customer base. So we're really excited about the achievement so
far.

Matthew Fields

Okay. And then as a follow-up to that early in the call, I think Mr. Burritt, you
mentioned that you'd like to pull the trigger on Big River yesterday. If you had
pulled the trigger yesterday, how would you fund it?

Dave Burritt

That's great. I also said I'd pulled the trigger yesterday on the last quarterly
call as a recall, but you've seen our balance sheet. We've got cash in our balance
sheet, so we could certainly do it with that cash.

Matthew Fields

Okay. Thanks very much. And good luck.

Operator

Thank you. Our next question is from the line of Andreas Bokkenheuser with UBS.
Please proceed with your question.

Andreas Bokkenheuser

Thank you very much. Just a follow-up question on Keetac, you obviously mentioned
supply reliability over the winter, which may makes a lot of sense. How should we
think about that kind of going into the spring and basically later into next year,
I mean, presumably you're not going to shut it back down again. So how do we think
about that? What's the strategy there? Are you going to just buy less from outside
third parties? And then you read through Granite City, Blast Furnace A, that's
basically the question. Thank you very much.

Dave Burritt

That's another really good question. And we already said that it's inventory
related here, but the key piece of course, is who are the customers and what did
the customers want. And I think we've been able to demonstrate in a short period of
time that the pellets that we make on the range are in high demand.

We have been selling on the seaborne market and we've actually picked up a couple
of agreements here in North America. So we feel pretty good about that business and
the opportunity to actually grow it. But for right now, we have to figure out, does
it make sense to go through the – how long we'll keep Keetac open or not, if we
have to figure out, does it make sense to do it right now. And obviously, there's
some decisions to be made, but it's going to be customer-driven.

Rich Fruehauf

Yes. Dave, the only thing I would add to that for some additional context is around
the financial implications of the potential decision. The restart costs in and of
themselves are not material, less than $10 million, if we choose to move forward
with the restart of the Keetac facility. And then not only cost them on the flip
side aren't significant either. So we'll continue to be flexible as we evaluate the
potential to restart Keetac.

And if we decide to go ahead and restart that will also be flexible in how we
proceed running that asset into the future. So, as Dave mentioned, it's all about
the internal demand. It's about satisfying a third-party customers and we'll make
sure we have the footprint as we always do to support the business.

Andreas Bokkenheuser

Got it. Thank you very much.

Operator

Thank you. And that concludes the Q&A session. I will now turn the presentation
back over to our presenters.

Kevin Lewis

Thank you, Dave, would you like to wrap up with some final remarks?

Dave Burritt

Thanks everyone for your interest in U.S. Steel. And before I sign off, I do want
to thank our employees and our customers for their continued support. To our
employees, thank you for your continued commitment to safety and delivering for our
customer. I know it's been a tough year, but you've rose to the challenge. Thank
you so much. Our future is bright. To our customers, thank you for your
partnership, as we collaborate to develop winning solutions together. Now let's get
back to work safely.

Operator

That does conclude the conference call for today. We thank you all for your
participation, and we ask that you disconnect your lines. Thank you, and have a
great day.