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Edited Transcript of X earnings conference call or presentation 31-Jan-20 1:30pm GMT

Q4 2019 United States Steel Corp Earnings Call

PITTSBURGH Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of United States Steel Corp earnings conference call or presentation Friday, January 31, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine S. Breves

United States Steel Corporation - Senior VP & CFO

* David Boyd Burritt

United States Steel Corporation - President, CEO & Director

* Kevin Lewis

United States Steel Corporation - General Manager of IR

* Richard L. Fruehauf

United States Steel Corporation - Senior VP- Chief Strategy and Development Officer

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Conference Call Participants

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* Alexander Nicholas Hacking

Citigroup Inc, Research Division - Director

* Brian J Lalli

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* David Francis Gagliano

BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Karl Blunden

Goldman Sachs Group Inc., Research Division - Senior Analyst

* Matthew James Korn

Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Seth R. Rosenfeld

Exane BNP Paribas, Research Division - Research Analyst

* Tyler Lange Kenyon

Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to United States Steel Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. As a reminder, today's call is being recorded.

I'll now hand the call over to Kevin Lewis, General Manager, Investor Relations. Please go right ahead.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [2]

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Thank you and good morning. We appreciate your continued interest in U.S. Steel and welcome you to our fourth quarter and full year 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 fourth quarter and full year 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 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, who will begin today's presentation on Slide 4.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [3]

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Thank you, Kevin. Good morning, everyone, and thank you for your interest in U.S. Steel. We are pleased to update you on our progress since we last spoke in November. 2019 was a year we set the company on a new strategic path. We announced and closed on a series of investments that uniquely position our company to bring the best of both, the integrated and mini mill steelmaking technologies to the market for our customers, for our employees, for our stockholders. We are enthusiastic about our strategy and have a quiet confidence about how we are executing.

Have markets been challenging over the last several quarters? Yes. But we are confident that things are improving as we turn the page to 2020. We are confident in our view that the market has hit bottom. We are confident that our focus on cash management, industry-leading cash conversion cycle and opportunistic capital market activities have positioned us well for continued execution. And finally, we are confident in our U.S. Steel team because we achieved significant breakthroughs together in 2019.

Let me begin today's call with our strategic performance on Page 5. It starts with our safety performance. And we set a record in 2019, all-time best Days Away from Work performance and no days away at Europe or Tubular. We strengthened customer relationships with an increasing focus on providing value-added solutions.

Here are a few examples. In automotive, we have been shipping our XG3 material for key safety components on the Jeep Gladiator that launched last year. And we are helping other automotive customers design XG3 into their vehicles that are launching later this year with even more next year.

In Tubular, we developed a new innovative connection which improves customer efficiency and secured additional monthly volumes from a large rig operator in the most active oil basin in the United States. We announced significant investments in best of both technology, including our minority investment in Big River Steel and our investment in state-of-the-art Endless Casting and Rolling at our lowest cost mill at Mon Valley. We raised $1.1 billion of incremental capital that gives us optionality for nimble execution. We achieved $75 million of run rate fixed cost reductions and have line of sight to delivering our $200 million target a year ahead of plan.

We announced a business smart approach to achieving our 2030 Greenhouse Gas emission intensity reduction target aligned with the investments we are making in our best of both strategy, and we significantly improved the funded status of our pension and OPEB plans, reducing our liabilities and extending the time line for potential mandatory contributions to the plan. These are significant achievements and quarter-by-quarter and year by year, we are transitioning the business.

Let's turn to Slide 6. Looking to 2020, we believe markets in the U.S. have hit a bottom. Our flat-rolled order book is healthy and customer interactions suggest demand should be solid. We are particularly optimistic about construction activity, which has shown strong demand in typically weak seasonal periods. The automotive market remains strong as inventory levels entered the year low and recent industry publications suggest build schedules should increase in 2020. Inventory levels at service centers are also at levels that suggest 2020 buying activity should increase. We are beginning 2020 with the lowest months on hand to start the year since 2014.

In Europe, improving prices are beginning to increase market sentiment. Distributors and service centers have low inventories and steel production cuts across Europe have better balance supply with demand. Still, we are starting at a very low base and raw material prices remain high relative to steel prices in the region.

While there are preliminary signs of improving conditions, at this time, we expect our idled blast furnace to remain offline in 2020. While market conditions remain uncertain for our Tubular segment, we are excited to complete the electric arc furnace at Fairfield this year. The electric arc furnace will be up and running in the second half of the year and will provide the rounds substrate to our seamless pipe mills. We believe this will allow us to respond more nimbly to continued market volatility in this segment.

Turning to Page 7. Our keys to execution are aligned with our strategy: remain nimble and preserve optionality; advance strategic projects and transition the footprint. As we demonstrated, successfully executing our strategy requires flexibility, our current capital spending budget for 2020 remains at $875 million, with 50% of the budget dedicated to our highest priority strategic investments. In addition, the incremental capital that we raised and our strong liquidity position gives us the flexibility and optionality to access additional capital on an opportunistic basis. We are also exploring opportunities to divest noncore assets, including highly attractive properties in our real estate portfolio.

Turning to our strategic projects. Big River remains our top strategic priority, and we continue to be encouraged by their progress. Big River reports Phase 2A expansion is progressing ahead of schedule and is on budget. Our collaboration with the Big River team is also off to a great start and has so far validated the logic of our investment as our complementary assets bring new opportunities to consumers of steel. Thank you to the entire Big River team for approaching our partnership with the same passion that you're using to build your company and for your commitment to safety.

We also continue to progress our investment in endless casting and rolling and cogeneration facilities at the Mon Valley in 2020.

We have completed our detailed engineering and have identified 2 modifications to the scope of our investment. We amended the environmental permit applications to include a new ladle metallurgy facility in order to ensure the Mon Valley can produce the projected volume of advanced high-strength steels while maintaining its highly competitive cost structure and operating efficiencies.

In addition, we also updated our expected capital cost of the cogeneration facility that we will build at Clairton. We remain committed to delivering the improved environmental performance across the Mon Valley.

We now expect the total investment to be approximately $1.5 billion. But as you would expect, we have adjusted our overall project portfolio to ensure the increase in this project cost does not result in incremental cash requirements for the business. And of course, as I said, CapEx for 2020 remains at $875 million. The expected benefits of the project remain unchanged: $275 million of run rate EBITDA benefits, including the $35 a ton structural cost improvement from better yield and enhanced operating efficiency; differentiated product capabilities, including gauge and width combination, not available today in the United States; fit-for-purpose attributes, such as providing the steel for our industry-leading XG3 advanced high-strength steel; increased optionality across our flat-rolled footprint, so all operations run more efficiently, and; significantly improved environmental with the construction of the complementary cogeneration facility at our Clairton Works. We are truly excited by this high-tech, low cost, highest capability, endless casting and rolling mill in Mon Valley.

As we mentioned earlier this year, we will complete our EAF investment at our Fairfield tubular operations, and we'll also begin shipping substrate to the new advanced high-strength steel, CGL, at PRO-TEC. As we announced on December 19, we will begin transitioning our footprint as we plan to indefinitely idle a significant portion of our Great Lakes Works beginning in April.

We have been working with our customers to ensure a smooth transition as we source their steel needs from other facilities within our North American footprint.

Before I hand it over to Christie, I want to reemphasize my commitment and excitement for the future of U.S. Steel. The turnaround of U.S. steel is well underway. I am confident we are focused on the right priorities in the right markets with the right people to create the right value for our stockholders. Our future is bright and I'm confident our progress will continue in 2020. Christie?

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [4]

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Thanks, Dave. Good morning, everyone. I'm excited to be participating on today's call in my new role as CFO. I look forward to meeting many of you over the next several months.

Let's turn to Slide 8. Adjusted EBITDA for the quarter was $4 million or approximately $30 million above our guidance issued on December 19. Our flat-rolled operations performed well at the end of the year and exceeded our expectations on shipments and cost management. This was the major driver behind our better-than-expected fourth quarter results. As expected, our flat-rolled fourth quarter results were lower versus the third quarter. The flow-through of lower steel selling price in the back half of 2019 accounted for over half of the quarter-over-quarter EBITDA change.

Our European segment also saw lower selling prices impact their results. This was offset by a combination of lower iron ore costs and onetime items. Our Tubular segment continued to be impacted by market conditions, including continued high levels of imports. In the quarter, we maintained our intense focus on cash management, and we released $400 million of working capital and ended the year with nearly $750 million of cash on the balance sheet.

Let's now go to Slide 9. We continue to be positioned well against our balance sheet priorities. Our cash balance of $750 million and total liquidity of nearly $2.3 billion is well above our minimum targets over the investment horizon. As Dave mentioned, we remain flexible to support the continued execution of our strategy. The incremental capital we raised last year and our 2020 capital spending target of $875 million provides us with the optionality to access markets opportunistically. The capital we've raised so far has come from efficient sources and has been complementary to our existing capital structure and debt maturity profile. Our goal is to maintain this flexibility with any future capital raises.

Before I turn it back to Dave, I want to touch on our current view of the first quarter on Slide 10. We currently expect the first quarter to be the trough for the year and anticipate our first quarter results to be similar to the fourth quarter.

Let me quickly cover a few key points. Like every year, we expect the seasonality of our mining operations to be a headwind for the Flat-Rolled segment. Due to winter weather and the restrictions placed on the Soo Locks, our mining operations do not ship pellets to our blast furnaces in the United States or to our third-party customers in winter. The locks close by mid-January and they do not reopen until mid-March or later. While our mining operations still produced pellets during this period, we opportunistically execute planned outages during the winter to position our mining operations to run more efficiently the remainder of the year. We currently anticipate steel shipments in the first quarter to be down in our Flat-Rolled and European segments.

First quarter will also include a quarter's impact of our portion of Big River Steel's depreciation and amortization and net interest expense. As we outlined in our earnings presentation posted yesterday afternoon, Big River expects their 2020 depreciation and amortization to total approximately $150 million and their net interest expense to be approximately $95 million. When you partner with the newest and most technologically advanced mill in the U.S., higher levels of depreciation and amortization and interest are not unexpected as they ramp up production and scale.

I'll now turn it back over to Dave.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [5]

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Thank you, Christie. Let's turn to Slide 11. We are confidently executing the strategy we laid out for you in 2019. We have the team in place to be successful, and I couldn't be more excited to get to the future state. 2019 was an important year for our company. We moved the company forward and set the foundation for continued strategic execution. 2020, we'll see the start-up of our EAF at Tubular, the state-of-the art advanced high-strength steel CGL at PRO-TEC and continue to steady progress on our best of both strategy.

Kevin, let's move to Q&A.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [6]

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Thank you, Dave. (Operator Instructions)

Operator, could you please queue the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll proceed with our first question on the line from Matthew Korn from Goldman Sachs.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [2]

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First, a market question. Dave, you outlined some of the reasons that you believe that we're at a bottoming of the market, some of the destocking that's going to wound down. Could you go over what your lead times currently are across products, maybe versus a couple of months ago versus last year, some things that make you encouraged?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [3]

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Yes. Yes, thanks for the question. I appreciate that. I guess, first, I'd say, our view is that market conditions are stabilizing and the underlying demand is solid. We are hearing from our customers and the support, I guess, I'd say, it's in the numbers. Lead times are strong at 5.6 weeks. And that's 2 weeks more than a year ago. On service centers, year-over-year inventories are below historical norms and give us confidence that normal buying patterns will continue. Our melt backlog remains healthy. And frankly, our conversations with customers suggest that healthy demand in expected key segments like automotive, appliance and construction, it looks good.

But I don't want to give anybody the wrong impression about the first quarter. I'd just want to go back to this. As we all know, this is typically our weakest quarter due to seasonality issues with mining and the potential for weather impacts. And this year is not expected to be different. That we expect flattish results in the first quarter versus the fourth quarter. So just to be clear, again, the first quarter should mark the trough and be similar to the fourth quarter of 2019. And results are expected to improve throughout the year.

And maybe, Christie, do you want to add anything to that?

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [4]

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Okay. Well, let me add a few more details on the current full year expectations. We are expecting to ship 10 million tons to third parties in 2020 from flat-rolled. And this takes into account the indefinite idling of a significant portion of Great Lakes Works that's planned to begin in the second quarter. We are also planning to take a 48-day outage at Gary Works No 4 blast furnace in April. So we'll be building up inventory in front of that in the first quarter.

In Europe, we're seeing some signs of life but we're very off -- but that's off a very low base. So that's why we're continuing to expect to have one blast furnace offline in Europe in 2020 and to ship 3.2 million tons. Our Tubular segment is expected to ship about 900,000 tons in 2020. And the biggest difference between 2020 and 2019 shipments for that business is the No. 1 ERW mill, and that's going to be running for a full year in 2020. And this line was restarted in the late second quarter of 2019, and it's expanded our suite of products for our Tubular customers.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [5]

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Great. I appreciate all that detail on the operations side. Let me follow-up a little bit in terms of pricing. As best as you can characterize it, how should we be thinking about the effects of the contract price negotiation that you finished over the past year? And how should we think about that even going into the next quarter and thinking about the effects on the flat-rolled side?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [6]

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Yes. So thanks. This is Kevin. So related to fixed-price contracts, obviously, we won't get into too many details about the results of those. But we're very pleased with where they've ended up, given market conditions during the times of negotiation. But one of the things that we've really been focused on is creating more of a staggered approach to negotiations on these fixed-price contracts. So we've been attempting to smooth the negotiation period with our -- with the OEMs to enter into these fixed-price contracts with us. So we're seeing good success on that front. And that should help take some volatility out of the year-over-year changes in fixed-price contracts.

Speaking more broadly to pricing, I think there are a couple of key dynamics that we're paying attention to in the marketplace. The first is related to scrap. And I think there's a market sentiment is soft sideways on scrap. In our view, that is not atypical in February. If you actually look back over the last 9 -- 10 years or so, February scrap is below January scrap in 9 out of the last 10 years. Coincidentally -- or not coincidentally, HRC prices have increased 6 out of those 10 years, if you look at February versus January. So we don't necessarily believe that just because you might have soft sideways on scrap that, that means HRC prices are vulnerable as we move forward in the first quarter. We continue to believe that demand will eventually be the catalyst for prices.

And then if you look at spread versus kind of the downstream products, we're clearly a bit extended, about $230 a ton spread. We look at that more as attributable to the strong demand for downstream products, as Dave and Christie both alluded to, in auto, construction, appliance, et cetera. So we think that speaks to the health of the marketplace as lead times extend and order entry rates remain strong.

So we look at all that as supportive of higher HRC prices moving forward. And if you look at some of the indexes, multiple publications you see a wide range of prices being quoted right now. So we're optimistic that the pricing environment will continue to improve.

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Operator [7]

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We will proceed to our next question on the line from the line of David Gagliano from BMO Capital Markets.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [8]

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Just first of all, just a quick follow-up on that last answer. Just if -- for modeling purposes, in the first quarter, should we expect the realized prices in flat-rolled to be up or down versus the fourth quarter? That's the follow-up question.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [9]

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Okay. I would say, on a quarter-over-quarter basis, we're looking at relatively flattish average selling prices in our Flat-Rolled segment.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [10]

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Previously, it was indicated the plan, I think, was the tap into the debt capital markets. Has that expanded into considering tapping into the -- or not considering into tapping into the equity capital markets as well?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [11]

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This is Dave. First, I'd say, given where our position is with the amount of liquidity that we have today and the optionality that we want to have to be opportunistic, we feel like we're in pretty good shape. So it's not that we have to go and tap the markets in 2020. But we certainly could if things present themselves in a positive way for us to move ahead and get a total solution to make sure that we can put in place our best of both strategy. But we're going to be appropriately patient and we'll look at all opportunities to access the markets.

You'll also recall that back in October with our announcement of Big River, we highlighted that we have the opportunity to monetize pellets in Minnesota. And so we're looking at that possibility as well as real estate assets and other opportunities that can give us the required cash flow to deliver on our best of both strategies.

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [12]

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Now I'd say, we're in really a good shape right now because we already took a lot of activities. We already did a lot of things to get ready. We decreased our capital from $950 million to $875 million expected spend for 2020. We've already secured $1.1 billion in the fourth quarter of 2019. We have good, strong liquidity. We have a minimum target of liquidity of $1.5 billion, right now, we're at $2.2 billion. Cash also of $500 million and we have $750 million on the balance sheet. So we're in a pretty strong position to be able to be opportunistic as far as financing and the capital raise, particularly not needing to raise capital in 2020.

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Operator [13]

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We'll proceed to our next question on the line from the line of Seth Rosenfeld from Exane.

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Seth R. Rosenfeld, Exane BNP Paribas, Research Division - Research Analyst [14]

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A couple of questions on the European business, please, trying to better understand the gain that you reported in Q3 on your CO2 cost. Can you help us better understand what drove that benefit in Q4? And how that compares to the guidance for that $35 million improvement in 2020 year-over-year. Are those the same factors with regard to carbon emission credits? Or will they be different over those 2 periods? I'll start there, please?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [15]

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Yes. Sure, Seth, this is Kevin. So when you look at 2020 and the favorable change you mentioned related to CO2 credits of $35 million versus 2019, as you're well aware, you need to purchase CO2 credits above and beyond your designated allotment. And under a 3-blast furnace configuration in Europe, we would be required to purchase some CO2 credits externally. Under our 2-blast furnace configuration, we're obviously using less CO2 credits and that's what's driving the favorable change year-over-year in Europe.

You did see some onetime items in the European segment in the fourth quarter related to electricity rebate, that is kind of a typical year-end process with the Slovakian government related to electricity. So we called that out because it was something that was different versus the third quarter and more of a onetime event. So that should cover the majority of the onetime events that you saw as well as the expectations of CO2 credits for next year.

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Operator [16]

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We'll proceed to our next question on the line from the line of Karl Blunden with Goldman Sachs.

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Karl Blunden, Goldman Sachs Group Inc., Research Division - Senior Analyst [17]

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You mentioned the CapEx increase at Mon Valley. Is there -- are there any specifics you can share about the cadence of CapEx and whether that increase leads to an uplift or an increase in the expected EBITDA uplift that you had in mind when you initially announced the plan?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [18]

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Yes. Karl, this is Kevin. Look, if we think about the distribution of the CapEx over the next few years related to the endless casting and rolling and cogeneration facility investment. As Dave mentioned earlier, for 2020, there's no change to our $875 million of CapEx, which included about $175 million to $200 million for this particular project. So no change this year in the scope of the project.

Looking forward to '21 and '22, we expect those to be the 2 largest years of CapEx with 2021 being a little bit larger than 2022. Obviously, as we ramp our engineering and construction we will have our highest levels of spend on this project in 2021. And then a little bit in 2023 as we complete things, but the timeline really is unchanged with first steel being in 2022.

The $275 million of EBITDA remains intact. If you think about a second LMF at our Mon Valley facility, we view that as a way to make sure that we're maintaining the efficiency and low-cost structure as we expect demand from our customers to grow from this differentiated product. So it's really something that we introduced into the permitting and the scope in order to ensure that facility remains top quartile in the U.S.. And then the increase in spend in the cogen was really related to making sure we hit those environmental benefits that we're working so hard to achieve across the Mon Valley. So $275 million remains intact. And as Dave mentioned, we're extremely excited about the capability differentiation this line is going to bring to the market. And then we're going to be able to solve a lot of really great problems for our customers and provide them with a whole lot of value.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [19]

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Yes. Our customers are excited about this when we meet with them. And we're certainly excited about it because, ultimately, we believe this will be the most capable mill in North America. We'll be able to produce coils up to 76 inches wide and gauges as thin as 0.023 inches. Now think about that. That's the equivalent to the thickness of 6 human hairs stacked on top of each other. We're incredibly excited about the possibilities of this. And that fits in so well with our best of both strategy. Coupled with the work that's being completed this year at PRO-TEC, we believe we have a winner and with this extra CapEx of $1.5 billion -- remember, this is an internal rate of return of at least 15% over the investment horizon without increasing capital elsewhere because we're more flexible, we're more nimble and we can do puts and takes because of the revitalization of asset program has improved our operations so that we can be more flexible. We are excited about the endless casting and rolling line at Mon Valley.

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Operator [20]

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We'll get to our next question on line --

(Operator Instructions) And we'll turn to our next question on line from Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [21]

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Just want to follow-up on some modeling question and then a bigger picture one, please. So just on your comments about 1Q results similar to 4Q, you also said sort of 1Q shipments will be down sequentially in flat-rolled and in Europe. Realized prices will be flat to 4Q in Flat-Rolled. So does that mean kind of we're thinking -- I know you don't want to give EBITDA guidance, but EBITDA in 1Q, similar to 4Q or even potentially worse with fewer shipments and flat pricing?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [22]

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Well, so I think -- this is Kevin. So I think the description of the quarter related to shipments and prices is really why we believe the first quarter will be similar to fourth quarter. So obviously, that's -- we've taken that into consideration in our latest look at the quarter. But you're right, we expect shipments to be down a tad in the first quarter in both flat Rolled and Europe. And as I said, average selling prices remained flattish in Flat-rolled. So that should help calibrate you around our latest expectations for the first quarter.

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Operator [23]

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We'll proceed to your next question on the line. From the line of Alex Hacking with Citi.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [24]

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Yes. And congrats on the new safety record that you set last year. In terms of questions, first question would just be, what do you expect for working capital this year? That was an important source of funds last year. And then secondly, with steel prices at current levels, given your CapEx program, where do you think that you would end the year in terms of net debt?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [25]

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This is Dave first. Now Christy is new as CFO, and I want to thank her for the leadership in this space. The weekly cadence, the business rhythm on the cash calls that include, not just our financial folks but our operators, our sales and operations planning teams enabled us to be able to have this really strong finish with the release of $400 million in working capital this last year. So thank you for that. What's in store for us here in 2020?

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [26]

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Okay. Well, thank you, Dave. Thanks. Yes, we do put a very intense focus on working capital here. I actually lead a team where -- it's a cross-functional team made up of not just accounting people but sales and operations and planning, operations people, procurement people, we're focused on reducing working capital every single week with clear targets and actions. And the fourth quarter result was a result of that. There were several specific inventory projects that came in and delivered that $400 million, and also we got contributions in inventory in the Tubular business and the USSK business because that's a global team.

But looking forward to 2020, we are expecting to build inventory in the first quarter and getting ready for the Blast Furnace No. 4 at Gary is going to go down for 48 days starting in April for a planned outage. So we will be building inventory in front of them. But then during the year, we will be taking out inventory and we -- and other working capital overall, working capital will be a slight improvement in 2020. We will continue to decrease working capital, slight improvement for 2020.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [27]

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And related to your question around net debt, I don't think we're going to get into what we think our net debt levels maybe at the end of the year. Obviously, that's going to be dictated by any activities we choose to make in the capital markets. So more to come on that at a later time, but we probably won't into those details now.

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Operator [28]

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We'll proceed to our next question on the line from John Tumazos from John Tumazos Very Independent Research.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [29]

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Over the years, the corporation has idled a few plants. Could you give us a little rundown of the particular states where you'll be selling real estate? I recall over the years, there were vast tracks in Conneaut Ohio or half of Jefferson County, Alabama. There's a lot of ground around the company, please.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [30]

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Sure, John, this is Kevin. We do have quite an attractive portfolio of real estate. Obviously, as we've operated throughout the country for many, many years. We've acquired some real estate. So let me just go through maybe a few, and then I'll hand it over to Rich to provide some more strategic context. But I think there are a few that we're, particularly, excited about. If we think about our Keystone Industrial Port Complex in the eastern part of Pennsylvania it's an extremely attractive piece of industrial real estate with some very unique attributes that drive a lot of value for us and a potential buyers.

So we're excited about the opportunities related to that property. There are others across the U.S., as you mentioned, in Alabama, where we have more residential and nonindustrial commercial developments that could be of value. So we're going wide -- eyes wide open. As Dave mentioned, we're continuously focused on value and finding sources of funds to support the continued execution of our strategy. And when we look at the real estate portfolio, we see the potential for value, and it's something we'll continue to explore.

So Rich, if you have any additional color to add?

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Richard L. Fruehauf, United States Steel Corporation - Senior VP- Chief Strategy and Development Officer [31]

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Yes, this is Rich. I mean also, we've been trying for some time to find the right buyer for our former South Works location outside Chicago. So I mean that's an incredibly attractive piece of real estate, almost 500 acres right on Lake Michigan. We have other properties where we've had mills in the past, they tend to be very attractive from an industrial redevelopment perspective because you've got rail, you've got utilities already plugged in, you're generally in an urban or near urban locations. So there are any number of properties across our footprint where they can be redeveloped or, as Kevin said, in some cases, we have greenfield properties like in Alabama, where we are a large landholder. In Jefferson County outside Birmingham, we've done our own residential real estate development, but there's a lot of other opportunities there as well.

So we're looking for the best owner of those properties as we sort of focus on our core assets.

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Operator [32]

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Proceed to our next question on the line from Chris Terry from Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [33]

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Just a quick question from me, just to follow-up on asset sale opportunities. Just wondering if you could give a little bit more color on the iron ore business. Obviously, some changes there from some of your competitors in the region. Is there opportunities there to think about divesting actual capacity? Or are you talking more about pellet sale opportunities, but you still own it. Just wanted if you can give some time line and just lay out some more details on that?

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Richard L. Fruehauf, United States Steel Corporation - Senior VP- Chief Strategy and Development Officer [34]

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Sure. This is Rich. I think as far as the timeline, that's really -- it depends on the market opportunities. Who's the buyer? Who's interested? As Dave said, when we announced Big River, we're looking at our efforts to monetize our pellets. Those can be any kind of efforts and you outlined a few. We can continue to sell into the merchant market. We could look for actual sale of the assets to a new owner. We can look at internal uses as we become an EAF operator.

So there's lots of different opportunities there. I'm not going to get into time lines because, really, that's something where we're focused on doing it, but we've got to find the right partners for any opportunity there.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. And then just one other follow-up from an accounting side. In the back of the presentation from yesterday, Slide 24, when you stepped through the Flat-Rolled division. There's a negative $19 million on -- including other. Is that including Big River in there? Can you just talk a little bit about...

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [36]

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Could you speak up? We're having trouble hearing you. Just back that up a bit, say that again, is that Page 24? And then repeat what you said a little louder, please?

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [37]

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Sorry, did you catch that?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [38]

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No.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [39]

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No. Would you mind -- we could not hear anything there. Start over. We heard Page 24.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [40]

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Sorry. Okay. Yes, Slide 24, there's a waterfall chart just on the Flat-Rolled division. There's a negative $19 million in the other category. Just wondering -- just wanted to check that, that $19 million, part of that would be the Big River numbers as we understand it. Can you just talk through that a little bit. We just wanted to check in is that what you're going to report going forward? Will it go in that category?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [41]

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Sure, no problem, Chris. So the $19 million unfavorable change you are seeing on Page 24 of the earnings presentation is not related at all to Big River Steel. That is actually a change in electricity and natural gas energy cost within the segment. As we mentioned, and I think we detailed on one of the slides, Big River will actually flow through our other businesses segment when we look at EBITDA reporting. So you will not see it show up on any of the bridge charts for Flat-Rolled, Europe or Tubular going forward.

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Operator [42]

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We'll get to our next question from the line of Brian Lalli with Barclays.

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Brian J Lalli, Barclays Bank PLC, Research Division - Director & Senior Analyst [43]

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Just 2 quick questions for me. First -- and sorry if I missed this before, but could you walk us through what the right way to think about the pacing of CapEx is into '21 and '22 relative to '20, given your Mon Valley comments earlier, just to level set expectations versus the $875 million. And again, I apologize if I missed that. And then my second, just on the debt front. Obviously, you previously stated that the focus was on unsecured financing. Is that still the plan? Would you entertain using the secured market? And I guess, high level, how does the Big River acquisition at some point when that gets consolidated, and if and when it gets consolidated, adjust your thinking on the balance sheet. Some of the questions we get from investors. I appreciate it.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [44]

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Yes. No problem. This is Kevin and I'll start with the cadence of CapEx, in particularly on the Endless Casting and Rolling cogeneration facility, and then I'll let Christy talk about different sources of capital and how we're thinking of that as part of a broader solution. So first, starting with the Endless Casting and Rolling line, 2020, as we previously articulated as part of our $875 million of CapEx guidance for 2020, included about $175 million to $200 million for the Endless Casting and Rolling and cogeneration projects. We do see that ramping up in 2021 and 2022. Majority of the spend occurring in those 2 years as engineering and construction really starts to take shape. The first steel is expected at the end of 2022. So it is a 2-year timeline to do a lot of work. So we do see that being an influx in CapEx for '21 and '22. However, the EAF project, as Dave mentioned in his opening remarks, will conclude in 2020. So that CapEx will roll off of our CapEx budget. But generally speaking, we should see some modest increase in CapEx in 2021 and 2022 as we take on the Mon Valley project. But maybe I'll hand it over to Christie to address the second part of your question now.

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [45]

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Okay. Regarding secured debt, we think there are a lot of financing options available to us. We'll be looking at things like tax-exempt bonds, you saw we used environmental revenue bonds for the EAF. There is project financing. We're looking at that for cogen. There's also the unsecured market. We prefer unsecured to secured, but we have built flexibility into our debt agreements that allow us to access secured debt if we needed to. But that's not our preference, our preference is unsecured, unsecured debt as well as some of these other things that we've talked about. We have asset divestitures, all kinds of things that we can do to raise cash before we need to go to the secured market.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [46]

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Yes. Again, we feel really good about where we are here in 2020. There's not an urgent need for us to go into the markets. And we're going to get a total solution when we go, so that we'll be able to get the best of both strategy completed when required. So we feel good about where we are in terms of the cash flow, and we'll play this through to make sure we can get Big River Steel done, it's our top priority. Endless Casting and Rolling at Mon Valley is the second priority. And then at Gary Works, we're working on the hot strip mill. And of course, later this year, second half, we complete the electric arc furnace. And we're completing the PRO-TEC CGL3. So each one of these things are moving ahead just fine. And when we need the money to spend more money, we'll get it.

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Operator [47]

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And we'll get to our next question on the line from Tyler Kenyon with Cowen.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [48]

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Maintenance and outage was -- look like $108 million headwind in flat-rolled in 2019. Any help you could provide us with how to think about 2020? I know you do have some tailwinds just from some asset rationalization. And then maybe if you could help us think about the cadence of that through the year and specifically from the fourth quarter into the first?

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Kevin Lewis, United States Steel Corporation - General Manager of IR [49]

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Sure. So if we look at the first quarter, we don't really see any significant outage work plans, specifically in the Flat-Rolled segment. So we don't think that's going to be a material headwind in the first quarter. But as Christie mentioned in our opening remarks, we do have a planned outage, it'll occur in April at Gary. So you could see some elevated levels of maintenance and outage costs in that time period as we complete that outage work.

But the year-over-year change is just the continued reinvestment in our facilities and the focus that we have on increasing the reliability and quality of those facilities. So that's the reinvestment is really what drove the year-over-year change.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [50]

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And then just on the pension, OPEB. Can you explain a little bit more in detail some of the actions that you've taken there?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [51]

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We're really pleased with the progress that we're making on our pensions. And I think on the pension what, Christie, 93% funded? And then 108% on OPEB. And so the teams have been working really hard. We got some good returns. And there is some assumption of improvements based upon mortality and other access to the programs, the pension programs and benefit programs. But Christie, maybe you can share a little bit more.

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Christine S. Breves, United States Steel Corporation - Senior VP & CFO [52]

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Okay. We had strong asset returns this year. So that also impacted that funding status that Dave's talking about. And we did some updates on our assumptions, and that lowered our obligations, but also, we -- was partially offset by decreased discount rates. We actually hired an outside consultant to work with us to review best practices around this and all the different assumptions. And those assumptions have been reviewed by EY and PwC. And that's the change in the improvement in the funding.

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [53]

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And the good news for this is in terms of the amount that we'd have to put in a pension fund, there's no requirements in the near term. And based upon the current funded status, we don't expect to make a payment until -- beyond the time frame in which we invest in Big River, beyond the time frame we complete the Endless Casting and Rolling. So where we are today, we're in good shape.

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Operator [54]

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We'll proceed with our final question as a follow-up question from the line of Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [55]

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David, a couple of times in this call, you said kind of a total solution with regards to when you're asked about potential financing. What does that mean? Does that mean funding sort of CapEx needs plus the other half of the Big River purchase. What does the total solution mean?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [56]

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Well, we think of cash holistically. So there's lots of pieces that come together. And obviously, we have a portfolio of projects. Portfolio of projects related to divestitures. We have a portfolio of opportunities related to funding our balance sheet, and we have opportunities to look at unconventional ways to raise money. And so when we look at this, you think about the traditional, the old way we work at U.S. Steel and then also the new way where we look at tapping other sources that would enable us to implement our strategy.

Total solution basically means we need to get it done at the appropriate time to deliver on our best of both strategy so that we'll be able to do Big River Steel, and we'll be able to do Endless Casting and Rolling so that we'll have a big chunk, a big tranche to enable us to execute. That's what the total solution means.

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Operator [57]

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Thank and Mr. Lewis, we have no further questions on the line. I'll turn the call back to you.

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Kevin Lewis, United States Steel Corporation - General Manager of IR [58]

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Thank you very much, and thank you again for everybody's interest in U.S. Steel. Dave, any closing comments?

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David Boyd Burritt, United States Steel Corporation - President, CEO & Director [59]

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Yes. Thanks, everyone. We really appreciate you joining the call today. Before we conclude, let me provide some takeaways from today's call.

We have a strong cash and liquidity position, and will be opportunistic as to how and when we access capital. We have a strong business because of the strategy we are executing. And finally, we have strong employees, supported by a strong culture. We were recently named in the Forbes Global 2000 World's Best Employers list for 2019, and we received a perfect score of 100 on the human rights campaign's 2020 corporate quality Index, earning the designation of a best place to work for LGBTQ equality. These recognitions are truly an honor, and we look to build upon these accomplishments in 2020.

A sincere thank you to our employees for their contributions. 2019 was a year of extraordinary change and you rose to the challenge and embraced this unique opportunity. Thank you for your continued commitment to U.S. Steel. We look forward to continuing this journey with you. Now let's get back to work safely.

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Operator [60]

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That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a great day, everyone.