During U.S. Steel's (X 1.97%) second-quarter conference call, CEO Dave Burritt made it clear that the company's focus over the next few years will be to revitalize its assets. He spent the bulk of his prepared remarks detailing the company's plan to invest in itself so it can improve its operational performance, which should significantly boost earnings. Here's a look at how U.S. Steel expects those investments to transform the company by 2020.
A $1.2 billion bet on itself
U.S. Steel has two areas of focus right now: operations and geopolitical challenges. While Burritt and his team are doing all they can to help overcome the geopolitical hurdles, which include unfairly traded steel, the outcome of that pursuit is mostly out of the company's hands. However, what it can control is its operations, which is why Burritt stated on the call, "To be very clear, my primary focus is on operations." Burritt explained this by saying, "When we execute at our steel mills well, it shows." He also added, "Achieving operational excellence is what's going to make the difference for this company."
U.S. Steel intends on measuring its operational success by improving in four areas, with Burritt noting, "It's about safety, quality, delivery, and cost -- like the beating of a drum -- safety, quality, delivery, and cost." To improve in those four areas, the company will invest capital to revitalize its assets. U.S. Steel currently expects to spend $1.2 billion on this pursuit from 2017 through 2020, including $200 million to $250 million this year and nearly double that rate next year, with the bulk of this spending earmarked for its 13 most critical assets.
U.S. Steel believes that these investments will pay dividends in the near term, as well as in future years. It has modeled internal rates of return from 15% to 20% on this capital, driven by increased production, improved costs, and higher efficiency. For example, the company estimates that hot rolled band production at three of its mills will increase by 1 million tons, which is a 10% increase from the current output. Meanwhile, the company projects that quality will improve 25% and that downtime from unplanned maintenance will fall 16%. Combined, these factors should yield $275 million to $325 million in incremental annual earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2020, assuming current raw materials costs and market conditions.
That said, U.S. Steel won't have to wait three years to start seeing a payoff. The company has already completed 65 projects in the first six months of this year, totaling $30 million of investment, which has already yielded notable improvements. For example, it did some work on one of the blast furnaces at its Great Lakes Works facility, which resulted in that furnace achieving the highest daily production in its 65-year history in July. Meanwhile, in aggregate, the company expects these investments to boost 2017's quality 7% above last year's base, while downtime should decrease 3%. These steps forward should start contributing some incremental EBITDA by next year.
Becoming a well-oiled machine
U.S. Steel's goal is to invest in its assets over the next few years to get them running as efficiently and productively as possible. The net result is that in three years the company will be producing more steel for less money from its existing assets, which will significantly boost profitability by 2020. As long as the price of steel holds up, these investments should create value for long-term investors.