United States Steel Corp. (NYSE:X) is hoping that 2018 marked a transitional year, from a high cost, old-style steelmaker to a modern business with a refreshed vision and strategy. In fact, the company unveiled a new version of its corporate strategy in July 2018, which puts its focus on what management considers three critical success factors: winning in more profitable markets, improving its position on fixed costs, and nurturing and supporting the best talent. To put those goals into action, U.S. Steel is also in the midst of a multi-year Asset Revitalization Program (ARP).
A three-pronged strategic direction
The new strategic direction is focused less on increasing capacity and more on profitability, partially through customer and employee relationships. U.S. Steel wants to focus on the most attractive markets, such as high-strength automotive coated products. And by investing in its customers, it aims to grow relationships where it can collaborate on new product solutions like the thinner, lighter, yet stronger products which help automotive manufacturers lighten vehicle weight to improve fuel mileage. This adds value toward customer success and allows the company to try and differentiate itself among competitors.
Internally, U.S. Steel believes it can "move down the cost curve" to improve profitability. By improving its financial position and maintaining a strong balance sheet, it intends to invest in new technologies that help improve operational efficiencies, further aiding cost improvements. Even after almost doubling 2018 capital spending versus 2017, and reducing debt by over $300 million, there remained $1 billion of cash on the balance sheet and over $1.8 billion available under existing credit facilities at the end of 2018. The ARP, which we'll look at in more detail below, also plays a key role in future investments, along with better reliability and improved productivity through maintenance activities. The company has already hit 2020 targets set for equipment reliability improvement.
The third strategic arm is investing in employees and talent. Management believes "this will help us reinforce a culture where accountability, fairness and respect are foundational, and high performance and diversity in all its forms are valued and celebrated." In fact, beginning Apr. 2019, U.S Steel has announced enhanced benefits for its workforce that reflect a "culture of caring and inclusivity". Enhanced benefits in areas like parental and bereavement leave, domestic partner coverage, gender reassignment procedure coverage, infertility coverage and a vacation day purchase program are progressive for the industry. These programs roll out to the non-represented workforce, as the represented workforce operates under a new four year labor contract agreement between the USW and the company that was signed this past fall.
Optimizing existing assets
With the first and third arm of its strategic plan focusing on customers and employees, respectively, the second arm is using the multi-year Asset Revitalization Program to capitalize on internal improvements. The ARP kicked off in 2017 as a plan to invest $2 billion through 2020. As CEO David Burritt put it on the most recent fourth-quarter conference call:
It's not about capacity additions for us, it's about utilizing our assets in the most effective and efficient way possible, and that's why we're able to do the revitalization program and how we're getting the extra tons and not by adding excess capacity but instead capitalizing on what we have.
This strategy is in contrast to what some of its competitors have recently announced with new greenfield projects coming in the next few years.
Besides the capital spending (which is broken down into $1.5 billion of capital expenditures and $0.5 billion expense), the company is tracking the program using three other metrics, and management believes it is on, or ahead of, targets in each area:
The plan is to achieve these goals by investing in several, smaller projects. The bigger, single-impact capital spending plans, including potentially restarting a new Electric Arc Furnace (EAF) project at its Fairfield, Ala. plant, a new state-of-the-art continuous galvanizing line for high-strength automotive steels at its PRO-TEC joint venture with Japan's Kobe Steel in Ohio, and new lines in their Slovakian European operation for high-tech electrical steels, are not included in the ARP spending. By taking on more incremental improvement projects with this program, the company believes it will be able to realize the improvements without disrupting operations and negatively impacting customers.
New buyback shows support for strategy
All of this work is meant to position U.S. Steel for success through the inevitable business cycles of the industry. Management showed confidence in its plans by announcing a new $300 million stock buyback authorization as of Nov. 1, 2018. Through Jan. 2019, it has exercised $100 million of that, or over 2% of outstanding shares. As management stated in the latest 10-K: "We believe effectively executing our strategy will secure our position as an industry leader by reducing our vulnerabilities during down cycles, accentuating our advantages in up cycles, and enabling the creation of value -- and the related rewards -- for all U. S. Steel stakeholders through business cycles." The real proof will come when the operations are faced with the next down cycle, and we see how performance and results compare to the past downturns. Look for higher highs and higher lows in earnings through the business cycle as proof of a sustainable improvement.