Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Michelle, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland Clips third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Mitigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at cleveland-cliffs.com. At the conclusion of the call, it will be archived on the website and available for replaying. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Lorenzo Gonzalez, Chairman, President, and Chief Executive Officer. Please go ahead.

Lorenzo Gonzalez Thank you, Michelle, and good morning to everyone listening on today's call. Our third quarter results are a clear demonstration of the resilience of our company and a positive confirmation of the timely actions we took during the second quarter to prepare our operations and our inventories for the recovery of our main market, the automotive industry. We were significantly affected in Q2 by the unprecedented shutdowns that took place throughout the entire auto sector for an extended period of time of more than 10 weeks. Conversely, the sharp recovery in automotive production, starting in the second month of Q3, made abundantly clear who are the real players for automotive and who are the ones that are less relevant as suppliers or not relevant at all. With that, our Q3 numbers speak for themselves. The $126 million in adjusted deduct represents an over $200 million recovery from Q2. During the most challenging days of the pandemic, we went on the offensive. We prepared our operations to be ready when the uptick in demand inevitably change, and our clients would be back asking for just-in-time delivery. Our work in preparation for and ahead of the automotive sector restart gave us the excellence still making cost performance we showed in Q3, as well as the sizable working capital release that contributed to our $150 million free cash flow generation for the quarter. We use this cash flow to pay down debt, reducing our ABL balance by $150 million into three. Since we closed the key acquisition in March, we have cut our ABL balance in half from $800 million to $400 million. As we have stated before, our number one priority with free cash flow is and will continue to be paying down debt. And with the robust cash flows anticipated for the coming years, we should be able to continue to consistently deliver. Our good third quarter results were still negatively affected by a slower than usual shipment pace during the beginning of the quarter, particularly in July, as well as elevated idle costs reflecting Dearborn, North Shore, and Mansfield is still being down in the early part of Q3. As such, with shipments at a healthy pace and idle costs fading, our financial performance should continue to improve. as we progress toward the end of the year. With that, we expect closing 2020 on a high note with strong fourth quarter results. As we approach the end of 2020, our strong performance is not the only relevant thing we look forward to. Before the end of the year, we expect to close on our acquisition of substantially all the operations of ArcelorMittal USA. Our third quarter results are a clear illustration of the power of base loads, volume, and dilution of fixed costs in this industry. And in this regard, this deal will only help us improve our profitability. It has been a little less than a month since we made our announcement, and in that short period of time, our cliff scheme has grown even more excited about the potential for optimization of all disasters under one roof. The combined footprints of legacy Cleveland cliffs, AK Steel, and ArcelorMittal USA are ice-team makers' dreams. when it comes to both quality and cost efficiencies. We are preparing for a smooth transition and to hit the ground running as soon as the deal closes. Nowadays, people talk a lot about technology. I cannot think of anything more technologically advanced than literally using explosives to pull our own work from the ground in our mines in Michigan and Minnesota, and then ending with car parts and components manufactured at our subsidiary Precision Partners using robotic operations equipment and delivered just in time to our automotive clients. We are doing exactly this and more all within our footprint, from our taconite mines to our state-of-the-art hot-dip galvanizing lines, and further downstream into our fully automated manufacturing facilities for automotive parts. We fully recognize the responsibility that comes with becoming the largest flat-rolled steelmaker in North America. Going back five years ago to my criticism of the irresponsible behavior of the major iron ore miners, I have long been a proponent of value over volume approach. Under my watch, FLPS has never been and will never be tempted by the stupidity of volume for volume's sake. we will continue to manage our business in the most quality purpose and cost-efficient way, always reaching for real value and return on investment capital. For now, we are working through the regulatory approvals of our transaction, and we will certainly have more to discuss once we have closed the acquisition of ArcelorMittal USA in a couple months. Another piece of excitement as we approach the end of the year is the upcoming startup of our state-of-the-art direct reduction plant in Toledo, Ohio. We have completed all construction and installation and we have now entered into the final stage of commissioning the plant. At this time, we are pleased to inform you that we look forward to start producing HBI in a few more weeks. Our original plan to become a merchant seller of HBI remains the same. However, with our AK Steel existing footprint and the announced acquisition of ArcelorMittal USA, we plan to redirect a relevant portion of our HBI production to in-house utilization in our own EAFs, BOFs, and blast furnaces. Nevertheless, we should still have a meaningful tonnage of HBIs available to sell to select mini mill clients. For EAFs, the value proposition of this project is well known. Our 3% carbon content HBIs is a top-quality metallic seed stock without the impurities that come with scrap and without the complete disregard for environmental compliance embedded in imported pig iron from the usual sources in Russia and in Brazil. The metalization and carbon content of our HBI are very similar to the foreign pig iron that a number of American EAF-based steel companies import to the tune of 5 million metric tons per year. However, our direct reduction process uses pellets as feedstock instead of dirty sinters, and natural gas as reductant instead of coke or charcoal, making our HBIs much more environmentally friendly than pouring cigars. Our HBI also has a superior logistic advantage over imported cigars. We will deliver HBI to our clients in sync with their consumption rate and without imported cigars' significant freight cost component or multi-month lead time. Why will we use our HBI in-house at Cleveland Cliffs in our own EAFs? We will also use a portion of our HBI in our glass furniture to improve furnace productivity, reduce coke rate and costs associated to coke consumption, and very importantly, to reduce carbon emissions. Equally relevant, Cleveland Cliffs is a buyer of scrap, and our HDI may also be used in our own VOF as coolant to reduce our scrap costs every time the cost of the scrap we buy in the market justifies such use. Thanks to not having signed any long-term contract, with our HBI client, we were able to keep all this optionality to the benefit of Cleveland Cliffs and to the benefit of certain select EAF-based steel companies with which we have been working for several months and which will soon start receiving our HBI. In another way, we fully expect our HBI, to become, as early as next year, in 2021, a positive differentiating factor between our own blast furnaces and the blast furnaces of other integrated steel mills with no access to HBR, as well as a positive differentiating factor between the mini mills that will be our clients for HBI and the others. Back to our third quarter results, I would like to highlight a few items, starting with the 80% increase in flat-boiled volumes to 1.1 million tons. The increase was almost entirely driven by the automotive market, which made up 73% of our sales. I will repeat, 73% of our sales. This number was 63% in 2018 and 66% in 2019 and is now 73% in Q3 of 2020. It pays off to be able to produce all types of material for automotive life, particularly exposed parts. As you all know, Our subsidiary company, AK Steel, has been supplying exposed parts to the automotive industry for a long, long time and from several different locations. And due to our equipment and our technological capabilities, it is actually natural for us to produce the high-end materials. We don't need to go out of our way to do it. It also helps to be able to deliver material on time every day and to provide second-to-none technological support from our state-of-the-art R&D center and to be able to produce parts and components in-house. In some, we already are where others are trying really hard to get to. Our predictions around the effects of the pandemic on increased automotive demand have come to fruition. Public transportation, air travel, and ride sharing are no longer considered safe by consumers. Instead, private car ownership is growing, and traveling by car is trendy again for individuals and families. the U.S. automotive seasonally adjusted annual rate increased from 8.6 million units in April to 16.4 million units in September, even while fleet sales remained down 30%. The recovery in car sales is consumer-driven and shows no signs to end anytime soon. as it also follows people's migration from concentrated metro areas to suburban living. We are working closely with our automotive clients to keep up with this increased demand and to help them replenish their inventory. We see at just 50-day sales outstanding, a nine-year low. The inventory situation is even more dramatic for the truck and SUV market, which, by the way, accounts for about 83% of our sales to automotive clients. After their initial restarts in May, the OEMs did not really hit their stride from a school ordering standpoint until mid-August. So our 1.1 million tons shipping volume still reflects a little black for the first half of the third quarter. That said, our client has been doing well since then. This trend has also been evident in our downstream business, particularly with precision partners whose stamping capabilities are in high demand. In sum, as we are very pleased with the timing of our acquisition of AK Steel and our current role in the automotive market, we are also excited with the acquisition of ArcelorMittal USA. Going forward, we intend for the high-margin automotive space to remain our core commercial focus. On the mining and pelletizing side, our better-than-anticipated cost reduction and the strong iron ore prices in the international market were the reasons for our good Q3 results for our legacy business. The pricing indexes that act as a proxy for this business and the volatility associated with these indexes have always been a double-edged sword. making predictability of our cash flows a difficult thing. Once the ArcelorMittal USA acquisition is complete, we should be able to secure in-house demand for 90% of our pellet output, significantly reducing the unpredictable influence of commodity prices. The one index that stands out most is the pellet premium. which has been contaminated beyond repair by incompetent players in the market. Once the acquisition of ArcelorMittal USA closes, this particular index will be meaningless to our results. And that's a good thing. Regardless, after the closing of the acquisition of ArcelorMittal USA, our legacy iron ore business will be as critical as ever for our performance and should continue to provide us a competitive advantage in the form of high-quality in-house, custom-made health. As a combined company, we will continue and truly emphasize our commitment to sustainable steelmaking. We are a relevant player in the most environmentally friendly steel industry in the world, the American steel industry. We feed our integrated steel plants with pellets and soon also with natural gas reduced HBI. Going forward, we plan to provide enhanced disclosures on our carbon emission reduction and overall environmental performance through our upcoming sustainability reports. With that, I will turn it over to Keith Guse before my closing remarks. Keith, please.

Keith Guse Thanks, Lorenzo. As you noted, our dramatic $208 million quarter-over-quarter improvement in adjusted EBITDA was driven by increased steel shipments to the higher margin automotive business, better cost to increased production volumes, and reduced idle costs, and also driven by increased pellet prices. After excluding $22 million in one-time items such as acquisition costs, severance, and inventory step-up amortization, our earnings per share was in positive territory for the first time this year. In the steel and manufacturing segment, our automotive carbon shipments increased 164% to 667,000 tons compared to 253,000 tons in the second quarter, driving the bulk of the improvement in our flat rolled volumes. As noted on our last call, we expect fourth quarter shipments to climb even further and look similar to what was shipped by AK Steel in last year's fourth quarter. On the cost side, temporary idle costs in this segment were $39 million, which should be reduced to less than 10 million in the fourth quarter. Also, of our total SG&A of approximately $60 million in the quarter, $37 million of that flowed through this segment, with most of the remainder running through corporate. As for mining and pelletizing, sales volumes of 4.9 million long tons came in as planned, and we expect to see an increase of about 10% into the fourth quarter as furnaces stock up ahead of the winter months. Pricing per long-ton of $98 was supported by a higher IDEX, partially offset by a lower HRC average and lower pellet premiums. At current commodity prices, we would expect to see an increase in this rate in Q4 due primarily to the recent run-up in HRC. Our cost per ton improved quarter over quarter due to reduced idle costs And with all of our mines back in operation, we should see more normalized levels in Q4. Margin eliminations for the third quarter were 29 million, which we expect to look similar in the fourth quarter as we restock pellets at AK Steel ahead of the winter months. This amount should then normalize to close to break even throughout next year, absent the impact of the ArcelorMittal USA acquisition. On the Camp X side, Of our $96 million in capital spend during the quarter, about $46 million was related to the HBI plans, and about $14 million was capitalized interest with the remainder in sustaining capital. We expect another $125 million in CapEx spend for the remainder of the year, lowering our full year expectation from approximately $535 million to $500 million. Our immense level of free cash flow generated during the quarter boosted our total liquidity to $1.2 billion between our cash and ABL availability. Along with improved performance across the board, we saw favorable working capital changes of $187 million during the quarter. Due to the recovery in business levels we have seen, we expect to invest in working capital in the fourth quarter, as well as make contributions to SERP and pension plans, but still expect a free cash flow positive back half of the year, as predicted last quarter, which has been further enhanced by favorable market developments. In closing, the actions we took during the most challenging period of the pandemic are enabling us to benefit from an improved demand environment and working capital release. The robust recovery we foreshadowed last quarter is evident in our third quarter results, and we expect further improvement in the fourth quarter. With that, I will turn it back to Lorenzo.