Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Amy and I will be your conference facilitator today. I would like to welcome everyone to the Cleveland Cliffs first quarter 2021 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 predicative statements that are intended to be made as forward-looking within the safe harbor protections for the Private Securities Litigation 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 clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special treat items. Reconciliation for regulation chief purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Cliff's Executive Vice President and Chief Financial Officer, Keith Kosey. Please go ahead.

Thanks, Amy. And good morning, everyone. Going right into our results, our first quarter adjusted EBITDA of $513 million represented a 79% increase over last quarter, reflecting our first full quarter of results from the former AMUSA assets, as well as stronger steel pricing, offset by reduced third-party pellet sales due to the annual maintenance of the Great Lakes locks. In the steelmaking segment, we sold 4.1 million net tons of steel products, which included 28% hot rolled, 18% cold rolled, and 33% coated, with the remaining 21% consisting of stainless, electrical, plate, slab, and rail. This mix is generally in line with what we expect to see going forward. Our aggregate average selling price of 900 per ton in Q1 is certainly the low point for the year in our forecast and is lower than our Q4 2020 average solely because of the different mix associated with the former AMUSA plants. On the cost side, our performance came in as expected. Relative to last year, we are seeing decreases in costs for coke and coal, as well as benefits from decreasing scrap use and higher productivity from using our HBI products in-house. This has been offset by higher prices for scrap, alloys, and natural gas. We also saw higher labor costs due to increased profit sharing. DD&A was $217 million for the quarter, and we expect about $840 million on a full-year basis today. now that purchase price accounting has been further refined. An important moving piece this year in our cost structure will be iron ore costs. We certainly benefit on the former AMUSA side from transferring pellets at cost, but during the first and second quarters, we are working through the pellet inventory previously purchased from Legacy Cleveland Cliffs. These pellets were purchased at a margin prior to the acquisition, And therefore, the higher cost runs through our income statement in 2021, and the resulting impact is not included in the add-back for inventory step-up. This short-term anomaly had a negative impact on our first quarter of approximately $50 million and will be a $40 million headwind in Q2. After that, the impact will be negligible. creating nearly a 100 million EBITDA tailwind going forward in comparison to the first half of 2021. We experienced this same anomaly in 2020 as a result of the AK acquisition. As for synergies, we have already identified and set in motion 100 million in cost synergies from the AMUSA acquisition, some of which will take effect later this year. we are well positioned to reach our target of $150 million of annual run rate savings by the end of this year for a total of $310 million from the two combined acquisitions. As far as cash flow, Q1 contains several previously discussed one-time items that will not recur going forward. As was contemplated in the acquisition of AMUSA, we had a significant investment in working capital of nearly $650 million during the quarter due first to the completion of the unwind of the ArcelorMittal AR factoring agreement, as well as other acquisition-related cash impacts. We are now completely done with this, and receivables have been rebuilt. Second, we saw a working capital build related to receivables corresponding to the rising steel price environment. Also, we made our deferred pension contribution related to the CARES Act of $118 million in January. With the passage of the most recent stimulus bill and the extended amortization feature, future cash pension contributions will be reduced by an average of $40 million per year over the next seven years. For the remaining three quarters of this year, we will be generating record levels of free cash flow. In future years, we expect certain cash outflow items to be lower than in 2021. Sustaining capex will be approximately $525 million annually. Interest expense will be lower due to reduced debt, and pension contributions will also be lower without deferral payments and with the new stimulus benefit. In addition, working capital impacts will likely revert to neutral over time, unlike the large build we project this year. Upon releasing our Q4 earnings, we guided to a substantial EBITDA improvement from Q1 to Q2. And by the end of March, we had enough pricing visibility to disclose a $1.2 billion adjusted EBITDA guide for Q2. The increase from the first quarter is driven primarily by pricing, offset by higher incentive compensation and profit sharing, and higher raw material pricing for scrap and alloys. On the liquidity side, we currently have $200 million in cash and $1.6 billion of availability under our current credit facility. Our ABL debt balance is currently $1.6 billion, and we expect to have this paid off by the end of the year. Our pay down of this instrument will come penalty free, and every dollar that is reduced in ABL debt will be added to our liquidity. In closing, we find ourselves well-positioned to take advantage of a healthy steel market and also take care of a significant portion of our debt balance in very short order. Based on what we are seeing in the market, we believe our estimates supporting $4 billion of adjusted EBITDA for the year are conservative relative to today's forward curve. And now, I'll turn it over to Lorenzo.

Thank you, Keith. And good morning to everyone. I will start my prepared remarks reminding our investors that this first quarter of 2021, which we are currently reporting results, was the very first full quarter for Cleveland Cliffs following the closing of the acquisition of AMUSA on December 9, 2020. And it was an immensely successful quarter for our integration, culture change, and clearly our profitability. Our attitude towards commercial and steel pricing is the main reason behind the massive numbers we are showing for the quarter and guiding for the balance of the year. including $513 million of EBITDA in Q1, $1.2 billion EBITDA next quarter, and $4 billion EBITDA for 2021. The steel industry is capital intensive, and return on invested capital is necessary. If we lose track of that, we would not be able to address issues like equipment reliability, workplace safety, or the environment. We are not greedy. We are realistic. That's why steel prices are where they are, and that will continue going forward. Right now, the American consumers are consuming, and they are consuming a lot. The stimulus money provided to the majority of the population is being redirected right back into the economy. And that's great for flat-rolled steel producers like Cleveland Clips. This money is being spent on consumer goods like HVAC and appliances and cars, evidenced by the skyrocketing auto SAR in March. the so-called experts that long predict the demise of the domestic steel industry have been proving completely wrong. When Cleveland Cliffs bought AK Steel and AM USA, or when the COVID recovery began, they had an easy window of opportunity to fix their failed thesis. Unfortunately, their addiction to negativity is apparently the only thing that they care about. These folks just don't want to see our industry thrive, and they clearly don't care about the well-paying middle-class jobs we generate and sustain in the United States. For the record, from our approximate years, the median yearly pay of... Our 25,000 Cleveland Clips employees is $102,000. And we're hiring because we're growing. Make no mistake, we are adding jobs. Since December 9, 2020, we have already added 710 new employees to our workforce. As we always do at Cleveland Cliffs, we are putting our money where our mouth is and bringing back the America that we love with a vibrant manufacturing sector, a thriving middle class, and with opportunities for all people that believe in education and hard work. The main factors supporting this new way of doing the steel business are the following. First, industry consolidation. Prior to our acquisitions of AK Steel and AM USA, they were both buying Iron War pellets from Cleveland Cliffs under take-or-pay type of contracts. As a result, their top concern was filling up their steel order book so they could satisfy their purchase requirements with us. And in many cases, that involved being aggressive on pricing their end product so they could move material. We and the business we acquired are no longer burdened by this. Which leads me to number two, a more disciplined supply approach. As I have stated in the past, we can be flexible with our production. and can walk away from bad deals, automotive, contract, sport, or otherwise much more easily. This industry has been plagued in the past by volume for volume's sake. But with our transformative acquisitions, we have all started to see rationality in the marketplace. And don't forget, the U.S. dominates the world in environmental performance. Of all the world's CO2 emissions from the steel industry, the U.S. comprises just 2%, while China is responsible for 64%. We have also the lowest CO2 emissions per ton of steel produced among the nine largest steelmaking nations due to both the prevalence of EAF production and the massive use of pellets in blast furnaces. This leads me to my final factor. the one that will drive mid-cycle hot-wooled coil pricing higher for the long term. The scarcity of prime scrap, EAS, make up more than 70% of steel production in our country. This U.S. reality is unique among all major steelmaking countries. EAFs have long taken advantage of the large pool of scrap here in our country. However, with all the new capacity coming from the EAF side of the business, their scrap feedstock has become stretched out. In order to make flat-roll products in EAFs, you need prime scrap and metallics. both of which actually originate from the integrated route. On top of that, manufacturers have become more efficient at processing high-grade steel, generating less prime scrap to be sold back to the system. The United States is a net exporter of scrap, but it is also a net importer of prime scrap. Combine that with China's growing needs for imported scrap, which will outpace their own generation in the near term, and the U.S. EAFs have a big problem. Obsolete and lower grades of scrap will likely be okay, as higher prices incentivize collection. But that's not the case for prime scrap. Lower-grade scrap is good for rebar, but it's not good or not enough for the production of more sophisticated flat-roll distilled products. This scarcity points to significantly higher prices for scrap. Meanwhile, we at Cleveland Cliffs will continue to enjoy the steady cost structure of our iron feedstock. our own 100% internally sourced pellets with decades of foreign war reserves ahead and our in-house production of HBI fed by our own mine and pellet plant. We formulated this view in 2016 And that has been the driving force behind our strategy for the past five years, including the construction of our HBI plant and our two transformational acquisitions executed last year. It is actually interesting to see other companies getting to the same conclusion five years later. At the time, Cleveland Cliffs has already started to enjoy the benefits of our investments of the past years. Our direct reduction plan has had a remarkable past few months since it started in December of 2020 and has already exceeded our expectations thus far on HBI production and shipments. We produced 120,000 tons of briquettes in the month of March and expect to reach our annual run rate of 1.9 million tons this quarter. While we have already shifted some HBI tonnage to select outside clients and at very good prices, We have thus far used most of the product internally at our own EAFs, blast furnaces, and DOFs. As planned, operational results have been above our own expectations in all times of internal usage of our HBI. Particularly at our EAFs, HBI currently makes up between 20 and 30% of their melt. More importantly, our HBI has effectively eliminated our need to buy prime scrap. We only need to buy lower grades at this point, substantially lowering our cost structure. It has also lowered our greenhouse gases emissions and improved our iron and chrome yields. The original intention for the Toledo Direct Reduction Plant, when Cleveland Cliffs was just an iron company, was to exclusively sell HBI to third parties. But that dynamic has changed with our two acquisitions of last year. Given our expectations for the scrap market, Our HBI is an incredibly important Cleveland Cliffs internal resource and differentiating factor, both now and going forward. This is why I'm happy we did not sign long-term contracts to supply HBI to third parties. I did not need them to build the plant. I don't have them now. and I don't want long-term supply contracts going forward. For the record, the consistent performance we get out of our HPI in all of our plants, both in quality and environmental, is one of the most positive factors differentiating Cleveland Cliffs from the rest of our competitors, both integrated and mini mills. On the steel operation side, things have been progressing nicely. Our Middletown outage was a success. We completed the blast furnace repair in less than 14 days, and the BOF vessel maintenance was finished ahead of schedule. And we do not have any major outages scheduled in future. We are focused on getting steel out of the door. Despite all we hear about supply shortage of electronic parts and other components in automotive, we really have not seen a huge impact on volumes to this end market. We have been running our coating lines at full capacity in response to outstanding demand and are restarting our Columbus Coatings galvanizing line. That will increase our output of galvanized products starting in this second quarter and will help our clients take care of their own high demand. For these small amounts of automotive tonnage that has been deferred, we have been able to divert that service rate to higher margin customers linked to the sports market. we completed all of our April 1st automotive contract renewals with nice price increases and plan to continue to see significant improvement in these margins going forward. All of our actions support immense cash flow generation for this year and beyond, and that cash will be used to pay down debt. Under our latest forecast, we expect to generate a record level of free cash flow in the last nine months of 2021, which will put us at a figure of less than one time EBITDA leverage by the end of the year. With that, I'll turn it over to Amy for Q&A.

At this time, ladies and gentlemen, if you would like to ask a question, please go ahead and press star, then the number one on your telephone keypad. Again, that's star one to ask a question. Your first question today comes from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question.

Hey, good morning, Lorenzo and team.

Good morning, Lucas.

Congratulations on the continued success. Thank you. On prior calls, Lorenzo, and just now, in fact, there have been discussions about auto supply agreements and what you could do or what it could allow for in terms of improved value capture on your part. And I appreciate that this is a little bit of a delicate matter, but I wanted to ask in what ways, if any, these relationships continue to evolve. Thank you.

Lucas, the relationship is great. because there's a relationship built on codependence. They depend on us, and we depend on them. The good news is that since we acquired AEM USA, our percentage of automotive business in the overall business dropped dramatically. So even though automotive is still important, it's not a make or break like it was from for AK Steel when AK Steel was a stand-alone company. Another thing is that the real competition for the more sophisticated grades of steel that AK Steel and Cleveland Cliffs owned AK Steel alone for almost a year, the only real competition was AMUSA. So now we own both. So the automotive clients They have already realized that. And they are no longer negotiating with a beggar. They are negotiating with a supplier that treats them with a lot of respect and demands respect in retrospect. So we are doing great. We haven't had to shut down any clients yet in contract negotiations, but Every time they think about playing hardball, they should know that at the side of the table, there is someone that loves to play hardball. So, so far, so good.

That's very helpful. Thank you, Lorenzo. And then it's Earth Day today, and President Biden and President Xi have been outbidding each other with announcements on carbon reductions. And you spent quite a bit of time talking about the this larger context in your prepared remarks. But I wondered, could you maybe go back on some of the details? To what extent are carbon reductions in the U.S. by 2030, for example, a risk or an opportunity for the U.S.? And then, of course, you've always had great perspectives on what's going on in China and implications for global steel and iron ore markets. And, of course, it has major impacts for you as well. And so kind of wrapping it all together, if you could include those thoughts in your response as well, I would really appreciate it. Thank you.

Yeah, it's a lot to pack in an answer for you, but I will try to summarize this the best I can. First of all, I believe that the fact that President Biden is retaking the U.S. leadership in this environmental conversation is a very welcome move, and it's overdue. I have been hearing way too much from countries and companies that don't have anything to say, but they are saying anyway. The United States can say a lot. we have the most stringent and the most serious laws and regulations regarding environmental throughout the entire world. And in order to operate in the United States, you need to comply with them day in and day out. That's the start. The other thing that I love about what President Biden is doing is that he established a deadline for the reduction of 50% in 2030. And 2030 is around the corner. I hate when I see companies saying that they are for companies and countries and whoever, saying that there will be carbon neutral by 2050, or in the case of China, 2060. There is only one certainty about 2060. All of us that are in this call will be dead. That's the only certainty that we have. That 40 years down the road, I don't think that we have too many 20, 25 years old in the coal. They hide in basements and they hide behind keyboards. They don't come to coal to learn. So anyway, so for the 30s and 40s, if you're not dead, you are very old at that time. That's the only certainty that we have. But 2030 is around the corner. So it's good that Biden is talking about 2030. And he's putting a target of 50% reduction from 2005. And that's a good point to start. If you look at our environmental commitments, they are talking about our commitment. We are talking about 30% reduction in 2030, taking as a base case in 2017. We haven't checked yet with 2005 because this announcement came this morning, but I believe that we're already there. So that's good for us because we did not start counting 2005. We're counting 2017. That was the beginning of the HBI plan when we started building HBI. Going forward in our business, the data will start to be realistic. And we are going to start to see things the way they are. China is responsible for 64% of greenhouse gas emissions from the steel business. The United States is responsible for 2%. Here in the United States, we have... excellent performance from all EAFs, from the many mills from our EAFs at Cleveland Cliffs, and also from blast furnaces that are all fed with pellets. Our Middletown blast furnaces has a performance that is very similar to an EAF. Our Dearborn blast furnaces, if you look just into the number, because of the co-gen arrangement that we have with Dearborn Energy, DEI, we have numbers that are below the EAFs. So, that's another thing that needs to be fixed. Our blast furnace in Diabor is not better than an EAF. It's just the way things are accounted for. And there are things in Diabor that are not being accounted for, as well as there are things in EAFs that are not being accounted for. For example, the usage of imported pig iron, because imported pig iron goes against scope three. And everything that's being reported is scope one and scope two. So we are going long story short. With the involvement of President Biden and President Xi, things will start to be more in the real side of the world in terms of being discussed between academics and funders and people that are starting to sell consulting services. And reality will sink in and reality will prevail. The Cleveland Cliffs is reality.

Very, very helpful. Thank you, Lorenzo. I have more questions, but I want to be respectful of everyone. So I'll turn it over. Thank you and continue. Best of luck.

Appreciate it. Thanks a lot, Lucas.

Your next question comes from the line of Phil Gibbs with KeyBank Capital Markets. Please proceed with your questions.

Hey, Lorenzo, good morning. I'm also behind my keyboard here, but not in the basement, so I've got that going for me, which is nice. CapEx this year, Lorenzo, any update on that?

I'll let Pete handle that, but look, when I'm talking about the kids behind the board, I certainly am not talking about Bill Gibbs.

All right, Pete, go ahead. Yeah, me, Phil. No, we're still looking at around $650 million for the current year. That's our forecast. I mean, last time we talked about $600 to $650. We're at the high end of that range now. We're at $650. Okay.

Okay. And then do you have, with Middletown restarted, do you have an expectation for higher steel volumes in the second quarter?

That's a good question because that will allow me to say something that it's a bad association. When we do an outage of a glass furnace like Middletown that's a major, we prepare for that. So we never have any lower throughput Because of the 14 days that Middletown, 13 days and a half, that Middletown Black Furnace was down. Because we had enough slabs, we had enough hot pans, we had enough P&O, we had enough cold rolls for hard. We had enough everything as far as the working process to keep all the lines full and all the livers in shape. And then you say, but Lorenzo, the clients are complaining that they are not receiving steel. Yes, 100%. These are the clients that when Hawk Band was 440, they could have loaded the truck. They could have put their warehouses full through the roof. Because you can't get much better than that. Actually, we should have never been even close to that. And we never will again. And that's clear when Cliff's telling you, Phil. They didn't do it because they were waiting for another 10, 20, 30 bucks to drop to then be quote-unquote opportunistic. So they are basically collecting what they planted for. And we are taking good care of some of them. Some others are not taking care because they don't believe that they really even belong because we don't need all this money. quote-unquote opportunistic players in the marketplace. They just distort, destroy, complicate, gossip, talk on the phone, send fake information, do everything that we don't need done in the marketplace. What we need in this business is stability. What we need in this place is profitability. There is no real company in this market. Four months of 2021, that it's a real company that's complaining about higher prices. Do you know why? Because they are all making money. There is only one way for the supply chain to be profitable, is to have prices at a level that makes sense. This is a capital-intensive industry, Phil. We need to have return on invested capital. Without return on invested capital, we can't do anything. We can't pay dividends to shareholders. We can't pay down debt. We can't do anything. So that's what we're working for. We are doing our mandate. We are doing our job. We are working on behalf of the shareholders of the company.

So essentially what you're saying is that your volume should be reasonably stable, perhaps maybe up a little bit, maybe down a little bit, but kind of within this range. But the automotive supply chain certainly is a big part of your business. It's a big part of the sheet industry here domestically. I think we just want a better view, if you could, in terms of what's going on. I mean, obviously there are shutdowns that are taking place, but Are customers still taking steel on the prospects of ramping up in the back half of the year? Were your shipments down? Do you expect them down in the second quarter and ramping back up again? It's just tough to know from our seat what's actually happening on just the volume side. Thanks, Lorenzo.

Phil, you know, we supply pretty much everything to everyone because of our size. We supply everything. rough numbers, 4.5 million tons a year of carbon steel and another 500,000 tons a year of stainless. So all in, we supply 5 million tons to automotive. And I will be honest with you, I haven't seen a real impact on these shortages. Yeah, we can have a week that we are delivering a little less to customer aid plans But then the next week, that plant catches up. And then another plant or another OEM slows down because they don't have chips or because they don't have rubber or because they don't have foam. But then they catch up, and then we catch up with them. And in the meantime, Phil, we have been able to take better care of spot orders for the good service centers. And we have been able to increase our prices. I don't know if you know, but this morning, hot oil prices were reported above $1,400 per net ton. And we are cutting deals way above $1,500 per net ton. So we're in good shape. And that's fantastic. And this trend will continue. So there is no real impact from our standpoint as a supplier. and i am really talking about across the board could be a big one could be a not so big one but pretty much everybody is taking care of their own respective businesses and we are supplying them so no impact on us as far as producing more producing less i want to produce a little more why do i say that because we are bringing back Columbus coatings, and that's more galvanized in the marketplace. But that's just galvanized. So other than that, we are producing at capacity. And then I say, oh, but Indiana Harbor 3 is not in operation, and Ashland is not in operation. Yeah, they are out of operation for a long time, and they will never come back. Neither Ashland nor Indiana Harbor 3. They're done. They're not going to come back. They are not part of the picture. And we are producing more rock metal because we're using HBI in Indiana Harbor 7. We're using HBI in Dearborn. We're using HBI in Middletown. So that's what we're doing. And we will continue to produce more, increase productivity, increase throughput, and not bring any glass ones back.

Thanks very much.

Thank you.

So our next question today comes from the line of Matthew Fields with Bank of America. Please proceed with your question.

Matthew Fields Hey, Lorenzo. Hey, Keith. Congratulations on the great success this quarter and the continued momentum. Now that you've been in the YARF or middle assets for four or five months now, just wondering if you've sort of taken a review and seeing if there's any kind of major projects that you might need to do in the next year or two, whether it's, you know, some of the older plants like Steelton, the Kinshakan Plate Mill, Burns Harbor, or any of the Coke batteries.

Yeah, look, we are, yes, we learned the assets during due diligence and now we are really into the assets for a few months and we believe we know them extremely well. We compare the overall status of the assets at a level that is not the same level that we found the assets of AK Steel. This being said, everything that we need to do with those assets has already been contemplated in the CapEx numbers that we released with these results, and today during the call Keith Kosey talked about. there is nothing really major for us to be expecting. And all these ones that you mentioned specifically are all good niche businesses which we are taking excellent care and we'll continue to make them grow. Like, for example, Concha Rock, great business. We love doing business from Coltsville and Concha Rock with the military. That's the thing that we used to do a lot of business in my Metals USA time. We reconnected with the Pentagon, and our relationship is perfect. We'll continue to grow this business. Donizapo Plate is the best performer of plate out there, said by the clients. So the clients appreciate that we are taking care of business in plate. Better than the competition. And that's what the clients say. I don't know if they're saying something different to my competition, but that's what they're saying to our guys in plate, out of a Bonsalvo plate that also includes carry plate. So Stilton is a business that's a very niche business. As long as you price it right, you make a lot of money over there. The EAF there loves our HBI. We are no longer buying scrap over there. We are making an enormous saving. Even, you know, we sell HBI for the third-party clients for a very high margin, very good, profitable business. But we are making more money by replacing scrap in Stilton and not buying prime scrap in the marketplace using our HBI because the savings in costs are better than the margin that we make selling HBI. And we are denying service to the competition. So it's all perfect. So, all good, Matt. I don't know what else I can tell you.

That's helpful. And then, you know, I probably – I know this is, like, not that important to the way you run your business, but a lot of folks in my world kind of pay attention to this stuff. So, you know, your credit ratings are very mismatched between Moody's and S&P. Is there any reason that S&P just kind of doesn't get what's going on with steel prices or the steel environment, or are they just way behind – Is it something that you actively can focus on, or is it just they'll come around when they come around and get you out of that triple C rating, which seems kind of absurd at this point?

Look, I also noticed that, and Keith himself as well. That's why in the last deal I did not use S&P. I used Moods and Fitch. I'm not saying that Moods and Fitch are much better, but I'm just saying that S&P is just horrible. So it's just that they're blind, and they don't get it. So I don't know. We've got to ask them. If that day the brain is working, they might give you an answer. Otherwise, they will just receive your reply the next day. So they're bad. All right. Yeah, fair enough. Let me do a follow-up with you, Matt. When will be the day that high-yield investors will allow me to do a deal without having a rating? Because you guys all know that these folks don't know anything. So why investors like to see the rating out there? I price my deals at a different level of my ratings. I price my deals at yields that don't match my ratings. But I still need to print a rating. I mean, I go with a B, and I price below BB+. So you know that, Matt. You have been following us for a long, long time.

Well, I think the high-yield investors are sometimes smarter than the rating agencies. I believe so, too. But they are not smart enough to do it without the freaking rating. So anyway... Lastly, you've been right about a lot of things, but I hope you're wrong about one thing, and I'd like to live past 77, if that's okay with you.

I'm sorry, say that again?

You've been right about a lot of things, but I hope you're wrong about we're all dead in 2060, because I'd really like to make it past 77.

Yeah, Luca, I wish that's great for you today. I'm 73, and I feel that I'm already working in overtime.

Thanks a lot, Lorenzo, and good luck. Thanks a lot.

Your next question today comes from the line of Seth Rosenfeld with Exane. Please proceed with your question.

Good morning, Lauren and Keith. A couple of questions, please, starting out on decarbonization, then another one on working capital, please. On decarbonization, I obviously spoke quite significantly about the progress the US market has made in cutting carbon emissions, especially versus peers in Asia. Wondering, for Cliff's asset mix in particular, how you view that progressing over the medium term of the HBI, a very big positive here. Do you see opportunity to expand HBI or expand your EAS capacity in order to reduce your carbon footprint further, maybe over what time frame that might be considered?

Yes. I see opportunities on that.

Okay. Okay. Is there a level of leveraging after which we could consider larger CapEx investment, if we can understand the moving parts?

Large CapEx investments are motivated by real need, not by availability of capital. So keep in mind, when I started building the HDI plant at the time with a budget of $700 billion, to produce 1.6 million metric tons of HPI, that was a massive investment for Legacy Cleveland Cliffs. And we made it anyway, because that was the right thing to do. If I had not done that, today I would be announcing an HPI plant. And people would be telling me, congratulations, Lorenzo, you are Thinking ahead, you are thinking about building an HBI plant, and HBI will be something really good for the environment. Guess what? Remember that plant that you said that was a widowmaker that nobody can finish on time and finish on budget? You said that. We finish on time, we finish on budget, we increase the size. Instead of spending $700 million, we spend $1 billion, and now we have it, and now it's ours, and now we're using it, and we're decarbonizing it. In Europe, where you live, people are talking a lot about decarbonizing. They're talking about hydrogen, the technology is not there. They are talking about breakthrough technologies that not even the universities know where they are going. And the ones that are talking about, exception probably for ArcelorMittal, that they really know what they're talking about, everybody else, are fighting against bankruptcy, dealing with lenders that go bankrupt, dealing with banks in Switzerland that go down when they release results. It's a freaking mess in Europe as far as environmental. The person running the show in environmental in Europe is a girl that's 18 years old. Here, it's a 63-year-old guy that has been doing this for 41 years. If you guys start paying more attention, you'll be better off. What else do you need to know about decarbonization?

Okay, that's very clear. One more question, please, on shorter-term cash flow, please. Working capital, obviously, significant investment in Q1. Can you give us a sense, looking ahead into Q2, whether or not you think that given the cyclicality and price strength, there's a need for incremental working capital investment, or have you already been able to get investment levels stable going into the second quarter of the year?

Yeah, Keith will answer that.

Keith sure says, yeah, we will see a little more build here in Q2. Our selling prices continue to go up. Therefore, our receivables are going to go up. So, I think embedded in our numbers to the two to 300 million of working capital build on receivables in Q2 and then stable for the, you know, obviously for the remainder.

Very clear. Thank you.

And again, ladies and gentlemen, that's star one to ask a question. Your next question comes from the line of Sean Wendrick with Deutsche Bank. Please proceed with your question.

Hey, guys. Good morning, and congratulations.

Good morning, John.

Thanks. This free cash flow guidance is a far cry from the guidance we got in April of 2020. It's amazing to see this now. It totally backs up the buyback that you did back at that time. I'm just thinking, when you look at the $4 billion of EBITDA, I'm assuming the prices hold up, you know, $650 million of CapEx, this is sort of implying, you know, billions of free cash flows. Is that right? Are there other puts and takes, like working capital? Or am I reading the guidance correctly there?

Thank you. You are reading extremely correctly. We are talking about $2.3 billion of free cash. That's correct. You are reading right. And it will be all applied to pay down debt. And when we get to the end of the year, we're going to be below one time leverage. And guess what? I will continue to pay down debt. Right.

Makes a lot of sense.

Do you want to be debt-free? Yes. I want to be debt-free. Because you know what? I don't know if one day we're going to have another COVID. I don't know what's going to happen next. What I know is that if I have my footprint producing 17 million tons of steel a year, producing four billion plus of every guy here, that's free, I'm good.

right now that that's it's really impressive uh at this stage in the game and when we think about that um you know i think you have roughly 1.6 billion under abl right now um aside from basically applying debt reduction there um do you expect to permanently repay any any other debt or do you think you'll just refi it and maybe take out the secure debt as the time comes no we're going to start paying trenches in cash instead of

We have the plan laid out completely between now and the end of 2022 on what tranches we're going to take and when. And we're going to take them all down with cash. Then we're not even going to need a rating from the rating age. That will be the part that I really miss, you know.

Well, your bonds are pricing like they're a single B anyway. So I think people get the picture here. But thank you very much for answering my question.

John, what I'd like to have from this rating is, you know what? They need to start giving me one rating, LG, you know? That's it. Instead of A, B, C, D. Give me an LG rating. That's what the investors want to see. They give me money all the time. And we price stuff. 200 to 250 base points below competition all the time. Right.

Right. This is all very helpful. I appreciate it. Thank you very much, and good luck going forward.

Appreciate it, Sean.

Your next question comes from the line of Carl Blunden with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, guys. Congrats on the strong results and guidance. Thanks, Paul. This might be an extension of that question, but, you know, you have quite a bit of debt now. You've got a lot of cash flow. Once that debt comes down, you have to make decisions with your cash flow. Where, you know, what do you think you would prioritize as you go into kind of 22 and 23 timeframe based on where you see ability to get economic returns or potentially shareholders want to see a line of sight to return, whether it's dividends or share buybacks? Just be interested in your thoughts on that.

Yeah, all of the above, all of the above. This is a good problem to have, and we will address when we get there. We will not commit with anything right now other than paying down debt. Every single dollar that we pay down on the debt for the same enterprise value goes to the other side, goes to the equity. And the stock price, we will start to appreciate. We are in a moment here in the United States in which the economy is booming. The consumer is consuming, like I said in my prepared remarks. We are selling everything we want, and the stock price should continue to appreciate. It's time for real investors to start to move money to where companies are making money. I don't know in the tech side what's called tech. I still have a hard time believing that Uber, for example, is a tech company. It's a care company that doesn't have employees. They explore contractors. So anyway, the real companies, the ones that generate jobs, the ones that create middle-class consumption, the ones that generate the ability to move the economy, investors need to take notice because we are making money. And we are starting to trade at the multiples that are absolutely absurd, absolutely ridiculous. And... this thing is not going to stay there forever. What we'll continue to do, we'll continue to move numbers from the debt side to the equity side. That's what we're doing.

Yes, I mean, it makes sense. I think there is an argument to be made that North America, the U.S. deal market has matured or developed pretty quickly to be a healthier environment. When you think about The option set that you have is inorganic growth, part of the equation as well. Maybe it's not immediate because you're integrating a pretty large investment, but are there other opportunities like that to become bigger or more efficient?

Yeah, I would never rule out anything, but it takes two to dance. When I acquired AK Steel, I went there to buy a furnace. and saw the opportunity to buy a company. Then when that company was acquired, the opportunity to buy AMUSA showed up for us, and we acted very swiftly. So we will not rule out anything, but we are always in the lookout for more efficiency. We believe that our way of doing business is good. Our culture is good. The people that came from both NK Steel and AM USA, they are happy they are with us. We pay people well. We don't take advantage of people. We don't explore people. And that's the most important thing we have. So it creates a lot of momentum when we acquire a company. Because you don't go in and fire half of the employees and say we're saving costs. We're doing the opposite. We are hiring people. We are eliminating over time. So we are creating a workforce of people that really love to work for Cleveland Cliffs. So, yeah, there's a real possibility that we'll continue to do things, but I have no targets at this point, and usually when I have a target, I act so fast that between one call and another, we're going to have something announced. I have nothing to in the horizon right now. My focus is 100%, 100% on paying down that and eliminating that and creating equities. And then the numbers have no other place to go except the stock price. That's what I'm doing right now.

Thanks for the time. Appreciate it.

Appreciate it, Carl.

Your next question comes from the line of Emily Chen with Goldman Sachs. Please proceed with your question.

And congratulations on an excellent quarter. Apologies if I missed this earlier, but I remember, I think from the last call, you previously outlined a plan to keep six to eight blast furnaces online at any given time. It certainly looks like there's not much scheduled for 2Q, which makes sense given where prices are. But maybe one, I'd love to get your views on how long you think this supply tightness will ultimately last. And if you can point to any sort of utilization rates you'd expect to be running for the remainder of the year.

Look, Emily, we have 10 blast furnaces and four EAFs. So the 10 blast furnaces are, let's go one by one. We have one in Ashland that's dead, so take it out. We have one in Middletown that's running. We have one in Dearborn that's running. We have Indiana Harbor 7, which is the biggest blast furnace in North America. It's running. We have Indiana Harbor 4. That's smaller. It's running. We have Indiana Harbor 3. That's dead. It's not going to come back ever. We have two in Burns Harbor, C&D. And we have two in Cleveland, 5 and 6. both running. So one, two, three, four, five, six, seven, eight. That's it. I said six to eight because I was discounting the two that will never come back. When I say never, I'm saying never. Oh, but they're going to produce pig iron to sell pig iron. No. So please forget about that. Not you alone, everybody. So it's not going to happen. Now we are no longer a supplier for EAS. We are competitors. So I'm not going to supply them with PIGAR. So are they for sale? No. So that's not going to happen. They are under my control. They are not going to be supplied PIGAR, and nobody will buy those ferns to produce PIGAR. So we have eight blast ferns that are all running right now. I say six and eight, between six and eight, because at any given time I could have one in retail, like I have Middletown for 14 days, or maybe two. But the rule of thumb will be eight. Also, if you understood what I was saying during my prepared remarks, we are using HBI in the glass furnace. That's the most sophisticated use of HBI. That's actually why Vesalpin put their plant in Texas to supply their furnaces in Austria. So the difference is that we put a plant in Toledo to supply glass furnaces in the Great Lakes, but it's a lot cheaper, a lot simpler, a lot smarter. So anyway, so that's what we're doing. So we're increasing the throughput with our eight furnaces. We also have, that people forget, four EAS that are running at capacity and a little bit above capacity. And they are Stilton, they are Butler, they are Goldsville, and they are Mayfield. So we are running at the capacity the market supports. And we will continue to do exactly that. So we are not going to overproduce stainless steel for clients that don't exist. We are not going to produce electrical steel to destroy parts for price. So that's the company. So these are the ones that are at the very hot end, at the very beginning of the flow. When it goes down the flow and it goes through the hot strip mill and through the pickling line and through the galvanizing lines, then things become so more complicated. But the furnace doesn't define the throughput. That's what I'm trying to say.

Got it. That's very helpful. Thank you.

Thank you.

And there are no further questions in queue at this time. I turn the call back to the presenters for any closing remarks.

Thank you very much for our interest on Cleveland Cliffs, and we will be in touch. Thanks a lot. Bye now.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.