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.