Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Donna, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs' third 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 predictive statements that are intended to be made as forward-looking within the safe harbor protections of 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 Form 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 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 Gonsalves, Chairman, President, and CEO. Please go ahead.

Thanks, Donna. and good morning, everyone. Though many of those listening today know him already, I am pleased to introduce on this call our new Executive Vice President and Chief Financial Officer, Celso Goncalves. In his previous role as Senior Vice President of Finance and Treasurer here at Cleveland Cliffs, Celso was instrumental to our business and financial transformation. Over the past five years, he has led all of our capital structure efforts, being the key person behind the execution and financing for our transformational acquisitions, and managed our liquidity through the pandemic. Prior to Cliff's, Celso had a very successful career as an investment banker, first at Jefferies and then at Deutsche Bank. Also, if you couldn't tell by his last name, Celso is my son. During the last several years, Keith Kosey and I have been preparing Celso for this job. With Keith now in charge of our new business unit as president of Cleveland Cliff Services, we could not have a better or more prepared professional to lead our financial organization. With that, I will turn it over to Celso.

Thank you, and good morning everyone. I am humbled by the opportunity to serve as Cliff's CFO, fully aware of not only our rich 174-year legacy, but also our position of immense influence as the largest flat-rolled steel producer in the United States. I also fully expect that, given my family name and the high standards set by our CEO, the expectations for me will be even greater than for anyone else in this seat. I am prepared to deliver. My experience here at Cliffs over the past five years has taught me that strategic and financial opportunities exist at all points in the cycle. My priorities as CFO are simple. allocate capital in a way that strengthens our business, two, maintain and enhance our financial flexibility, three, deleverage the capital structure, four, evaluate and execute opportunistic M&A and capital market transactions, always with the focus on long-term shareholder returns, and five, continue our five-year track record of share outperformance relative to our peer group and the broader market. With those introductory remarks aside, I will jump right into our third quarter results. We reported another quarter of record revenues of $6 billion, record net income of $1.3 billion, and record adjusted EBITDA of over $1.9 billion. ahead of the guidance we recently set of $1.8 billion. Our 42% quarter-over-quarter growth in adjusted EBITDA was primarily driven by continued price increases on our index linked and spot shipments. These sharp increases on the revenue side were only partially offset by gradual increases on the cost side, including for labor, natural gas, and additional repairs and maintenance. most notably the realign of Indiana Harbor No. 7, the largest blast furnace in North America. And even though it was clearly a one-timer, we did not add back to EBITDA the vaccination bonus payment of $45 million that was awarded and paid out to our workforce under our very successful vaccination incentive bonus program, which resulted in over 75% of our workforce fully vaccinated against COVID-19. In the steelmaking segment, We sold 4.2 million net tons of steel products, with a mix of 32% hot rolled, 18% cold rolled, and 31% coated steel, with the remaining 19% consisting of stainless, electrical, plate, slab, and rail. Our automotive percentage of revenue was 20%, compared to 33% just two quarters ago, clearly reflecting the reduced volumes and the legacy annual prices from that sector. both of which should dramatically improve next year. We expect the trends on pricing and costs in Q3 to carry over into Q4, with higher prices from both index link contracts and some of our repriced automotive contracts, offset by similar cost impacts we experienced in Q3. Shipments will likely be lighter in Q4, due primarily to seasonality and lower automotive shipments. Offsetting this, we will be moving up to the fourth quarter some planned maintenance outages originally scheduled for next year, including the Dearborn hot end and both blast furnaces at Burns Harbor, along with a few other associated rolling and finishing facilities. These outages are being accelerated to this year in anticipation of a strong automotive recovery in 2022. All these events considered, our fourth quarter production should be reduced by approximately 300,000 net tons compared to the third quarter. Our free cash flow generation came in at $1.3 billion for the quarter, slightly lower than our original guidance due to slow demand pull from automotive, leaving more inventory to close out the quarter than we expected. The remaining outage period at IH7, as well as the additional outages we scheduled for the fourth quarter, should allow us to reduce these inventory levels during Q4. This free cash flow generated during Q3 was returned entirely to shareholders in the form of a stock buyback executed via the complete redemption of our 58 million common share equivalent preferred stock. With only one quarter's worth of free cash flow, we completely redeemed our preferred shares. I will note that because of the weighted average calculation and the fact that the prefs were outstanding during a portion of Q3, the full 58 million share reduction is not baked into our Q3 EPS just yet. and we will see a further reduction of diluted share count in the fourth quarter. With the press now completely out of the way, we have resumed our aggressive debt reduction activities. In only the last three weeks since the end of Q3, we have already generated approximately $500 million in free cash flow and have allocated all of it toward debt repayment under the ABL. Upon closing of the FPT acquisition next month, all excess free cash flow will continue to be allocated towards further debt reduction. By next quarter, our LTM adjusted EBITDA should exceed our overall net debt balance, resulting in less than one turn of overall net leverage for the foreseeable future at any reasonable HRC pricing assumption going forward. Because of our strong profitability this year, at some point in the fourth quarter, we will have utilized the majority of our tax NOL balance, leading to an expected Q4 cash tax rate of around 10%. Prior to the acquisitions of AK Steel and AAM USA, we once expected to be utilizing these NOLs for several more years, but the significantly higher profit generation following the acquisitions will result in the consumption of the majority of the $2.5 billion NOL balance within a year of closing the December 2020 transactions. Even with the additional cash tax outflow and payments related to the CARES Act FICA deferrals from last year to this year, free cash flow should remain remarkably healthy in Q4. The $775 million price of the previously announced acquisition of FPT is equivalent to less than two months of our free cash flow generation. Wrapping up, The financial position of the company is on stronger footing today than it has been during my entire time here at Cliffs, and the trend should continue into Q4 and 2022. The fixed price contract business we have with high-end clients, such as the automotive OEMs, gives us significant downside protection if spot prices trend lower. Therefore, even under the current bearish futures curve for HRC, our average selling price should be much higher next year than it has been this year, leading to the expectation of another year of outstanding EBITDA, cash flow generation, and debt reduction in 2022. With that, I'll turn it back to Lorenzo.