Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Kevin, and I'm your conference facilitator today. I'd like to welcome everyone to Cleveland's first quarter 2022 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's website. Today's conference call is also available and being broadcast on clevelandcliffs.com. and at the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results including certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I'd like to introduce Celso Goncalves, Executive Vice President and Chief Financial Officer.

Thank you, Kevin, and thanks to everyone for joining us this morning. Let me start by summarizing the key highlights from our Q1 results, and then I'll provide some additional context around our increased outlook for the remainder of the year. Our adjusted EBITDA of $1.5 billion in Q1 of 2022 is three times higher than the year over year adjusted EBITDA in Q1 of 2021, boosting our last 12 months EBITDA to $6.2 billion, which is a record for any 12 month period in our company's history. Relative to last quarter, our sequential Q1 EBITDA was essentially steady with Q4, despite the sharp drop in spot steel prices that started around September of last year and lasted into early March of this year before rebounding higher. In late Q4 and early Q1, we also saw relatively weak service center demand due to generally elevated inventory levels. Despite this unfavorable backdrop of falling HRC prices, and weak service center demand, we were still able to maintain a steady quarterly EBITDA level from Q4 to Q1, primarily due to the magnitude of our fixed contract price increases that went into effect at the beginning of this calendar year 2022. Ultimately, more than offsetting the spot price weakness backdrop and resulting in higher overall average selling prices for cliffs quarter over quarter from Q4 to Q1. We have been foreshadowing that the strength and fixed price contract renewals would eventually materialize in our numbers, and that has now been clearly demonstrated through our Q1 results. From a volume standpoint, we also achieved a 200,000 ton sequential improvement in direct volumes to the automotive industry, our best shipment quarter to this end market since the semiconductor shortage began in the first quarter of last year. This resulted in improved sales volumes to 3.6 million tons in Q1. Going forward, as we expect the automotive sector to continue to improve and the distributors and converters market to replenish inventories, we anticipate sales volumes to increase further on a quarterly basis. During Q1, we also concluded negotiations on all of our remaining fixed-price automotive renewals that reset on April 1st. with significant further price increases executed on all 1.5 million tons of annualized volumes that matured on that date. We are already benefiting from this price increase here in Q2. Beyond that, our next round of fixed price contract renewals will be negotiated this summer and repriced on October 1st, and we look forward to continuing this favorable pricing momentum on those negotiations as well. Adding additional context around our updated favorable outlook for the remainder of the year, we are increasing our expected average selling price by $220 per ton compared to our prior guidance in February. Our expectation is now for a full year average selling price of $1,445 per ton at the current curve compared to our previous guidance two months ago of $1,225 per ton based on the curve at that time. This improved outlook is driven by three things. One, our successful fixed contract renewals, as I have just explained. Two, a higher futures curve today compared to February. And three, wider than historical spreads between hot rolled and cold rolled steel prices. On the cost side, we are better positioned than any of our competitors to mitigate pressures from the current inflationary environment, given our vertically integrated and internally sourced iron ore pellets HBI, and scrap, as well as annual fixed price contracts for met coal. Our Q1 unit costs moved up sequentially, as expected, due primarily to coal, alloys, and energy cost increases. We also took $111 million in one-time accounting charges related to some operational and financial decisions that we executed during the quarter, namely the closure of Mountain State Carbon, and the idling of the Indiana Harbor No. 4 blast furnace, as well as the redemption of our convertible notes. Looking into Q2, we expect our unit costs to increase sequentially due to our Cleveland No. 5 outage and generally higher scrap and energy costs, although these will not impact us nearly as much as others in our industry that are much more exposed to high scrap prices and need to buy slabs externally. From a cash flow standpoint, Our inventory build of $372 million during the first quarter was more reflective of costs than actual units, as our total tonnage of steel inventory actually declined over the past quarter. With this one-time inventory build out of the way, our Q1 free cash flow of $297 million should be the trough in quarterly free cash flow generation for the year, with much higher rates of EBITDA to free cash flow yield conversion in Q2, Q3, and Q4. At the current steel forward curve, we expect our total 2022 free cash flow to exceed the record that we set last year. And that is even as we become a substantial cash taxpayer this year, which we were not in 2021. Speaking of cash flow and capital allocation, we continue to clean up our capital structure and favor debt reduction over other uses of capital at this time. This year, we have already redeemed our convertible notes and our 9.875% secured notes, which we completed this week well ahead of its 2025 maturity. With this proactive approach, our most expensive bonds are now completely gone, and our annual cash interest expense is significantly reduced. Looking ahead, we have a few more tranches of debt that we can pay down with our cash flow, prioritizing our 6.75% secured notes as our next target. In a few quarters, Our debt should be so low that it will no longer even be a discussion point, and I look forward to talking about other ways of returning capital to our shareholders at that time. Our LTM EBITDA of $6.2 billion already implies leverage of 0.8 times, the lowest level for Cliffs in over 12 years. As you can also see from this morning's release, we only spent $20 million in share repurchases during Q1. executed opportunistically at very attractive prices. Other than this, we used most of our remaining free cash flow generated during the quarter toward paying down debt, as discussed. Going forward, we will continue to favor debt reduction over share repurchases in the near term, and buybacks will continue to be only opportunistic. In closing, because of our domestically sourced raw materials supply chain, as well as our heavy weighting towards fixed price contracts, Our 2022 financial outlook is very compelling, with strong margins, record levels of free cash flow, and equity value creation through a massive conversion of total enterprise value to market value via debt reduction. With that, I'll turn the call over to Lorenzo.

Thank you, Celso, and good morning, everyone. I will start addressing the most significant development we are facing at this time The Russian invasion of Ukraine is a barbaric act. Its impact on the civilian population of Ukraine has made this event, above all else, a human tragedy. As a matter of fact, Russia and Ukraine have been at war since Putin invaded the Crimean Peninsula in February of 2014, a few months before we began the turnaround process at Cleveland Cliffs. Our business at that time was to supply raw materials to North American steelmakers, and we identified the massive share of pig iron coming to the United States from Russia and Ukraine as unreliable and at risk. Representing two-thirds of all U.S. imports of pig iron at the time, it was pretty remarkable that no one was really concerned about it. for working to reduce their dependence on both Ukraine and Russia. This helped us formulate our decision made in 2017 after we had already fixed the financial situation of the company to build a domestic source of virgin metallics with our Toledo direct reduction HDI plans. That was an attempt to provide the U.S. electric arc furnace market with a more reliable and carbon-friendly source of metallics, which they absolutely need to make higher specs of flat-rolled steel. In the seven years following the invasion of Crimea, we were the only company to act on this potential to reshore or base metallic supply back to the United States. Fast forward, now that we are a steel producing company, we are better off using our HBI in-house. That has allowed us to reduce our blast furnace footprint from eight to seven units while maintaining similar level of the steel production output following our recent idol of the Indiana Harbor number four blast furnace. This has also created a huge competitive advantage for us. With our own in-house pellets and relatively cheap natural gas, our cost to produce HBI has been just over $200 a ton. And that compares very favorably to the $1,000 per ton price tag for pig iron imported into the United States these days. The ongoing importance we placed on prime metallics did not stop with HBI. In November of last year, we acquired FPT, the leading prime scrap company in the United States. Since acquiring FPT just five months ago, we have already increased our access to another 400,000 tons of prime scrap per year, elevating our market share in merchant prime scrap from 15% at the time of the acquisition to 20% now. Both of these strategic moves, FPT and HBI, each underscored by our forward-looking view on the necessity of domestically sourced, high-quality iron units, have paid off in very short order. These actions were based on our view of the world, and we are benefiting now. Iron metallics are absolutely necessary to make high-quality flat-walled steel. We at Cleveland Cliffs are long on metallics in a country that is short of them. EAFs cannot make high-quality flat-walled steel just by melting scrap. They need metallics. That's why they import so much pig iron, vast majority from Russia and Ukraine. However, imported pig iron comes from some of the least environmentally friendly plants in the world, generating a level of CO2 emissions that will put them out of business here in the United States. But that is scope three emissions for the American importers of pig iron. And so far, that important piece is ignored when a company reports emissions. We at Cleveland Cliffs will continue to educate investors, members of Congress, and government officials on the importance of accounting for Scope 3 emissions. If you are serious about emissions, Scope 3 can no longer be ignored. As a result of the invasion of Ukraine by Russia on February 24, more than 4 million tons per year of imported pig iron supply have been disrupted. While the new situation hit very late in Q1, particularly due to vessels already sailing and material already unloaded on domestic grounds, 4 million tons out of a total of little more than 6 million tons is a full-blown disaster. for companies depending on imported pig iron. For these folks, Q2 should be very challenging. Supply from Ukraine will likely be out of the market for a very long time due to the significant damage to blast furnaces, oak batteries, and other equipment that cannot be fixed quickly. As far as Russian pig iron, well... we are sure that production will not be discontinued. Due to outdated trade laws and powerful lobbying efforts, pig iron from Russia can still come into our country with effectively zero restrictions, even after Russia losing the NTR, permanent normal trade relations status, with the United States. The revocation of PNTR status came with heft tariffs of 25% or above on most steel products from Russia. But the tariff on pig iron is still a meaningless $1 per net. This dates back to the 1930s, when pig iron was not even a product imported by the United States, and certainly not from Russia. Russia's predecessor, the Soviet Union. Again, as far as Russian pig iron, production will not be discontinued. Even if American companies decide to stop buying Russian pig iron as early as right now, in Q2, Russia's next move on the international trade arena is very predictable. Transshipment of Russian pig iron through Russian-friendly business-as-usual type of countries, such as China, India, Brazil, and a few others. Cleveland Clips will be watching the current developments around the international trade of Russian pig iron in Q2, and we fully expect the U.S. government to be on the lookout to block such predictable moves on transshipments of pig iron from Russia through third-party countries. Take one step back and learn from current events. The impact on supply chains should have been a lot worse if we're talking about the invasion of Taiwan by China. But the ongoing invasion of Ukraine by Russia should be enough for a clear call for the end of globalization. We call it deglobalization. I believe deglobalization is the most important game changer of this decade in the United States and for the American people. De-globalization is not just relevant for our industry, but for our customers as well. If the automotive OEMs had not set themselves up to be so reliant on imported semiconductors, they would have the demand to support the production of 18 million cars, both last year and this year, rather than the 14 to 15 million units they are currently able to produce. We are encouraged by investments made in onshoring this production, including a major $20 billion factory down the road in Columbus, Ohio. Cleveland Cliffs is an automotive supplier, first and foremost, by far the largest supplier of steel to this sector. It's also noted Q1 was our best shipment quarter to the automotive sector in a year. But we will be able to do much more in a fully utilized business environment. That day is coming, and the amazing results we have shown Over the past year, we will only be further amplified once we get there. Looking ahead to the rest of the year, based on the rationale I have tried to lay out today, we are set to benefit from our perfectly constructed business model. There are seven real producers of flat-rolled steel in the United States, and we are the only one among the seven that does not rely on imported pig iron or its labs. In simple terms, the high cost that our competitors are facing from sourcing these materials will force them to keep steel prices elevated, and we will benefit through higher margins. Our cost structure is not nearly as impacted. Also very important, new flat-rolled mini-mules ramping up capacity will only exacerbate their current issues with sourcing prime scrap and metallics, which will just further widen the competitive advantage we have. While I have focused the majority of my remarks on raw materials and substrate, the Russia-Ukraine conflict removed a lot of finished steel from the global marketplace as well, including its labs re-rolled in Europe. The war-induced steel shortage has pushed global steel prices up, making imports less appealing in the United States. We continue to read the same headlines about inflation, rising rates, rising lower growth, and the increasing likelihood of a recession. We long for the days that Fed officials will just keep quiet and do their job rather than giving doomsday interviews on Zoom almost every day. For us, underlying demand is good. Customer inventories have begun to decline, and issues related to sourcing labor or critical materials are showing signs of easing. The panic buying of 2021 is behind us. but we still have a lot of hungry mouse to feed and that will only increase as the same conductor shortages gets progressively better. Wrapping up, we did not wish for the current Russia-Ukraine situation and want to see peace soon. Russia should be punished for their vicious attacks and the steel industry around the world, particularly the American steel industry, can play an important role in inflicting maximum pain to the perpetrators of this despicable act against the civilian population of Ukraine. We have geared our strategy around the importance of a domestic supply chain, and it's unfortunate that it took this situation to be the wake-up call for the ones that were not paying attention. We are proud to provide our customers with steel free of association with Russia. With that, I will turn it over to Kevin for a question.