Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Maria, and I am your conference facilitator today. I would like to welcome everyone to Cleveland CLIF's full year and fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there'll 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 harbors protection 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 Forms 10-K and 10-Q and news releases filed with SEC, which are available on the company's 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 yesterday. At this time, I would like to introduce Celso Goncalves, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Maria, and thanks to everyone for joining us this morning. 2022 was the 175th year for Cleveland Cliffs, and we celebrated this milestone by generating record revenues of $23 billion. From a profitability standpoint, our adjusted EBITDA of $3.2 billion and free cash flow of $1.5 billion were each the second highest in company history, only exceeded by 2021. That said, Our most significant financial accomplishment in 2022 was the dramatic improvement to our balance sheet, where we eliminated over $3 billion in liabilities via debt pay down and pension and OPEB obligation reductions. I have been clear since day one that de-risking the balance sheet is my top priority, and we will remain consistent in deploying the majority of free cash flow toward debt repayment. In 2022, Cliff's average selling price for steel increased by almost $200 per ton, despite index hot rolled prices dropping around $600 per ton year over year. This was the primary driver of our record revenues and a testament to the improvements in the fixed price contracts we negotiated, which by the way, have only strengthened into 2023. We spent the majority of 2022 reinvesting in our facilities, which along with inflationary pressures, led to an uptick in operating and capital costs. With these initiatives now behind us and certain inflationary pressures easing significantly in 2023, we expect to see meaningful cost reductions going forward. We are already operating at much lower cost than what our recent COGS would indicate, which will be more and more evident as we report continued sequential cost decreases in the coming quarters. In the fourth quarter of 2022, we generated adjusted EBITDA of $123 million, which we believe is the trough in quarterly adjusted EBITDA going forward. Consistent with our guidance, we achieved our target unit cost reduction of $80 per ton of steel sold in Q4, which helped to partially offset the lower index pricing environment in the back half of last year. During the quarter, we shipped 3.8 million tons of steel, giving us our best shipment quarter in over a year. From a free cash flow standpoint, we generated $262 million, more than two times our EBITDA in the quarter, affirming our prior commentary that working capital would be a meaningful source of cash for us as real-time costs declined in the second half of the year. Consistent with our ongoing strategy, we deployed this cash to pay down $200 million of debt and used another $30 million to buy back 2 million shares at about 15 bucks a share. Looking ahead to the first quarter of 2023, our shipments should rise to the 4 million ton level on visibly improved demand. In addition, our unit costs should decline another $50 per net ton due to one, higher production volumes, two, lower energy costs, and three, normalized repair and maintenance levels. Our Q1 selling price will be impacted by lower surcharges, some lags on lower priced index deals, and higher CRU discounts on spot-based contracts. But our improved fixed price contracts will help to mitigate this impact. Overall, the first quarter decline in average selling price is expected to be less than the decline in unit costs, driving margin accretion compared to Q4. Beyond that, we expect costs to continue to fall into the second quarter and prices to accelerate much higher, generating a considerable further EBITDA improvement from Q1 to Q2. So, to be clear, as far as we can see, Q1 EBITDA should be higher than Q4, and Q2 EBITDA should be significantly higher than Q1. As noted in our release, we expect our steelmaking cost to decline by approximately $2 billion in 2023 compared to 2022, normalized for volumes. To provide further context and quantify certain components of that $2 billion, We expect an $800 million year-over-year reduction in maintenance and idle cost, a $400 million cost improvement related to higher production volumes, a $300 million reduction in natural gas costs at today's curve, including hedges, a $300 million improvement in alloy costs at today's levels, and a $200 million decrease related to supplies and other inputs. We do expect an uptick in coal and coke costs, but that will likely be offset by a decline in scrap costs based on today's curve. Our capital expenditure should also take a meaningful step down in 2023, with an expected range of $700 to $750 million, compared to the $943 million we spent in 2022. Last year, we had spending related to catch-up maintenance and the realign of our Cleveland No. 5 blast furnace. We are now running closer to a sustaining level of capex, with the only major projects above $25 million being an IT upgrade and a new line at our Coshocton facility, which will modernize the production of our Brighton Eel stainless trim, one of our highest price and highest margin products. With our pension and OPEB liabilities reduced by $3.4 billion over the last two years, we will also see relief on mandatory cash contributions related to these plans, which we expect to decline from $200 million in 2022 to $100 million in 2023, a portion of which is liquidity neutral, as some related letters of credits are released. Under our current outlook, we expect further reductions in working capital to drive an additional source of cash. We also expect a federal cash tax refund of $140 million in the first half of the year. And our SG&A expense in 2023 should be around $500 million, split evenly by quarter. In the back half of 2022, we were able to weather through market volatility and lower prices while remaining a healthy cash flow generator. With business fundamentals improving further this year, we are in an even better position to benefit with lower costs and fewer cash obligations, along with much better fixed price contracts. With that, I'll turn it over to Lorenzo for his remarks.

Thank you, Celso, and good morning, everyone. Transformational acquisitions, such as the ones we executed in 2020, are not done to build an empire or just so we could call ourselves the largest flat-rolled steel company. We actually do these things to unlock value through synergies. Not only the obvious synergies that anyone can identify, but also, and mainly, the ones that are not so obvious. but actually create real value from situations never identified before or never explored before by others. That's exactly what we have demonstrated in our latest round of fixed price contract renegotiations. For the full year 2022, our weighted average realized price for our carbon steel automotive contracts was about $1,300 per net ton on a mix that consisted of about 70% coated products, 15% cold-rolled steel, and 15% hot-rolled. For the majority of the past two years, the margins on those sales to automotive were lower than the margins obtained on sales of less technically challenging and much less customer service intensive products executed with our non-automotive end users and service center clients. Entering 2023, this situation has been fixed by Cleveland Cliffs. The ability of our company to service the automotive industry is at our deepest core. Our team's knowledge of automotive clients enables us to effectively anticipate their needs. We have a proven track record of consistent performance. Even with the supply chain disruptions, all of our clients in the automotive sector have been true during the past couple years. During that time, the clients had to worry about a lot of things, but they never had a single disruption caused by steel from Cleveland Cliffs. Steel was always there. automatic. We are good at that, and the clients know we are. That's why Cleveland Cliffs supplies over 7 million tons of steel to the automotive sector, including 5 million tons of direct sales and over 2 million tons of indirect sales. For all these reasons, Cleveland Cliffs deserves to be paid for what we do. From the automotive company buyer's standpoint, replacing Cliffs with another supplier might look intriguing, particularly when one or two steel companies are so eager to buy market share by selling steel cheaper than Cliffs does. The script is well known. A steel mill offers cheap steel and promises that, at this time around, their performance will be better. However, that's almost always a recipe for disaster. It may save some dollars per ton on paper and make the buyer look like a spreadsheet hero in front of his or her bosses, but for a limited period of time. And then, when it still does not arrive on time at the assembly line or does not match specification, reality sinks in, and it's always ugly. Well, in late 2021, we made some progress in reconciling the gap in value. However, the outside view, particularly for investors, was that we only achieved price increases because of the strong underlying price in the overall market. That was not the case. But it was not until this last renegotiating cycle toward 2023 that the new Cleveland Cliffs approach to the business became fully apparent. So in an environment where commodity flat-roll distilled pricing decreased 65% in a little over one year time period, we were able to achieve decent increases on our automotive contracts without sacrificing sales volume. We are actually expecting higher sales volume to the automotive sector in 2023 than in 2022. With that, for our direct automotive business, our largest end market, with typical volumes of 5 million tons per year, we expect our full year 2023 selling price of carbon flat rolled steel to increase to $1,415 per net ton for a $115 per net ton increase year over year. We consider that a significant but still modest price increase, basically in line with past inflation. Also, the vast majority of our customers recognize the value we provide the solid advantage they enjoy from our unique one-stop shop and customer service capabilities, and how only our blasphemous BOF-based steel can meet the most stringent quality standards for all of their flat-rode needs. Differently from every other steel company in the United States, Cleveland Cliffs is fully committed to the blast furnaces BOF technological route. Our significant presence as a supplier of highly specified automotive grade materials, particularly exposed parts, dictates the use of blast furnaces and BOFs. And we are not alone. Every country with a major presence of automotive manufacturing, such as Japan, South Korea, Germany, France, or even China, currently the largest automotive producer in the world, relies on blast furnaces and VOFs. These countries actually have to import massive amounts of iron ore pellets and sinter feed from others. And all these countries generate a lot of scrap, but they still do not transition to EAFs. and certainly do not rely on EAFs for highly sophisticated carbon flat-rolled steel products, such as in automotive. The reason is simple. In order to supply steel to their own domestic automotive clients, they need their blast furnaces and DOFs. That's also our case here in the United States. And that's why Cleveland Cliffs does not need to and does not plan to invest in new EAFs beyond the five EAFs we already operate. There's a lot more to that, but I believe you've got the picture. In our view of the current economic landscape, automotive is the most exciting steel-consuming sector for 2023. The current age of cars on the road, the consumer backlog, the low unemployment rate, and the still low inventory levels at the dealer lots continue to point to growth in automotive sales and production over the coming years, particularly now when they have finally improved the performance of their supply chains. Our January auto steel shipments rate was its best in nearly a year, and we expect this momentum to continue throughout 2023. Going forward, we remain committed to continuing to obtain fair prices for the steel we sell to our clients in the automotive sector. This improvement in the automotive market has also helped support pricing for our non-automotive businesses. as the increased demand in auto has reduced our overall availability to the broader market. Back in November, we started to note an inflection in both service center buying behavior and the scrap market, which finally began to point in a positive direction. We capitalized on this and announced our first of what is now five price increases. all of which have taken hold and moved pricing higher. While imports of flat old steel in general have not been a major issue for us due to tariffs and duties we have in place, the one area where dumped and subsidized imports have become a problem is our team plate business, which represents about 300,000 tons of sales per year for Cleveland Cliffs. Since 2019, we have seen a dramatic surge in unfairly traded imports of 10 mil products, which significantly undermines the fair prices we would otherwise achieve in our contract negotiation with our template clients. We have recently filed trade cases against eight countries who have distorted the market price here in the United States with their bad trade practices. We cannot allow this critical piece of our food supply chain to become fully dependent on imports. We have filed this trade case alongside our union partners, the United Steelworkers. We are grateful to have the USW taking on this fight with us, and we will do everything in our power to make sure US trade laws are respected. and the situation is properly fixed. The outlook for our other specialty products, however, is very good. We expect that in 2023, our electrical steel business will post its highest profitability since 2009, back when it was AK Steel's main profit center. This 14-year high is driven primarily by grain-oriented electrical steels, goals, products, as ongoing efforts to modernize the electrical grid have led to strong demands. With the investments we have put into our Butler PA and Zanesville, Ohio facilities over the past year, we now have even more capacity to serve our clients. We were also able to achieve unprecedented price increases on these products for 2023. Given the multi-year backlogs for electrical steels and the additional demand created by the Infrastructure Investments and Jobs Act, our electrical steel assets should be solid contributors to our profitability in 2023 and beyond. Finally, On the environmental side, 2022 was another year of progress toward achieving our carbon emission reduction goals. We are firmly believers that we will deliver on our aggressive 2030 targets with a footprint that's primarily glass furnace-based. We are pleased with the progress we have made in our study of full-scale carbon capture at Burns Harbor, our largest steel plant. As we look at it now, based on the incentives the US government has offered per unit of carbon sequestered, this project should generate a meaningful IRR. There is also the ability to substantially increase the use of hydrogen in our operations, replacing fossil fuel-based energy that we use throughout the entire footprint, particularly in our direct reduction plant, and in our blast furnaces. We already use hydrogen in some processes, like in annealing, but its broader use will depend mainly on the economic availability of hydrogen itself. To facilitate this, we have joined with industry and academic partners in forming the Great Lakes Clean Hydrogen Coalition, or GLCH. a coordinated hydrogen hub effort to transition the Midwest into a leading low-carbon fuel production center. Cleveland Cliffs has successfully implemented the use of HBI in blast furnaces. Now, we look forward to becoming the first steel company in the world to utilize hydrogen as a clean reductant to iron oxides in a full industry scale. To wrap up, we at Cleveland Cliffs have a lot to be proud of for what we have accomplished in the last two years, and even more to be excited about looking ahead. We have broken free from the harmful old paradigm that automotive steel should be priced like a commodity. Our balance sheet improvement over the past year is remarkable, and it will only get better from here. Our costs are down, and our backlog of capital needs from the time of the acquisitions has been taken care of. Prices are on the upward trend. With the fourth quarter EBITDA trough behind us, we look forward to the success that 2003 will bring to Cleveland Cliffs. With that, I'll turn it over to the operators for questions.