Cleveland-Cliffs Inc.

This is Daryl, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs first quarter 2023 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 Forms 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 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.

Thank you, Daryl, and good morning, everyone. Our Q1 results marked the rebound in profitability from the trough in Q4, as we effectively doubled our adjusted EBITDA from the previous quarter. We outperformed on our three most important metrics, selling price, unit costs, and steel volumes. We guided to a Q1 implied selling price of around $11.20 per ton and realized around $11.30. We indicated that unit costs would decline by $50 per ton, and they declined by $60. We said volumes would rise to around 4 million tons, and we delivered 4.1 million. Most importantly, we set the stage for another highly profitable year in 2023, which we expect to further materialize with a much higher Q2 EBITDA and strong free cash flow generation in the last three quarters of the year. Q1 free cash flow was lower, largely because we invested in working capital due to strong demand. As pricing and volumes went up, we saw higher receivables and higher inventory tons. In Q2, we expect this trend to continue, but EBITDA will be so much higher and CapEx will be so much lower that the massive amount of free cash flow coming in Q2 should far outpace any further build in working capital. Adjusted EBITDA in Q1 was $243 million, a 98% increase from the previous quarter, driven almost entirely by reduced unit costs, a function of normalized repair and maintenance spend, lower input costs, and higher steel production. Our Q1 shipment volume of 4.1 million net tons was roughly 250,000 tons higher than the previous quarter, making Q1 of 2023 our highest steel shipment quarter since Q3 of 2021. Automotive demand was robust, service center buying behavior has improved, and we did not have any significant maintenance outages like we did for much of last year. Q1 selling price of $11.28 per net ton came in ahead of expectations due to higher tonnage and higher value added mix in automotive. A little more than half of our sales are index linked, with lags generally varying from one to three months. Due to these lags, the recent rise in flat rolled index pricing was barely reflected in our Q1 results. This improvement is now in full force, which will benefit our results meaningfully here in Q2 and beyond. We have been successful in implementing several spot price increases over the past few months. We have also achieved continued increases in our fixed price contracts for the April 1st renewal cycle. Taken together, these improved prices will propel our realizations in Q2. In addition, due to the same factors that drove Q1 costs lower, our unit costs should continue their downward trend going forward. We also expect that our strong volume performance will carry over into Q2, as the order book remains full and we run at our configured capacity levels. As pricing and volumes improved in Q1, particularly in the month of March, we built around $230 million in receivables, contributing to the lower free cash flow quarter over quarter. As these receipts come in, our cash flow performance will ramp up significantly in Q2, particularly as we have already received $110 million in tax refunds here in April. This comes after a tax refund receipt of $25 million received during Q1. Furthermore, we expect our Q1 CapEx of $188 million to represent the peak CapEx quarter for this year due to some carryover maintenance projects from 2022. So Q2, Q3, and Q4 CapEx should each be lower than Q1. In fact, we have lowered our total expected full-year CapEx range by $25 million to $675 to $725 million, reflecting primarily sustaining projects. Touching now on the capital structure, two weeks ago, we completed a seven-year unsecured notes offering for $750 million, pricing at only 325 basis points above the comparable treasury. This was our tightest spread on any unsecured high-yield bond ever. We took advantage of the inverted yield curve to issue these notes. which are priced off of lower, longer-term rates, and use the proceeds to pay down our ABL, which is priced off of currently much higher short-term rates. We have been comfortable using our ABL as an effective source of liquidity for some time, given it was nearly free money. But with the rapid rise in the Fed fund rates, this is no longer the case. So terming some of this ABL balance out with longer-term bonds was a no-brainer. The coupon on these new notes is effectively the same as the all-in interest rate on the ABL. The additional liquidity provided as a result also gives us more flexibility for whatever market conditions or opportunities may come up. This being said, this swap of shorter-term debt with longer-term notes does not change our capital allocation priorities. We intend to continue using the robust free cash flow we expect to generate this year toward continued debt repayment and opportunistic share buybacks. We still have over $1 billion in prepayable debt on the ABL and another $1.5 billion in callable bonds. For now, the main priority for debt reduction will be to continue driving down the ABL balance. When that has been paid off in full, we will then target redeeming our 2026 secured notes. As we've shown in the past with aggressive bond buybacks, even our non-callable, long-dated, unsecured bonds are effectively prepayable since we can also opportunistically buy them back in meaningful amounts in the open market. We plan to continue this capital allocation strategy until our net debt gets down to around $3 billion. And assuming market conditions remain as they are now, we should achieve that at some point this year. With that, I will turn it over to Lorenzo for his remarks.

Thank you, Celso, and good morning, everyone. During the past quarter, Order release rates from our automotive clients were the strongest and the most consistent we have seen since becoming a steel company three years ago. Also, service center buying behavior in Q1 came back to more normal levels. These two factors, combined with reduced imports of flat old steel, forced the buyers to increase their order levels with domestic producers. In addition, the excess scrap and metallics inventories that were built by other steel companies in response to the war in Ukraine were ultimately drawn down, forcing scrap prices back to what we believe are higher but still acceptable and sustainable levels. We used all of these factors in our favor to implement several spot price increases, which have ultimately driven index pricing higher. Our conviction that this country's prime scrap and metallic shortage will continue to tighten over the coming years is at the core of our strategy. Last year's strange scrap movement in the second half of the year has been proven to be an outlier, and the prime scrap market is back in a shortage position. There is less than 20 million tons of annual prime scrap and metallic supply in North America currently, and unless you are a producer of only rebar and nothing else, you need prime scrap and metallics. Our in-house production of 2 million tons of HBI per year at Cleveland Cliffs is an integral part of our own internal supply chain. We use our HBI primarily to facilitate feed our own blast furnaces to reduce coke rate and CO2 emissions, and that results in very limited availability to sell HBI to third parties. We anticipate that with the new electric arc furnaces coming online, demand for prime scrap and metallics will be at 30 million tons by 2026. This will require significant levels of imported metallics. The largest sources of these imports up until last year were Russia and Ukraine. More than a year after the invasion of Ukraine, that import avenue remains heavily disrupted. Said another way, unless one is rerouting Russian supply through other countries for transshipment, which is, by the way, illegal, they cannot get all the feedstock they need. Because prime scrap is a byproduct of manufacturing, and we as a country have been moving manufacturing offshore, prime scrap supply has been shrinking in this country for over 50 years. Bringing more manufacturing back to the United States over the coming years should help alleviate this situation, but that will take time. The alternative to address the scrap shortage would be additional metallics production, but that requires iron ore. As the largest producer of iron ore pellets in North America, this plays right into our favor. For the majority of the last three decades, flat-rolled steel production with EAFs took advantage of cheap and plentiful prime scrap. This historical situation is changing fast. Greenfield flat-road production from EAFs also plays into our favor in the automotive market. As some EAF startups have been demonstrating for a few quarters now, the metallurgical challenge in automotive is too big for them. This fact, along with our customer service and our R&D capabilities, are the three main reasons why Cleveland Cliffs remains the supplier of choice to the automotive industry in the United States. That also helped us achieve annual price increases from all and each one of our major automotive clients. Some of these price increases will only show in our Q2 results as they are effective April 1st. Our shipments in the first quarter to our direct automotive customers were the highest they have ever been in our three years as a steel company and at higher prices. This was the biggest reason for our strong quarterly shipment number of 4.1 million tons and why we're running all of our steel making shops at full capacity. Our higher levels of steel production have led to the partial restart of some operations at our iron ore mining and pelletizing swing facility at North Shore earlier this month. As you may recall, North Shore has been totally idle since the spring of last year. We will continue to treat that facility as our swing operation, and at this time, we still do not expect to operate North Shore in full any time this year. The remarkable improvement in automotive demand is a combination of the easing of their supply chain issues and the American consumers' growing appetite for new cars. Auto sales seasonally adjusted annual rates, usually called SAR, in the United States averaged about 15.2 million units during Q1, a massive uptick after averaging 13.7 million units during all of 2022. As such, our forecast for North American automotive builds in 2023 of 15.5 million light vehicles is the best in four years, with one car equally in roughly one ton of steel, and with Cleveland Cliffs representing nearly half of the flat road market for automotive steel, you can do the math on the additional volume this will bring. The auto sales and production increases we have been seeing are further confirmation of our view on how steel demand in the US will shift in our favor. For the last couple of years, Non-residential construction has been the outperformer in the steel market, with automotive lagging significantly behind. As you know, Cleveland Cliffs is not a big player in non-RAS. That said, given the massive backlog that has been created as a result of supply chain issues over the past few years, and with the Federal Reserve reaching the end of their interest rate hiking marathon, Going forward, all signs point to automotive being the outperformer. Cleveland Cliffs is ready to accommodate any improvements in demand from the automotive sector, whether that be from internal combustion engine vehicles or EVs. And our clients know that very well. At Cleveland Cliffs, we are agnostic to whatever ways that demand materializes over the coming years. as we are the clear-cut leader in supplying steel for both types, electric or conventional vehicles. That said, earlier this month, President Biden's administration put forth their latest push to drive large-scale EV adoption in the United States. The proposal includes a projection that two out of every three new cars sold in the United States in 2023 in 2032 will be electric, compared to about only 7% today in 2023. This is a structural reset that we have dedicated our research and innovation center efforts toward since we acquired AK Steel in March of 2020. Put simply, due to our size as a supplier of automotive steel in the United States and also due to our unique technical capabilities, these goals of the U.S. government cannot be reached without Cleveland Clips. We are an integral part of this transition from ICE vehicles to EVs in the United States, regardless of whether it happens at a fast or at a slow pace. This includes our supply of exposed body parts, structural cages, battery support, and non-oriented electrical steels for motors. Regarding non-oriented electrical steels, we call NOS, and responding to growing demand from our existing customers, we have already deployed $30 million as capex into our Zanisville, Ohio facility, to increase our production capacity of nose by another 70,000 tons annualized. We should start operating this new capacity in the third quarter of this year. Also as a reminder, Cleveland Cliffs is the sole producer and a well-established supplier of both gross grain-oriented electrical steels and nose in our country. That's our technology, originally from Armico, the A in AK Steel. The market for these products is huge, but any new entrants to this market will have to first learn the products and then perfect the manufacturing process. Then the rookie producer will have to qualify these products with each one of the clients. That's not our case. We are already in the house with all of these clients. A couple more things before we open for Q&A. Earlier this month, we published our 2022 sustainability report. we are pleased to report that as of 2022, our absolute scope one and two greenhouse gas emissions were already below our aggressive target for 2030 of 25% reduction in comparison to our emissions in 2017. That was when we made our decision to build our state-of-the-art direct reduction plant. This early accomplishment of our target was made possible primarily by the use of massive amounts of HBI in our blast furnaces, helped by hot metal stretching through the increased utilization of scrap in our BOFs and natural gas injection in our blast furnaces. We also reported that our Scope 1 and 2 emissions intensity from our blast furnace and BOF operations in 2022 was down to 1.60 metric tons of CO2 per metric ton of steel. This number puts Cleveland Cliffs in the third percentile of integrated steelmaking emissions worldwide and compares extremely favorably to the global average of 2.32 tons of CO2 per metric ton of steel. Because of the meteorological requirements and quality needs of our automotive customer base, we remain committed to the blast furnace BOF still making routes, and we will continue to work to make it less carbon intensive. In order to further reduce these already low emission numbers, we are pursuing potentially high IRR projects in emerging technologies, particularly carbon capture and storage, and iron reduction by hydrogen. As things progress on these fronts, we'll continue to keep you informed. With that, I'll turn it over to Daryl for questions. Thank you.