Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Daryl, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs' second 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 this morning. At this time, I would like to introduce Celso Gonsalves, Executive Vice President and Chief Financial Officer.

Thank you, Daryl, and good morning, everyone. Q2 adjusted EBITDA of $775 million was more than three times higher than Q1. We had our best free cash flow quarter since 2021 at $756 million. We used most of that cash to pay down over $550 million of debt, bringing our net debt down to $3.9 billion, our lowest debt level since we were just a mining company in 2019. Q2 of 2023 was our largest quarterly debt reduction in company history. We also returned nearly $100 million to shareholders by buying back 6.5 million shares at an average price of just over $14 per share. Since the acquisition of FPT in November of 2021, we have dedicated the vast majority of our free cash flow to debt repayment and share repurchases. To summarize our balance sheet accomplishments over the past two years, net debt has gone from $5.3 billion to $3.9 billion, down by 26%. Net pension and OPEB liabilities have gone from $3.8 billion to just $750 million, down by 80%. And our diluted share count has gone from $585 million to $514 million, down by 12 percent to the benefit of our shareholders. We have remained disciplined in our approach to capital allocation and will continue to do so going forward. Our current and future CapEx needs are low, and we expect to maintain a very strong free- to remain a very strong free cash flow generator for the foreseeable future. Q2 was a multi-year low in CapEx for us. Looking ahead, Very importantly, based on more recent evaluations by our operations team, the blast furnace reline at Burns Harbor that we mentioned on the last call, which was originally planned for 2025, has now been pushed by one year and will now only be done in 2026. With that, we now expect annual cutbacks to remain around the $700 million level for 2023, 2024, and 2025. Drilling down specifically on our results for this past quarter, our volumes and selling prices were both up sequentially from Q1 to Q2. Shipments of 4.2 million tons effectively matched the high watermark that we set as a steel company two years ago. This was highlighted by a much richer sales mix with another quarterly record shipment level to our automotive customers and more value-added end-user sales than originally expected. This mixed impact led to better price realizations than expected, with our selling price averaging $1,255 per net ton, representing a significant increase of nearly $130 per ton quarter over quarter. During Q2, the offsetting impact of the richer mix came on the cost side, as our unit costs were effectively flat compared to the prior quarter. We ultimately sold a higher proportion of value-added tons than originally expected. This being said, the cost reduction targets that we laid out in the prior quarter remain on track, as we anticipate a $40 per ton reduction in steel costs from the second to the third quarter. You can already see this foreshadowed in our cash flow statement, as replacing higher cost inventory with lower cost inventory drove a working capital benefit in Q2. This cost reduction is a function of healthy production volumes, normalized repair and maintenance costs, as well as lower scrap energy, and alloy costs. The reduction in costs coming in Q3 will help to partially offset the impact of recently lower index pricing, which will roll through in the back half of the year. As typical for the sector, we will likely see lower volumes, lower automotive volumes in Q3 due to OEM outages for model year changeovers. While we still aim to maintain in Q3 the same high levels of total shipments we achieved the expected product mix should drive a favorable impact on unit costs. We are excited that we have now worked through effectively all of our higher cost inventory leftover from our days of elevated repair and maintenance and reduced production volumes. Looking forward, we not only see the near-term costs coming down in Q3 and then Q4, but also expect to see further reductions into next year, mainly related to lower coal prices. During the quarter, Following the well-timed issuance of our unsecured bonds in April, we were able to successfully upsize and extend the maturity of our ABL facility from 2025 to 2028, pushing out by three years what was previously our nearest dated debt maturity. With the assets of FPT now included as part of the collateral, we rightsized our ABL from $4.5 billion to $4.75 billion. The ABL, together with our bond offering and free cash flow, allowed us to end the quarter with record liquidity of $3.8 billion. With that, I will now turn the call over to Lorenzo.

Thank you, Celso, and good morning, everyone. The first thing I will highlight about our second quarter results is our total shipments of 4.2 million tons. We've matched the record high we set in the second quarter of 2021. At that time, back in 2021, we were operating a total of eight blast furnaces. And now, in 2023, we operate only seven. If you recall, we idled our Indiana Harbor number four blast furnace at 2.1 million tons per year unit in 2022. So with one last major blast furnace in our footprint, we were able to accomplish the same levels of production and shipments. This fact demonstrates the efficiency of our strategic use of HBI as feedstock in our blast furnaces, together with the maximization of scrap usage in our BOFs. As a result, we're able to use a lot less coke for the same amount of pig iron produced. Let's make it even more evident. Had Cleveland Cliffs not acquired the two steel companies in 2020, the same amount of steel would be produced today, but the CO2 generation would be a lot higher. The use of large amounts of HBI in blast furnaces introduced by Cleveland Cliffs allows for significantly less CO2 generation. In our case, 32% less in five years, while maintaining the same level of production and the same product mix, which is heavy in flat-rolled automotive steels. We do not know of any other company, mini-mill or integrated, in the US, Canada, Europe, Asia, or anywhere else in the world that has achieved similar magnitude of reduction in CO2 emissions in such a short period of time. One of our key competitive advantages is having full control of our main raw material, iron ore pellets, from our mines in Michigan and Minnesota. Speaking of Minnesota, in Q2, we got a final resolution of the issue at Nash Walk. We have been fighting for Nash Walk since I came to Cliffs back in 2014. Nine years later, we now control the state leases. These leases, together with the private land we acquired there six years ago, add decades of high-quality ore to our reserves at Hibbing. We have already started the work necessary to develop NashWalk, and our preliminary assessment confirms that this ore body will support the production of both blast furnace pellets and direct reduction grade pellets for the long term. On that note, we find ourselves in 2023 reaping the benefits of our early decision to invest in direct reduction. back in 2017. We broke ground in 2018, and the plant began production of HBI in late 2020. With natural gas prices where they have been, we are producing HBI at a cost of less than $200 per metric ton. So our HBI has not only been a carbon intensity reduction agent, but also a productivity and margin enhancing agent. It's also worth reflecting on our success in building, ramping up, and operating our Toledo plant. Neither one of the two direct reduction iron plants previously built in the United States by two other companies are good examples of success. Their failure to execute caused a lot of skepticism regarding our ability to do it successfully, to the point that one research analyst once called it a widow-maker. Moreover, when comparing Cleveland Cliffs' execution of the Toledo plant to other greenfield sheet and plate meal products in our space, in the struggles that they have had during construction and after startup. It goes underappreciated that since we built and commissioned our HBI plant, we have been operating uneventfully and at capacity for two and a half years. Case closed. Our customers are starting to recognize the important role that HBI has played in our carbon reduction goals. With that, we have recently introduced in our invoices to our clients what's called a CliffsH surcharge, which is a $40 per ton surcharge applied to each ton of steel made with CliffsHBI. For the ones that work in metric tons, it's $44 per metric ton. We deserve to be paid for a characteristic of our steel that truly differentiates us, particularly when compared to other major suppliers of steel to the automotive industry in the United States, in Europe, in Japan, in South Korea, in China, or anywhere else throughout the entire world. We also believe that the $40 per net ton cliff state surcharge should be passed along by the car manufacturers to the final consumer. And that would only increase the window sticker MSRP price of a car by less than 0.1%. Regardless, as one of the largest suppliers of steel to the automotive industry in the world, Cleveland Cliffs wants to continue to invest in green initiatives. And therefore, we need to be paid for that. That's not unreasonable and should actually be expected and universally accepted. We at Cleveland Cliffs are happy to be the first ones on this path. The next step in our evolution will be the use of hydrogen throughout our footprint, including at our DRI facility and our blast furnaces, which we have already proven are hydrogen ready. Three months ago, on May 8, at Middletown Works, we became the first company in the Western Hemisphere to successfully complete a full-scale trial injecting hydrogen into all two years of a blast furnace for an extended period of time. Using the existing pipeline and transportation infrastructure in place, Hydrogen gas was injected into all two years of the blast furnaces and used as a substitute for fossil fuel reductant. This ultimately replaced the release of CO2 with the release of H2O, which is water vapor, with no impact to product quality or operating efficiency. We'll be next trialing the technology at our largest blast furnace Indiana Harbor 7. We believe hydrogen will be the true game changer for the decarbonization of steel. It's simple chemistry after all, and we have already proven its effectiveness. The main hurdle right now is economics. As of today, equivalent units of hydrogen gas are about 10 times more expensive than natural gas. That's why we are an active player on the initiatives to build hydrogen hubs in the Midwest, specifically near our Burns Harbor, Indiana Harbor, still complex in northwest Indiana, and also near our Toledo, Ohio direct reduction plant. As hydrogen becomes more and more economical, we will be able to implement it throughout our entire footprint. The steel industry in the U.S. represents just 1% of our country's carbon emissions footprint compared to transportation and power generation, which together account for over 50%. With the role we play in automotive, we are actively engaged in providing solutions for much more carbon-intensive sectors. On that regard, I'm pleased to report that the 70,000-ton non-oriented electrical steels expansion at our Zanesville plant has been completed, and we have already started producing our MotoMax electrical steels for using EV motors. Every electric vehicle on the road needs about 150 pounds of these materials. And we are now in a great position to serve the growing demand for these steels. Outside of automotive, overall demand remains healthy. In recent months, we have seen a massive influx in orders related to solar projects, which are heavy users of our galvanized steel. As a relatively new market for steel, this is by far the largest growth area for us in terms of demand. Now that it appears that inflation is under control and the soft lending scenario is a real possibility, caution on the part of service center buyers should begin to ease. Service center inventories remain way too low. And with these new sources of demand, along with the incoming new demand related to federal spending initiatives, Steel buyers are starting to come off the sidelines. On a very specific note, for those who have been following the recent I-95 bridge collapse in Philadelphia, I'm proud to report that Cleveland Cliffs Plate Division's ability to respond quickly to the crisis led to us being awarded the contract to supply the steel plate needed to repair the bridge. We received the PO on a Friday, melted steel on that Sunday, rolled on Monday, and began shipping on Tuesday, a four-day turnaround from both our Burns Harbor and Coltsville plants, ahead of the fabricator's already accelerated schedule. This was a huge effort and a great accomplishment achieved by our Cleveland Cliffs team, and I would like to personally congratulate all the men and women involved in getting this job done so quickly and so professionally. We look forward to the speedy reopening of this important piece of our infrastructure. With that, I'll turn it over to the operator for questions. Daryl?