Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Sherry, and I will be your conference facilitator today. I would like to welcome everybody to Cleveland Cliffs' first quarter 2025 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 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 the 10-K and 10-Q and the news release 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 on the earnings release, which was published yesterday. At this time, I would like to introduce Lorenzo Goncalves, Chairman, President, and Chief Executive Officer. Thank you. You may begin.

Thank you, Sherry. And good morning, everyone. Our first quarter results were unacceptable, with worse than expected EBITDA and cash flow, mostly due to underperforming non-core assets. Underlying these weak results was the lagged impact of very low steel prices that we were exposed to during the second half of 2024 and into the beginning of 2025. The implementation of across-the-board tariffs on foreign steel under Section 232 executed by President Trump on March 12 was the most relevant and necessary action. to eliminate unfairly priced competition, the entire domestic industry, Cleveland Cliffs included, continues to suffer. And we're starting to see a more consistent business environment and improved pricing in April and May. Besides pricing, our results over the past quarters have been significantly affected by three company-specific issues. In order to bring back consistent profitability and free cash flow generation through the balance of 2025 and into 2026, these three issues must be resolved. Issue number one, underperformance from our core automotive end markets. Number two, loss-making operations that are not core to what we do. And issue number three, a very disadvantageous slab supply contract with ArcelorMittal Nippon Steel Calvert. Let's address each one of these three issues. On the first one, the numbers speak for themselves on the automotive industry in the United States. In 2024, only 50% of the cars sold in the United States were actually made in the United States. Said another way, imported cars sold in our country basically split the market in half with domestically produced cars. No one would argue that we don't need automotive production in the United States and that it is OK to import cars instead of producing them here in the US. Therefore, nobody should be surprised to see consequential policy work toward reshoring automotive production. The Trump administration has shown strong support for both the American steel and the American automotive sectors. Fortunately, Cleveland Cliffs is situated right there at the crossroads of these two sectors that are so critical to the U.S. national and economic security. Cliffs is not just a steel company that happens to make some automotive steel. Cliffs is the American steel company designed to supply domestically produced steel to the American automotive industry. The actions taken by the administration are squarely aimed at boosting the production of cars and trucks in the United States using steel produced in the United States. The best suppliers of steel for these current situations are the ones that are well established, with the highest OEM marks for quality, reliability, and delivery performance. As our automotive clients are now working to reshore their manufacturing footprint in the United States with a great sense of urgency, we are proactively engaging with these automotive customers and finding short-term solutions for them. There is plenty of spare capacity to increase car production here in the United States right away. And we are already seeing some of our most important customers shift overseas production back to made in USA vehicles. We are enjoying meaningful success in working with both domestic and international auto OEMs in securing longer term automotive steel supply as they run their existing factories in the US at higher utilization rates and make plans to build new plants to expand domestic automotive production. We have also gained back market share from our key automotive OEM accounts. At this point, it is very clear through our order book, as well as a consequence of recently extended contracts with our well-established clients, that profound changes are coming. Automotive remains a high-margin business for Cliffs, and we expect to see a benefit in the $250 to $500 million EBITDA range annually starting to incrementally materialize in the second half of this year and fully impacting our results in 2026. This brings us now to issue number two. We firmly believe that the Trump administration is spot on in its push to bring back manufacturing to the United States. And we know that in the long run, this will be good for the American steel industry and for Cleveland Cliffs. However, in the short term, we need to do everything we can to make sure that we remain cost competitive. In order to do so and to return to profitability, we are taking decisive actions to optimize our operating footprint. Several of the assets impact have been loss making for some time. But we have been absorbing these losses in anticipation of new business resulting from projects widely advertised but never materialized, supported by the Infrastructure Bill, the CHIPS Act, and the IRA. Unfortunately, that never happened, creating a situation that we now need to fix. We don't take these decisions lightly, knowing that approximately 2,000 employees were impacted by these operational changes. That said, these are necessary actions, and we have made the following changes to our operations. First action, we fully idled our Menorca mine and partially idled our Hibbing-Taconite mine, both in Minnesota. These idles were necessary to rebalance working capital needs and consume excess pellet inventory that we produced in 2024, responding to the weak demand that plagued us during the final months of the Biden administration. Second action, we're idling the hot end at Dearborn, Michigan. Dearborn Works has very modern downstream equipment with a PLTCM pickling line tun and cold meal, and an extra wide automotive-grade galvanizing line for exposed parts. These facilities will continue to operate with no interruption. But Dearborn also has a stranded blast furnace BOF caster without a hot strip mill. We'll be replacing Dearborn's current production of hot metal with the restart of our Cleveland No. 6 blast furnace. We should be back in operation. by the time the Dearborn blast furnace is idle. The mines and the Dearborn blast furnace idles are geared toward efficiency gains, and these changes will not affect our ability to serve our OEM and service center customers. Outside of these, we still carry some legacy assets that are simply not competitive and loss-making. We'll be idling these assets, which are included in the next three actions. Third action, Stilton, Pennsylvania. Stilton is primarily an electric arc furnace rail mill. Unfortunately, our rail customers prefer artificially cheap imported rail. In one case, the customer imports 50% of his needs from Nippon Steel. who is continuing to ship rail from Japan right through the Section 232 tariffs. That creates substantial pricing pressure for the domestic portion, or the other 50% of the business that we share with other two domestic suppliers, both of them with more equipment than Stilton. Fourth action. Conshohocken, Pennsylvania. Conshohocken is a high-cost specialty plate finishing facility. We can perform the vast majority of the finishing work currently done at Conshohocken in our EAF facility located in Coatesville, Pennsylvania. Fifth and final action, Riverdale, Illinois. Riverdale depends on liquid pig iron sent by railroads across the state line from Indiana, creating a significant cost disadvantage for the plant. There are several competitors for the Riverdale Book of Business, each of them with a more competitive cost profile. This action generates operational efficiencies related to logistics and fixed costs. with no change in overall volume output. The Idle of Riverdale will allow us to keep the pig iron where it belongs, at Indiana Harbor, a plant that currently has underutilized capacity in both steelmaking and rolling. With more tonnage of liquid pig iron available for internal use, we expect Indiana Harbor to be one of the biggest beneficiaries of the expected reshoring of automotive production into the United States. These last three operational changes solidify our move away from three markets that have not been profitable for us. Rail, specialty plate, and high carbon steel sheet. The situation can always change, but for now, this is the right thing to do. Taken together, these changes represent savings of over $300 million annually, not including the reduction of associated overhead and improving the efficiencies at other operations. Very importantly, as we eliminate all this legacy inefficiency it will become apparent that Cliffs is not a high-cost steel producer. By using pellets and HBI 100% made in USA in our steel plants, at today's bushling scrap price, we produce hot-rolled coil in our integrated mills for a cost that is very competitive when compared to any EAF flat rolled mini mill. This is why the EAF mini mills are lobbying hard to exempt pig iron from tariffs. They want to continue to enjoy a very unfair advantage by continuing to be able to buy dumped imported cheap pig iron from Brazil, Ukraine, South Africa, just like importers of steel prefer to buy cheap imported dumped steel over domestically produced steel. The level playing field rules should be applied to the EIF mini mills as much as it is applied to everyone else. And we fully expect that the EIF mini mills are treated by the Trump administration the same way All other importers of dumped stuff are treated. Issue number three is the contract with ArcelorMittal to supply slabs to their 50-50 joint venture with Nippon Steel in Calvert, Alabama. Most of you are aware that as part of our acquisition of ArcelorMittal USA in 2020, We signed a five-year agreement to supply the Calvert hot strip mill with up to 1.5 million tons of slabs per year, primarily from Indiana Harbor. This slab supply agreement has become exceptionally burdensome in the current environment. The contract price for these slabs is driven by the Brazilian FOB index that usually correlated with US flat-rolled steel pricing. So, when we guided to hot-rolled sensitivities, this slab volume was baked in. However, the correlation with HRC has been disrupted significantly. Brazil, rightfully so, is now facing 25% tariffs in lieu of the previous Section 232 slab quota. With that, the buyer universe for their slabs in the U.S. has shrunk, and the Brazilian slab mills have had to look elsewhere for buyers in other markets, which led them to dump their slabs at lower prices. So, while the domestic flat-roll prices have gone up, our realized prices under this particular Brazilian price-linked arrangement have declined. leaving us with a significant negative margin on this product that is reflected in our Q1 results. We have discussed possible remedies with ArcelorMittal, but a mutually acceptable solution has not materialized. At this point, as the expiration date of this lab contract is getting closer, the best solution for Cliffs is to let the clock run out. on December 9, 2025. Based on the current market for slabs and HRC, we expect to see a benefit of approximately $500 million in annualized EBITDA beginning in 2026, just by virtue of no longer having this onerous contract in place. Let me now touch on the Stelco acquisition, which has proven to be well-aligned with our known automotive commercial strategy. Stelco is the steel company of Canada, and we, from day one, have taken deliberate steps to redirect Stelco's sales into the Canadian market, where they belong. Stelco's operations offer an ideal platform to serve their home market with speed and efficiency. With Stelco's favorable cost structure, they can compete for and win any business in Canada. Previously, as a participant in the US market, Stelco was a major disruptor here in the Midwest of the United States. While Stelco has benefited from absorbing legacy cliffs business in Canada, particularly in automotive, the strategic repositioning of Stelco as a Canadian supplier of steel to the Canadian market has given our U.S. mills more business opportunities, ultimately allowing us to restart Cleveland Works No. 6 blast furnace. On the strategic front, Some of you have probably seen headlines about the uncertain future of our DOE-supported strategic projects at Middletown and Butler. President Trump's administration clearly has different energy policy priorities than the Biden administration. That said, we are in direct dialogue with Department of Energy leadership on these awards. and the agency wants to fully understand both projects and the benefits of each one. As it relates to the larger Middletown project, we are working with the government to explore changes to the scope to better align with the administration's energy priorities. Such a change in scope would entail a substantially lower cost project, one that does not assume availability of massive amounts of hydrogen and would instead rely on readily available and more economical fossil fuels. We will hopefully have more to share on this project in the near future, but it is fair to assume that the Middletown project, as announced in 2024, will be substantially altered. As for the Butler project, The induction reheat furnace project is highly accretive with a favorable payback. And at a $75 million DOE grant amount, it is not something we feel at risk. Importantly, the Butler project directly supports the U.S. energy dominance goals of President Trump's administrations. As the only grain-oriented electrical steel producing mill in the United States, Butler Works is critical to energy security in our country. This project will expand the capacity and capabilities of Butler Works in response to the evolving demands of the transformer industry. We are still big fans of this project for its economics, low capital burden, and enhancement of our most profitable business, the production of GOES, grain-oriented electrical steels. Lastly, the transformer plant at Wheaton, West Virginia. Cliffs needed a partner that could supply the technology and licensing required to produce transformers. With our partner currently having second thoughts about the Wheaton location and also considering a smaller plant than the one we had originally envisioned, we have made the decision to no longer pursue this investment. I will now turn it over to Celso for his remarks.

Good morning, everyone. Q1 reflected much of the lagged impact of the challenging pricing environment from late 2024 and pre-section 232 steel tariff environment in early 2025. and the underperformance of non-core assets that we're now idling. For the first quarter, we posted an adjusted EBITDA loss of $174 million. Total shipments in Q1 were 4.14 million tons, consistent with our guidance to break above the 4 million ton mark with a full quarter contribution from Stelco. Q1 price realization of $980 per net ton was only a slight improvement from Q4's 976. remaining weighed down by lower than expected realizations in plate and spreads for cold rolled. The inclusion of Stelco into our results continues to help manage our weighted average unit costs, but the underperformance of non-core assets in Q1 largely drove an increase in our unit costs of $15 per ton. Quarters like Q4 2024 and Q1 2025 are completely unacceptable. nor are they a reflection of our typical run rate for us. Between improved pricing and the three factors that Lorenzo laid out, automotive recovery, idling of loss-making assets, and the end of the onerous slab contract, financial results should improve in the second half of 2025 and then reset higher in 2026 as all of these factors become fully baked. The six separate asset idlings are the primary reason why we expect even greater cost reductions year over year. Our previous expectation was a $40 per ton year over year reduction in 2025 relative to 2024. And now we're at a $50 per ton year over year reduction. Because of the timing of the WAR notices, all of these reductions will come through in the second half of this year. On our last call, I indicated that, with the inclusion of Stelco, for every $100 increase in the HRC price on an annual basis, our yearly revenue would increase roughly $1 billion, all things equal. And after factoring in changes like profit sharing and historical scrap correlations, this $1 billion impact would largely flow directly down to EBITDA. This correlation still applies, assuming all things equal. the current environment has resulted in some unusual dislocations that have challenged the all things equal assumption for the equation. For example, as previously mentioned, while the HRC prices have rebounded here early in 2025, slab prices have not moved up in tandem as you would typically expect. The fact that we have kept stelco tons primarily in Canada and other factors like lower than expected plate and cold rolled correlations to hot rolled prices have also muted the impact of that billion-dollar correlation for now. With that said, even with the HRC curve currently in the 800s, you can still expect meaningful EBITDA improvement in performance in the second half of 2025 relative to the first half. Something that often comes up in moments like this is divestitures of non-core assets, and this is a very asset-rich company. We have recently received several unsolicited inbounds from buyers interested in acquiring an array of assets in our portfolio. While there's no assurance that any of these opportunities will ultimately lead to any transactions, we're always open to pursue a deal if the value is right, if competitive dynamics are not disrupted, and if the sale does not compromise our key competitive advantages. We also continue to take a serious look at capital expenditures. and have further reduced our 2025 CapEx guidance from $700 million to $625 million, mostly due to reduced sustaining CapEx at our idled assets and canceling of our capital deployment at Weirton. Beyond 2025, Lorenzo has laid out the status of our three strategic projects, and based on that, it's fair to expect significant reductions in CapEx in 2026 and beyond as well. though we won't have exact numbers until our negotiations are more advanced. From an SG&A standpoint, we have also taken a closer look and taken action to reduce overhead costs, and we're lowering our expected SG&A expense in 2025 from $625 million to $600 million. From a balance sheet perspective, despite our elevated debt level, we have no meaningful debt maturities until at least 2027, and less than $700 million in total bond maturities over the next four years. We remain in a healthy liquidity position following our latest well-timed capital raise. We have approximately $3 billion in available liquidity and another $3.3 billion in secured capacity. Our leverage metrics remain above target, but we'll continue to look to meaningfully reduce debt and leverage as we return to profitability and deploy 100% of our cash flow generation towards debt reduction. To the extent that our inbound inquiries lead to successful divestitures, we'll also deploy cash proceeds from non-core asset sales towards that reduction as well. American steel companies can compete and thrive as long as illegally dumped steel remains outside of our borders. President Trump's Section 232 steel tariffs are here just for that. Our priority now is to return to profitability and the strong free cash flow generation that we have delivered in the past. Our focus is on serving our customers reducing costs, optimizing our operating footprint, generating free cash flow, and lowering our debt. With that, I'll now turn it over back to Lorenzo for his final remarks.