Cleveland-Cliffs Inc.

Good morning, ladies and gentlemen. My name is Darrell, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs' second quarter 2026 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 can cause actual results to differ materially. Important factors that can 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 on the earnings release, which was published this morning. At this time, I would like to introduce Lourenco Goncalves, Chairman and Chief Executive Officer.

Thank you, Gary. and good morning to everyone. After several quarters of talking about the future earnings power of this company, we can finally point to tangible evidence that the progression we have been forecast is now reality. During the second quarter, we returned to positive free cash flow and tripled our adjusted EBITDA from the first quarter. While the second quarter represents meaningful progress, it still understates where this company is headed over the coming quarters. Q2 maintenance outages and our lagged contracts still did not allow us to demonstrate the full capability of our asset base. That will be more visible in Q3, in which we are expecting to more than double Our Q2 EBITDA. Due to our health backlog and improved pricing, the second half of 2026 will look substantially better than the first half of the year. With our third quarter adjusted EBITDA guidance of $575 million, we have a situation where higher prices, lower costs, and higher shipping volumes We will all be converging at once. Weather-related impacts are behind us, finishing lines are full, and pricing remains strong. Better yet, at the current curve for steel, we expect the fourth quarter to further outperform the third quarter and adjust the EBITDA, with even more improvements to come in 2027. When profits were below our standard at this time last year, I laid out three key areas of improvement that would bring us back to a respectable level. Automotive volume recovered, footprint optimization, and the expiration of the uneconomic slab supply contract we had in place with ArcelorMittal culverts. These three factors have all now materialized, and with stronger pricing, the improvements we see are even better than previously forecasted. Automotive demand deserves special mention. Cliffs continues to be the supplier of choice for the automotive sector in the United States, illustrated by the fact that we have received the top supplier award from both Toyota, and Jerome Morris, so far this year. During the quarter, our shipments of steel to our automotive clients were the highest in the last two years. Our finishing lines, which ran at suboptimal utilization levels for the last couple years, are now back to running at a healthy level of utilization. with a favorable impact on our costs. Thanks to our multi-year contracting strategy, the ongoing reshoring of automotive production into the United States and major supply chain disruption suffered by competitors, our automotive coating volumes are back to the strong levels we saw back in 2023. This improving situation in both steel and automotive demand can be attributed to the long overdue trade policies we now have in place in the United States. Section 232 has been the single most effective industrial policy implemented in our country in a generation. We applaud President Trump, Secretary Howard Lutnick, and USTR Ambassador Jameson Greer for their conviction in these policies. The results are visible. Manufacturing investment is accelerating, domestic steel utilization is improving, and capital is being allocated to US-based production rather than offshore production. The reshoring movement that's now occurring throughout American manufacturing simply would not be happening at its current scale without Section 232 and the enforced mechanisms that support it. We have long argued that America cannot maintain a strong manufacturing base without maintaining a strong steel industry. Today, that argument is no longer theoretical and has been validated by real-world investment decisions made by some of the largest companies in the world into automotive production, electrical infrastructure, and defense-related applications, among several other sectors. All of those investments require steel, and Cleveland Cliffs is uniquely positioned to meet that demand, given the breadth of our product portfolio and our domestic footprint. Besides their great success in combating illegal trade of dumped steel and steel derivatives into the United States, the U.S. government has been instrumental in making our industry more energy efficient via grants from the Department of Energy. Our Butler Works induction reheat furnace upgrade continues to progress well and, upon completion in 2028, will provide us with the ability to supply more tons of the high-end grain-oriented electrical steels our country needs. In addition, we have made major progress on the re-scoping of the Middletown project in compliance with the Trump administration's energy dominance goals. The Middletown blast furnace is due for a reline by 2030, and these DOE grants will allow us to go further in optimizing the furnace and maximizing energy efficiency by capturing and using blast furnace gas to generate electricity on site. We expect to make a public announcement in the next months or so. Furthermore, as discussions surrounding USMCA continue, every outcome that has been publicly discussed would be a positive outcome for domestic steel producers. Whether the final result includes Stronger melt-and-pour requirements, tighter enforcement of rules of origin, increased verification requirements, additional scrutiny of transhipped material, or stronger content requirements for automotive production, each one of those outcomes favors steel-produced materials. in North America by companies with meaningful domestic operations. We are uniquely positioned because we are here in the United States of America, and we are miners, pellet producers, iron makers, steel makers, and downstream manufacturers. Therefore, every policy that emphasizes domestic content, domestic production, and Domestic Manufacturing directly benefits Cleveland Cliffs. A similar trade dynamics applies to Canada. We were pleased to see the extension of the Canadian tariff rate quota system through June of 2027. Canada has struggled with many of the same challenges faced by the United States prior to President Trump. The world has way too much still-making capacity, and certain countries continue to export that excess capacity at prices disconnected from economic reality. Our STELCO results have improved, and their contribution to Cleveland Cliffs is part of our second-half improved guidance. While we have seen improvements on the hard-rolled side, With the vast majority of what we do in Canada, on the finishing side, Stelco is still lagging. Without further measures to protect fair trade in Canada, the future competitiveness of our galvanizing lines in Hamilton is at risk. We continue to defend our point of view with the Canadian government officials, asking them to do what is right. Thank you for your attention. If Canada really wants to have a domestic steel industry, more needs to be done. One other matter to highlight in today's call is our Cleveland Cliffs safety record, including Stelco. I don't talk publicly about safety very often, but we have worked very diligently since the two acquisitions of AK Steel and ArcelorMittal back in 2020 to implement in our steel plants the same level of Cleveland Cliffs safety standards we put in place in our mines since we took office in 2014. In fact, our total recordable injury rate for the last three years has been best in class. Safety is also good business practice. Because of our sustained safety performance over multiple years, we are now seeing meaningful reduction in workers' compensation expense and other related costs. One important item to mention today, we have officially kicked off negotiations with the United Street Workers Union to renew our collective bargaining agreement. and I'm pleased to say that the process is off to a constructive and productive start. We are approaching these negotiations like we always do, with a shared commitment to maintaining a competitive and sustainable business while continuing to create opportunities for our employees. Based on the dialogue to date, we are confident that we can reach an agreement that strengthens our partnership and delivers meaningful benefits for both Cliffs and the USW. Before turning it over, I would like to recognize Celso's appointment to our Board of Directors as President and CFO that was announced this morning. This appointment formally reflects the role that he has already been playing in driving our strategy and delivering important and many more. Celso has been an indispensable partner to me and a trusted leader across our organization, and this promotion better reflects his role. It also marks the early stages of a transition in leadership. I'm not going anywhere anytime soon, and I plan to lead this company for several more years with Celso as my right hand. With that introduction, I will turn it over to him.

Thank you, and good morning, everyone. First, I'm grateful for the opportunity and the responsibility that the board has given to me. I'm excited about where we sit today, especially considering the amount of improvement we have seen over the last year, combined with our promising outlook. There's a lot more that we can improve upon, and I'm confident that we can make it happen, as the need for integrated steelmaking in North America is undeniable. Turning to our quarterly results, our adjusted EBITDA in the second quarter was $286 million, our best quarter in two years. Second quarter shipments were just over 4 million tons, down sequentially from the previous quarter due to the maintenance outages we underwent during the quarter, as well as improved automotive demand, which comes with longer lead times. We expect to see steel shipment volumes above 4.3 million tons in the third quarter. as the order book remains strong and backlogs are extended. Pricing also continued its steady climb upward. Our average selling price increased by $76 per ton as pricing lags started to materialize and we sold a richer product mix thanks to our automotive heavy order book. This climb will continue into Q3 as we have visibility on pricing on nearly every ton we will ship in the next quarter. Based on this, We expect our average price to increase another $55 per ton in Q3. HRC spot pricing has, of course, played the largest role in our improvements, but the trajectory of the cold rolled coil price, which many of our contracts are linked to, has even further outpaced hot rolled coil prices over the past several months. This is another factor illustrating the importance of trade policy, as it has driven our pricing realizations to higher than originally expected levels. As for unit costs, as previously guided, the inventory lag effect from last quarter and our maintenance outages pushed costs up quarter over quarter. But with that behind us, we should see a $10 per ton reduction in costs into Q3. After two years of negative free cash flow, we finally flipped back to positive in the second quarter. We expect this trend to continue going forward. On top of that, we are now under contract on all of our major property sales with earnest money in our control in all cases. The bulk of the $400 million proceeds from our property sales are expected to come in the second half of this year. With volume, price, and cost all moving in the right direction into next quarter, We felt it prudent to provide an adjusted EBITDA guide with our results this time because of the magnitude of the change quarter over quarter. We expect adjusted EBITDA of approximately $575 million in the third quarter, which would be our strongest quarter in three years. With where the curve for HRC stands today, we would expect even further improvement on that figure in the fourth quarter even with the typical seasonal slowdown we usually see around the holidays. Beyond this, if you ran out the futures curve over the next year, we would expect to hit our leverage target of sub 2.5 times by this time next year as the cash flows generated from both ongoing profit and asset sales will be used to de-lever over that timeframe. These are not based on any extraordinary assumptions as we see achievable opportunities going into 2027 beyond just commodity pricing. We'll have an opportunity in the coming months to reset a large portion of our fixed price contracts substantially higher, which we estimate will represent a $500 million EBITDA improvement year over year. We also see a major improvement coming from Stelco based on where its order book is today, as well as further cost reduction opportunities from AI-based initiatives currently being implemented with our partner Palantir. On the strategic front, one thing that has become increasingly apparent through the multiple processes that we've run is that prospective counterparties approach discussions with the assumption that Cleveland Cliffs was under pressure to transact. This includes our processes for HBI and FPT, as well as our ongoing dialogue with POSCO. We went into these processes with the backdrop of foreign companies paying enticing multiples for U.S. industrial assets. These were opportunistic ventures aimed at unlocking value at higher multiples than where we trade at. We understand the replacement costs associated with these operations, and we are well aware what these assets contribute to Cleveland Cliffs. So far, the offers that we have received related to these processes have fallen short of our value threshold. On top of that, our HBI has become substantially more valuable for us with the strong order book that we have in place. HBI used in blast furnaces juices our iron making capabilities where we are constrained, and we have been able to push more volume through our mills as a result. This will be evident in our third quarter shipping volumes. Regarding POSCO specifically, discussions still remain friendly and ongoing, but we don't have a deadline on our side. We continue to have constructive dialogue and believe that there are strategic benefits that could be realized, but valuation and structure are important and we're not desperate to do anything unless these two factors are met by POSCO and acceptable to us. The United States is the best market in the world and it's not cheap to play in our sandbox. The story today is very simple. Cleveland Cliffs is entering the strongest earnings environment that we have seen in years. and we are doing so with a better operating footprint and a domestic steel market that remains supported by trade enforcement and manufacturing investment. There are still low hanging fruit opportunities such as fixed price contract resets that can amplify our position even further and we are anxious to pursue this in the coming months. The factors that have delayed our earnings recovery are largely behind us while the factors that support future earnings remain firmly in place. With that, let's open up the line for questions.