Q2 2020 Cleveland-Cliffs Inc Earnings Call
[music].
Good morning, Ladies and gentlemen, my name is machina and I am Your conference facilitator today I would like to welcome everyone to Cleveland Cliffs second quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background away.
After the speaker's remarks, there will be a question answer session.
He company reminds you that certain kind of made some eight on today's call will include predictive statements that are intended to be made as forward looking within the safe Harbor protection of the private Securities Litigation Reform Act up 1995, Oh, though.
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 Dick.
Important factors that could cause results to differ materially are set forth in reports on forms 10-K, and 10-Q and news release is filed with it is easy.
Which are available on the company's website today's conference call is also available and before I can't say Cleveland cliffs Dot com.
At the conclusion of the call it will be archived on the web site 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 Lorenzo can solve these chairman president and Chief Executive Officer.
That's what's wrong and good morning to everyone.
Over the past few months, our company has gone food splitting the stronger resilience that I have highlighted in the past.
Despite dealing with a pure looked on.
And reach our largest and market the automotive sector was effectively closed.
We were able to preserve and enhance our business.
Very early on and ahead of any future mandates or guidelines.
We implemented initiatives Brookdale, the health and safety or employees.
We did not just it's all a footprint for both the sharp reduction in demand as well as its gradual recovery.
By ticking down and Dan restocking.
50 facilities over a three most spirit.
At the same time, we improved our strong belem, our strong liquidity position and preserved our healthy balance sheet.
In addition, acting as fast as only.
Cleveland cliffs couldn't do.
We were able to find a way to create $181 million.
<unk> equity by executing up perfectly timed liability management transaction.
That's for two to date.
We dollar customers in the automotive sector.
Back to more normal levels of activity.
We have resumed production at all of our facilities that were temporarily idle.
Except the Northshore mine, which will be back in operation next week.
With that we're back on track.
And Red <unk>, who feel our vision for the new Cleveland cliffs, which includes our minds in pellet plants.
AK steel.
8-K too.
Procedure partners and our new age you likely.
We go or it could be I planting operation later this year.
We will be able to add meaning abuse.
Our portfolio of glass.
And with that you spread our exposure what other sectors beyond automotive.
As you know Cleveland cliffs is essentially a supplier to the automotive industry.
Most directly through our supersede the aerie AK steel.
And indirectly through our third party clients for Blessed ones felt.
Why are we already are at the place where others you companies would like to be.
With more than 60% or production insteels dedicated to automotive.
Our second quarter results were direct consequence.
Well the almost complete answered it shuts down often times automotive sector, interrupting you know revenues and generating costs associated who I believe some of our asset.
As a usual and unexpected as it was.
That's what happened in Q2.
As the second half of the year progresses.
To ship and through continued to improve.
And idle expense.
We will fall back to zero.
The second quarter did not change anything related to our strategy.
Our fully integrated footprint from captive iron ore mines through hi, tech carbon and stainless steels and out of parks.
Yes, I unique technological advantage no one else can have replicate.
You got Dementing business, so supply is steel who the automotive industry can be calling middle logical consistency is critical.
We can do this very well because among other things we have our own our war production and our self sufficient in pellets.
We also have the right equipment to produce the highly specified materials, our automotive flying neat.
Including blast furnaces and video apps for carbon steel.
As well as electric arc furnaces, and AOL DC for Stangler.
In the state of the art downstream facilities for both carbon and stainless steels.
Equally important we also have dedicated brainpower and they are and D capability to develop this use of the future car.
And that's something others in this market, we'll not be able to accomplish anytime soon.
Our clients know that.
Our competitors do too.
It is rental cars.
Which in the past have accounted for about 20% of all new vehicles. So.
Different strong retail clients.
Fleet buyers do not care as much about the quality of the car.
Them, it's all about cost.
So over the past three decades.
We have seen cost not quality.
Becomes the primary value.
For many American car maker.
However, this approach is quickly become antiquated.
Due to that pandemic blood centers are sharply down.
Where at the retail car buyer has been largely unaffected.
As soon as to the American consumer up late.
Heavy remain close to three Corbett projections.
Yeah America automotive market is now at consumer driven month.
Japan damage has made car ownership trendy again.
And while fleets by cars because they're cheap.
People buy cars, because they are reliable cool and phone to drive.
After decades of foreign competitors, gaining market share in United States by recognizing this trend.
American base car companies are starting to fight back.
We finally have American car companies innovating again.
After a long period, having their lunch eaten by Google comparisons.
They have block is the best example.
No. It doesn't occur is actually just one total of steel all wheels.
Theoretical $200 per tool.
I see increase for highly specified galvanized steel.
I would kill radically force and increase on the final price tag of the car by only 200, though and no consumer who choose not to buy a car just because the car is now $200 more expensive.
Maybe fleet buyers would change their mind you.
Due to a $200 price increase per car.
Not individual consumers.
On the other had an equivalent price deck decrease of $200 would not be compelling enough.
Who make anyone not willing to buy a car who decide to do so.
But that would certainly drive all the qualified this fuel suppliers out of this.
In the United States.
And also in other countries, such as Japan, Germany, South Korea or Fran.
Just to name a few of the countries that are home for his two companies with technological expertise.
Like all the needs and demands of the automotive industry of the president and of the future.
Our goal with the new Cleveland cliffs.
Yes to be able to record the value loss in the supply chain over the cost of over the course of the last several years.
For decades.
They do companies have allowed.
Highly specified skews carrying a lot of technology and value to the client.
To be treated and prices as commodity.
Yeah, if anyone would be able to produce and supply the same materials.
That's simply not true.
In order to continue to invest in support the challenges of the automotive industry of the future they still suppliers to England cliffs included.
Just realize a return on their investment.
And we will.
One problem, we have been fighting since we acquired AK steel.
Is the proliferation of gossip and deliberate attempt to influence the market all this guidance as news.
Go around the steel market these days.
And this parallel universe off Mizzy formation.
It's still views are always one step away from flooding the market with unnecessary and unwanted product.
Prices or scrap and the steel products are always going down or if not we'll go down soon.
And HRC is a proxy for everything else industrial business.
Well I'm pleased to inform that HRC.
As defined by they see our use air Mems and flat of the world is commodity grades you.
It has nothing to do with automotive.
It's a fine products for many applications liking the energy market.
But not for automotive steel.
In fact, we at Cleveland cliffs and AK steel.
I do not care much about HRC.
Because hot rolled is just as more fraction of the product mix we sell.
That's why it's goblins deals what you're really care about is automotive grade galvanized steel and other products using high end application.
Such as exposed parts.
Our goal with future contract renewals will be to make it very clear.
Then over the course of the next years you start receiving the proper value for what we do for our automotive client.
We have already won the hard this battle of this war.
Because our customers love, our abroad, and our ability to deliver high quality consistently and on time as demonstrated by the award. We recently received from General Motors asked supplier of the year for the third year you know.
<unk>.
The next phase is translate these support into higher margins.
Which we will be implemented and accomplishing in due course.
As you may recall.
We did the same thing with their or pricing.
That when I started at cliffs.
Back in 2015.
The big players in Australia, and Brazil, where all set with a completely irrational rates the buttons.
And iron ore pricing was forecasted by every quote unquote predictor.
We stay below $40 per metric ton.
In perpetuity.
We at cliffs.
Third the ones, who called out the underlying absurdity or search I recollect attitude toward Bryce.
Ultimately rationality was restored to their market.
Since then we have enjoyed appropriate rights.
In the current number above $110 per metric ton is no longer a surprise.
We are pleased that their recent recovery manufacturing activity and demand.
Has allowed us to bring our temporarily idled assets.
Back to Corporation.
The most exciting restart however.
Is that of the construction or four hour to legal H.B. I play.
Despite the new corporate related restrictions on the number of workers allow those sites.
We're able to come up with a solution to start producing H.B. I before the end of this year.
Good to does restrictions, we will need another four months to complete construction and to start operations.
But they intensifies demand for locally sourced or base meant that it.
Made.
Finding a way.
Restarts construction sooner rather than later I talked priority for us over the last couple months.
Last but not least I'd like to provide a brief update on the achievements of the synergies we committed to get when we acquired AG here back in March.
We announced last quarter that we had already set in motion you're $120 million in synergies that we expected to realize within one year.
As of today I'm pleased to announce that we have identified and setting motion I tutto off $151 million rescinded exceeding our original target by $31 million.
These additional synergies have come from a deeper understanding of our real needs that they overhead and operational levels for months into the acquisition of AK steel by Cleveland.
I will now pass it over to key school seat for a discussion on our quarterly results before getting my final remarks, and opening the call for UQM <unk>.
Thanks Lorenzo.
As you noted our second quarter results reflected the full impact of the covert 19 pandemic.
Volume and cost side of each business segment.
Positive note due to the contracts we have in place and the value added nature of what we supply.
Overall pricing for both are still find iron ore products was not impacted by the demand environment.
Our quarterly consolidated adjusted EBITDA loss.
$82 million was driven by lower than typical steel shipments as well as $159 million in cash idle costs that were incurred as a result of the several facilities that were temporarily taken down during the quarter.
[noise] in the steel manufacturing segment as expected the most significant impact on shipments was from our automotive carbon side, which were about 250000 tons for the quarter down 65% compared to last years second quarter.
However momentum began to pick up by the end of Q2 and over 70% of the auto carbon shipments we recorded in the quarter went out in June.
Well 177000 tons.
Flat rate has accelerated into July as we expect to record about 210000 tons in auto carbon shipments and that is further evidence that the second quarter was truly an anomaly.
In addition.
The bulk of the idle costs recorded for the quarter came from this segment, which will be substantially reduced in Q3, as all temporarily idled facilities, including the Dearborn blast furnace last week have resumed operations.
As for mining and Palletizing sales volumes, a 4.8 million long tons remained solid due to the take or pay arrangements, we have in place and our customers need to replenish inventories that were depleted during the winter.
Pricing prolong can also held in the mid Ninetys as a strong IODEX performance offset weaker HRC prices and pellet premiums.
Our cost per tonne was impacted by idle expense, which will be mitigated in future quarters now that Tilden has resumed operations and north shore is slated to restarts next week.
[noise] because they're blast furnaces are still working through pellet inventories sold to them prior to the acquisition most of our 1 million long terms of intercompany sales were eliminated from corporate EBITDA translating to about $32 million in negative margin.
That inventory will begin to be released in the third quarter. So we will still show some eliminated margin through the end of the year.
Quarterly operating expenses were $62 million of which 28 million flow through corporate EBITDA and most of the remainder through our steel manufacturing segment.
Our full year 2020, as DNA expectation has come down substantially to about $210 million, which represents about a 50% reduction from what the combined company would have reported last year.
Clear illustration of the synergy achievement as described by Lorenzo.
On the Capex sites.
All of our $145 million in cap spend during the quarter.
90 million for H.B. I payments for work done in Q1.
The remainder, what's sustaining capital and capitalized interest.
We expect another 250 million in capital spend for the remainder of the year.
About 110 million of that related to the completion of H.B. I.
We maintained our healthy liquidity throughout the pandemic.
And we currently have above 1.1 billion available to us between our cash balance and Navy l. availability.
We received our second 60 million dollar M.T. tax refund of the here on July 14th.
Based on our current business projections as well as the anticipation of over 100 million and working capital related cash inflows.
We expect to generate positive free cash flow in the second half of the year, which factors in the H.B. I capex.
This would allow us to exit the year at a higher liquidity level than where we were at the end of Q2.
In closing.
We have weathered through the most stressful period, so the pandemic and taking the necessary actions to preserve our strong financial position, which allowed us to maintain the desired comfort necessary to restart our Toledo H.B. I project.
We expect a fairly strong second half of the year, which should ultimately amount to our second quarter pandemic driven results to be viewed as a blip in history.
And in advance of a robust recovery.
Lorenzo.
Thanks, Dave.
Just like the American economy, our company has already proven its own resilient.
Depend Danny has changed a lot of things, but not the need for our high end brought it in any Greece, Italy discerning marketplace.
We are ready to move fast the impact of customers shut downs.
And look into the future, where our competitive advantages we always food.
With that I'll turn it back we're bullish on for Chris Please.
Ladies and gentlemen at this time, if he would like to ask a question. Please press star one on your telephone keypad again it is star one.
Well pause for just a moment to compile the Q1 day roster.
Your first question comes from the line of Lucas pipes with B. Riley FBR.
Hey, good morning, everyone.
When I look us.
So Lorenzo I appreciate it that your comments on commodity grade steel versus no you are highly specialized steel products and.
I guess you will see.
Your second quarter carbon price and the 10-Q pretty soon but would you be able to walk us through your carbon steel prices and cost in the second quarter, and where you would expect them to go into second half a year.
Thank you very much.
Oh, well, we we'd do not have a lot of exposure to commodity type of pricing because as you know Lucas our contracts are are set in stone. So for one year or time frames and are therefore, the prices that we are basically selling.
The automotive clients Newsday isn't that I'm talking two thirds of our business blips.
So it's a lot.
Were set in place.
Long time ago in a different pricing environment. So we're not going to school forecast any numbers toward the second half of the year, but the price are still good the prices are still in good shape. What happened in Q2 was all demand related they shut down the last time that adds.
Something similar.
The what happened the Delta Motor Theindustry was during World War two.
Just to give an idea.
So it wasn't completes its just going to us.
It came with <unk> without a lot of a lot of Oh.
Anticipation or I'd bought though we're past.
Doing well.
The last month of several important what Paul.
We have stainless in the mix you stay last was not very effective.
We have electrical steels in the mix electrodes views are not very effective we have a lot of positive thing, but automotive was really bad.
Going forward, we're seeing out the motive.
I mean, very close to normal levels, a big commented sectors, working three shifts and production levels over the second half.
We'll be back to normal and that will change dramatically the footprint remembering to be able to show the power of the combination offer Cleveland cliffs and AK steel.
Thank you for that Lorenzo and HM two hone in on the second half a great to hear that you'll be a cash flow positive is are you able at this point to provide some sort of range are we talking 50 million more than that left and that kind of a rough ballpark and and I buy.
Keith mentioned the ATM refund was obtained in July and any other kind of discrete cash items that we should consider that for the second homes that have this year to get to that free cash flow positive number. Thank you.
I will let you answer that you please.
Yes look as you know the 60 million as part of a part of it were also anticipating about you know about a 100 million dollar reserve release out of inventory during the second half of this year, that's going to be a contributor to the positive free cash flow you know if its a.
Before I can disclose the exact amount, but you know your 50 million to 100 million is it's probably about right and on what we're looking at right now and positive free cash flow for the second half.
Well wait to see how things go and there's there's definitely some potential for some upside to that to us as though for the <unk> automotive market recovers.
That's very helpful. I appreciate that them that best of luck. Thank you.
Thanks Lucas.
That's right.
Your next question comes on line of Scott here with the Clarksons.
Hi, good morning, everyone.
Good morning, Scott.
Following up on a as kids, where this is questions.
Could you provide any kind of color or commentary around.
Kind of your auto contracts any early talk your expectations for how slide 2021 is shaping up.
We are in an ongoing process, so because we supply so much growth of water, that's where all isn't an ongoing <unk>.
<unk>.
Losses of negotiating result on board we of course do not as you know Scott do not supply a color or detail on any commercial endeavors that where we are.
Hey.
Doing it and the taken care off with clients.
But the overall is very positive the clients understand our position the clients are.
Getting more in the asking for more or less <unk>. Yeah. We are the one stop shop.
We can produce great a structural steel directly through AK steel and indirectly through a key too.
We can't provide all the parts group, we did see for Seadrill partners.
We can.
Provide carbon steel galvanized the lateral galvanized we expose parts not no exposed quite so they liked that a lot. So we are in great shape as far as conversations with celebrate glide and we're adding new.
It's not just the traditional was well be very oh upfront and very open to.
Entertain a conversation videos with the likes of Daz lie and.
Nikolai and ER review and and several other new names there KMI and we are very happy also that our traditional crossing obeys like general Motors in Florida, and Ford and Volkswagen and others are going the same direction. So we are.
Looking into the future and it's not a thing that we're going to go in a must buy muscle quarter by quarter business strategic that's why we are at.
And not all car manufacturers will survive.
But some wheel and one thing I would tell you Scott.
We from Cleveland Clinic suggest you will you be bear with all this fall.
Particularly the ones that are not.
It's driven.
Blindly you wanted to understand that if they really want to compete and win in the stock market place they need to partner with us they need to make money, we need to make money.
They the times off a.
Repurposing price degrees, we still views are over as far as the United States of America, we're not ready to allow that to happen to Cleveland cliffs AK steel.
We don't want to go out of business like several Muse in Europe are going out a bit.
You're not going to do the same thing with ourselves.
But the good thing good news that the new a wave of cars right economy.
In the new wave car builders that are are starting to gain momentum here in United States. They have this technological mindset, that's exactly where we are.
Okay. That's very helpful. I appreciate that color I switching gears are you able to kind of provide any expectations around second half EBIDTA, especially on the AK steel side I specifically in in terms of volumes for the second half side now that some auto manufacturers are good.
Back to treat chefs are you expecting I returned to a more normal run rate a a volumes by the end of the year.
Yeah look I think we've provided a lot of quota magaji, what's happened in the second semester, but he went to [laughter].
[laughter] elaborate a little bit on the Yep number did so sure yet we were we won't disclose the an EBITDA forecast, but we will you know we're counting on about 85% of normal in terms of automotive volume for Q3, and and we're looking to 100% of normal by Q4, and that's what we've got a baked in that.
And then free cash flow assumption.
Okay, Great I appreciate that and thanks for taking my questions looking for a senior actually your play out.
Thanks, So much Scott Thanks, Scott.
Your next question comes from the line to Matthew fields with Bank of America.
Oh, Hey, Lorenzo Keith.
Well into your comments on the fleets were interesting earlier in your prepared remarks.
Obviously, we're seeing problems with the rental cars and you know Hertz has had a big issue, we're trying to reject their fleet contracts do their restructuring.
How do you how do you view kind of the consumer.
Able to weren't or not able to make up for the lack of sleep buying you know this year and maybe next year, how does that sort of play out into the overall Saar picture.
Yeah, we have to see how these things replay math because.
Despite all this new trends.
The overall a consequence for us is still suppliers as being a positive.
Because.
The demand is there so much so that we're seeing a they are running.
Adaptive or close to pick up as you do several gazans adds to capacity you know euclid or read that will come back. So they are unaffected so far.
ER and we're the only when supply.
They automotive industry. So I I came on it gives you the perspective offer Cleveland cliffs.
Thrown to the point of view off of my subsidiary AK steel so far so good the ones we are belly to abide and they are buying more in the asking for more and things are picking up good I'm not so sure about competition because.
I don't know yeah, that's not my day.
We are Oh, we are we brought capacity back at the right times Oh, we do.
For instance that Dearborn bless ones for years, we were able to bring a couple brought this fantastic job off our people in India, born and all our technological team a blast furnaces, including help from people from either down. So realty is hats off for for the there.
Last ones guys to bring back that phone so.
It's mostly and Dearborn, but we've made changes in our food Greens already like they did yeah.
Defensive idling Alpha the hot strip newer deal for now we have long one integrated company, we're gonna have outstripped Neil the middle Gong to second half that to run at full capacity, who nominal capacity bad debt and what's your view hasn't run at school nominal capacity for a long long time, so we adjust our footprint already.
To supply the market that we have.
But the overall markets not taking care by AK steel, along and others participate and a Esquire buzard really.
Uh huh.
That's a good gingrich's.
Hi, Thanks, and then.
And then Keith.
You mentioned that the SGN a levels are kind of way down from from the combined company is I guess it is that a big part of the additional synergies you're able to find or can you give us sort of a little break down about about that 150 of synergy is kind of by by bucket.
Yeah sure met the a 151 right now you've got about 69 million less than would be in the us DNA category.
82 million as cost of goods.
81 million in.
Well, good overheads 56 million tons, and another 14 million mm for are coming from the supply chain.
The actual here so the reductions in as she and they are really dramatic you're seeing a.
A half of that Theres. There's a couple of other factors that are going into that we do have some accounting classification changes on on the expense side. So some a sizeable chunk of the actually in a cost that there were being charged to the two S. DNA last year by by AK are now under the cliffs methanol.
We are being a inventoried and run through cost of goods sold so you're also seeing that.
As a factor and then the third factor is just the fact that costs are obviously down for other reasons. Yeah. The synergies are what we consider permanent cost reductions the the other cost rejects reductions or just the ones that come down as far as a result of having a year where were you know profits are lower so you've got lower incentive compensation, you've got a low.
Our travel costs because of the covert so there's a number of other factors hitting it as well.
So that helped but I hope you, Matt and yeah. That's great and then and then is there any any additional pull through through precision partners included in that number or is that is that still yet to come.
Yeah, we are starting to see some movement in that direction, but that future was not definitely not the moment, who execute on that because as you know well Matt.
They end market was shut down for is actually precision partner was the first want to shut down in the first went to come back.
But that there would have.
It's in that I'll give an example, dazzling that there was not the traditional clients of Ah AK steel in the past is working with US both with the precision parts in that case. So we're working altogether. It's your personal part of the fan. So we're doing a lot of.
Thanks, and I Mission example, because everybody's interest in Tesla, but it's happening with other manufacturers as well. So we're very excited with the who will be executing the plan that was put together for this combined the company and.
We are going to be a delivery don't does result in Oh look shore.
That's one from me assuming I'm.
Assuming you have no more security acetate, which hopefully you can confirm that.
What's the plan or if there's any or the outlook on any debt reductions.
In the back half the year.
Do you have some cash coming in from M.T. are working capital lease do you think you think there are some targeted or strategy on kind of being able to buyback more unsecured debt. It is at a discount for the back.
Got the 2020.
I'll first of all Oh, we have.
Have now one thing in place that allows us to continue to reduce debt without necessarily.
Buying back debt on tomorrow.
Yeah, that's they'd be up yeah, I'm sure you'll notice that we pay downs or Dave.
Thank you to this spiked up a oh despite of Oh.
Well pay down they deal with.
Cash and.
Any excess cash flow generated we will be used primarily to continue to pay down DBO. That's of course Inc.'s second thing is that as far as the secured capacity education keep in mind. The 2020 fours secured we will start to be a available for us to redeem.
Come in January.
A very close to par at one or 2.5.
So that's our NAV or targets or no.
I'd now are trying to report portfolio to address outside of the deal.
We have a plant we have a plan and we'll continue to execute the plant.
We've created that cushion to five years question that we normally do we might I normally doing my companies.
Did did with metals USA.
Good good gloves and green now within your cliffs. So we have a plan will continue to execute everything is restored to securing capacity issues.
And that went before is that the right continent, you. So it will be done at the right.
But again I will likely just on that the primary source of.
This is that right now is paying off the baby.
And that's where the casual alright, that's very helpful. Thank you.
Okay. Thanks, a lot Matt Smith.
Your next question comes from them on kind of Alex hacking with Citi.
[laughter].
Okay.
Yeah. Good morning, I have a couple of questions I'm on until Ito could you remind us of your expectations for sales there next year.
And then also kind of remind us where you stand in.
Okay with customers you know I know you had a lot of a lot of.
Pretty good discussions and then also in terms of.
You know how those discussions of.
Thank you.
Well either next year, we'll be running a to achieve a nominal capacity.
Before going to be able to to achieve that by the end of year remains to be C.
Remember when will you were planning to who is starting June recorded.
We knew that would ramp up.
In the second half of the year and a 2021 would be no no capacity no we're going to be stocking at the very end of the so more likely sample so who make sure that though we do everything properly and read on Threep overall.
Shelves.
We can assure that we're going to be running at 1.9 billion for next year, but we if we don't get too and points I'd Wanna get really cool because we bought on data had we don't believe that they ramp up will be a a long way we have enough no ridge about our plant than that.
<unk> processes.
No that their ramp up here before.
As far as offtake with Oh with your clients I have already explained that we need to be any thoughts.
H.B. I sells into their metallics markets into the a they scrapped the backup and that's not how the clients work I address that in 2017, when I did not they elected not to good long term geos to do project finance and when they're out of.
Usually bonds initially other financial instruments in doing that.
We doubt having project finance, so we are 100% comp.
That we're going to sell that products and sell that probably got the right right.
More than that Alex we already developed that procedures to use H.B. I ask school and the in their Pos, particularly the off.
Back to material that will be generated as we ramp up the plant and we use that most immuno Tom Dearborn and we also have the procedures to use in our highly sophisticated d. I have said both Butler and.
And that means field, our own plans are and that will be he spec material. So off spec in video App owns back and dollar yeah.
Have the procedures, we can even work with our clients to develop the right way to melt the h. VI and we're going to be a bit are very successful on that and then as far as hub prices and levels off pricey.
Sure you'll see when it's all right time by mine now to be very profitable and it yeah. It would be a big contributed to edge to Florida.
Okay. Thanks, Lorenzo and just a follow up if I may thanks for the color.
How much of about 1.9 million could you potentially consumed internally that.
HM 250000 to 300000 million no said state year would be out very conservative number and we will do that not because we want to just make them or to disappear because as you may know.
18, you have a buyer of scrap so we're going to be CD money by doing that and we're not going to be or doing anything to jump or dies or.
Ability to generate could be done so we will not be for that not you will not be having the same impact on the east side, but we're going to be having a positive feedback on the cost side of the they seek these new facilities that names. So its cost advantageous do that but the number.
Isn't that the ballpark of 250000 Paul.
The rest movies will will be sold in the marketplace. We have a lot of either coming from the usual consumers into Europe side and ER. We are not planning to sell a two day blast for inside because we don't want to give their competition.
They are advantage that we will enjoy in our costs or by using a middle child and Dearborn.
Okay perfect. Thank you so much and good luck in the second half.
Thanks.
Your next question comes from the line of Mapthree OSA with Jefferies.
Thanks. Good morning. Thanks, Thanks for taking my question and and thanks for the color on.
Further the the plan there at AK steel around not to treating your product as commodities I'm wondering.
How do you think about pushing price around your steel products at AK steel.
Relative to some of the aluminum competition, how do how does a like novellus implement the other aluminum guys.
Factor into that equation.
Well aluminum has been trying to.
Become a a mainstream material and car for a long long time.
And.
Except for the affluent DC Ford F 150, they have never succeeded on pretty much anything that they tried.
The biggest problem with aluminum is call it the consumer.
Consumers all at once these need a with the aluminum salt life sticker.
That's the fact that we we have evidence of that.
So or.
Never really had been Dion, therefore, 50 and as far as I know.
No plan for that another example off or they are failure of aluminum is the fact that.
Tesla as.
It was aluminum and that bad luck three is.
Fred dominantly almost everything yeah.
No.
No matter how skinned the cat.
Now let me look what we continue to be a one to be no matter, what any aluminum ideal say they will continue to be outside looking in.
And the technological development, though stocking about me I'm still bad there then aluminum yeah from their overall cost standpoint for the car a lot better so.
I don't.
I have any problems with the aluminum younger more there.
Okay and then you know similar question on on the Iron ore side, I guess, just relative to competition I mean, not a lot of the great work you did on the the iron ore contracts.
I suppose is a function of of yard you know you know position or in the market in North America. You know how do you think about I guess some of the U.S. steel iron ore pellets, you know freeing up.
As they close some of their blast furnaces and look to market there iron ore into the market and then you know if you had any comments or thoughts on the implied valuation of that deal with stelco that was announced a little awhile ago that would be interesting as well.
No I have no opinion on the their deal would still coined it would not be appropriate to.
Uhhuh.
Comment on that but as far as a the pellet.
The pellet market here in United States, Everything's fleeing exactly as we blame we Cleveland cliffs.
Let me recap.
Our contract with our biggest client Arcelor Mittal go through 2026, so it's totally out of Rick.
Or anyone else.
The quantities are extremely well done and.
Happy they are happy life is good.
The second biggest slackers AK steel.
And I don't need to comment on that.
Oh just.
But size that the we're not going to consume any fellas rather than Cleveland.
The third the fact is Oklahoma and Oklahoma by design.
We left that you are agendas expired, but it doesn't have any because we needed the fellas to feed our H.B. I plant.
Oh.
It's happening Atlanta, one contract to continue all the rates in 2024 and two other contract.
We will expire by the end of the here because I have a better use in a more profitable use up sell it CDR Blanton believer, who could you say, yeah, so again going U.S. Bloom.
And Bob the rest is there extra capacity.
He definitely deals to produce D.R. Grace pellets, which we we thought that we are we would or find a booth market, whether pellets and I'm pleased to inform you that we already have a multiyear contract with supply are they.
So you have great felt production.
So a very good company and a very good operational Alpha <unk> plant in Green Dot. So we're in great shape read that well, replacing a bottom line you every place a woman with Nucor, that's I I Hell of a good trade off for that.
And replacing basic Oh.
Run of the new pellets that the supply a woman, Canada with highly specified yeah, great pellets school can pellets to nucor in Trinidad so fantastic.
Okay, and maybe maybe one last.
Very very big picture question, I mean, a lot of the conversations we have related to your company and just the broader steel industry is you know how do we think the sort of share in the domestic steel market shifts between gas and.
And blast furnaces over the coming decade, <unk> you have any big picture thoughts it seems like yeah. It's kinda shot up to two thirds of the market fairly fast, but maybe it's plateauing a bit any high level thoughts on how you see that playing out going forward and and I guess to some extend your H.B. I product maybe.
Eight the U.S. and some to some extent as they're able to produce better products with your pure iron inputs, but just high level thoughts on on that would be helpful. I think for for the market.
Matt you already answered your own question, you said that right.
It did affect the electric arc furnace abrasives did a fantastic job and.
During the last let's go.
For years to grab the market share that was available to them.
And so they did we are not very well.
It's a stupid bland, taking advantage drop there flexibility the fact that their nimble. The fact that they can do a lot of things.
For a lot less gloss.
And that's all great.
Now when push comes to show a we're getting to that the.
Las stress that Technelite technology matters.
The R&D support matters, the ability to produce excuse that their equipment doesn't allow them to produce matters and we are going to continue to the fan or that are niche as you can see he understand from my speech.
Here and though we are not where we didn't use price because we are so confident that what to do is differentiated.
That will continue to explain and educate on that.
Oh, we do a lot of Ah, yes, there are extremely competent.
And if you will be up they should do they get their landscape you are going to see that not everybody Google or not everybody is you then huh.
Yeah, you got jewel.
Great companies, great abrasive, but you go beyond that might find the CMC. That's also good company and then who stuck to have some.
Some difficult to.
To identify and fine and the good operators on the I'd hand, when you look to the automotive.
Footprint swaps the entire world you are going to see that in Japan, Nippon Steel Gee I see they are less going to celebrate why is that Japan has a lot of scrap why Japan doesn't agree to a U.S. and give a depots do and Jay I see our own for their money.
The automotive business I will answer the question because they can't.
Same thing weird or South Korea, with Posco possible, yes.
By and large for the automotive business, a blast furnace steel mill, even though they have been he was likely go to at AK steel. So things are not as simple as a as you read in the being there that gossage threats. So.
Let's take one step back and look exactly what kind of skews, we're talking about we're talking about.
About a his skills that we.
Tim Knox through June through the there yeah, Rob some they can and they are doing and they're doing a good job. It did that really there their participation, but I believe you think there we are H.B. I help them, yes marginally.
Well I thought what they can do today with pig iron or they will not be able to do much better with our age yard more efficiently, yes, more effectively yes, a week or a bad there or is there were a chemical composition, absolutely, but this will not.
Yeah differential for that Disney fairies, Shobi that they will have a supplier in the country, you said I'm happy to import from Ukraine, or Russia or whatever.
So.
We are we're pretty much at that at the top off watts or was there the transition.
Oh, yes, two blast furnaces and guess what there's something you operate India. You did last one section called Cleveland cliffs that is our embedded go or youre understands the business understands the technology evolves to produce you still for cars or has the R&D.
Cup ability I am absolutely kras, we'd that that's up noted that I found at AK steel in both the R&D Department and a broad developed and departments and we're going to continue to leverage that to care with our ability to supply feedstock food that's great.
And that's helping the business going forward.
Oh for though as learn concurrently.
Thank you Matt.
Your final question comes on line field Kids with Keybanc capital.
Hey, Lorenzo keys and team good morning, Thanks for taking my question.
The apologize if you talked about this already but the synergy number I think was north of 150 million how much of that did you achieved in the second quarter and how much relative to that that number on an annualized basis you have to go.
Yeah.
We are we were at a run as in June we were we hit a run rate of 84 million. So we picked up 7 million alone in the month of June so that.
For the quarter was about 17 million.
By by the beginning of Q4, we should be at that 120 that we talked about on the last a call and a the full 151, well will will kick in by January one.
2020, you Gonna say something Lorenzo I'm sorry.
[noise] I'm sorry to have because there's.
No I thought you're going to say somewhere under that so no.
So so when we think about it you've got a full once at the next year or Keith and this year, given what you've realized so far what you expect to realize in the second half is that.
I get you somewhere around 50 million plus or minus.
Yeah, that's pretty close feel yeah, like 65 or something like that for the current year summer. Okay. Yeah, a little more than that would you like the 65 for 70 level.
65 to 70, so you're getting that extra extra juice and next year's numbers on terms of the synergies having them for a full year and then also stopping them up.
That's correct.
Where did you up where did you find more.
[laughter] the more we.
Yeah integrate into more we understand that the more we develop the way we do business with the gate inside the footprint. The more we can do things a I'll give an example that was not part of our regional plant AK tube now it's part of the commercial effort of acreage.
You are 100%.
And he came to be was treated as a separate company.
We are in the process during the same thing with precision partners not to the point that the procedure in parts of it will become a department topic is still but that's what they keep two years right.
But they level of integration or mix for things that we did not predict coming from the outside who see that you can do these things in their real life.
Another thing is that due to our ability to absorb new things in our office in Cleveland or back to me. We still have our people are back into office, but no home offices in Cleveland, we continued to reduce.
The that there's some things in Westchester so.
The time and then all the jump that the New Corporation makes for this process. This process of absorbing synergies to become kind of put natural thing.
And Ah things are.
I mean.
Yeah in a very are exciting wait another point that I need to.
So glad device that with a combination of Ah AK steel into Cleveland cliffs, we're able to redo up a number of deep contracts a weird cereals advantages for the company Moneywise and that's also a big portion or what is.
Number.
It is a boosted number is coming from because now we have a much bigger well give an example, ray will transportation.
And we created it seems that will not part of a regional plant.
The fact that no longer have a hot strip mill Dearborn.
Made for more transport between Dearborn, and middle dialing back which is not a good thing, but it is a good thing because in the big scheme of things are saving a lot of money and we are optimizing our beautiful what's your view, but weve that we're able to redo the tires.
I think would Oh railroad transportation and were able to enjoy a lot of [noise].
A lot of costs in this SGN they enter the.
Not even just asked John a contract type booklet expenditures.
So and just as a follow up and again apologize if I missed this.
In terms of your pellet shipments this year in and not in the business.
Was there an update in terms of what you think that all that will be and then some question Youre, assuming fourfifty hot band and 110 iron ore in the current pellet premium where does that where does that put you for pricing in the back half as well. Thanks.
Piece going to take that.
Yeah, we really it Oh, we didn't really give guidance on a pellets and what we put out so far but we see any other pellets pellet shipments should Q3 should be very similar to Q2.
Maybe slightly improved and then we should see a a pick up in Q4 as well as we normally see as the blast furnaces need to stock up before the for the locks close for the winter. So that's that's kind of the volume output and if pricing were to stay where it is today, we'd we'd end up the year, probably in the low ninetys on a path.
As price and a you might see a true up in Q3, so maybe two three it'd be a little bit lower but it would it would average out to a low ninetys for the full year rate if prices stay where they are today.
Very helpful. Appreciate it thanks, so much that that's true.
There are a function of questions at this time.
Alright, thank very much appreciate it and it wasn't player to be would you guys on the phone today.
It is an exciting time for Cleveland cliffs, Thanks for a research and we'll keep in touch you. If you all have agreed to thank you final.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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