Q1 2021 Cleveland-Cliffs Inc Earnings Call
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[music].
Yes.
Good morning, Ladies and gentlemen, my name is Amy and I will be your conference facilitator today.
I would like to welcome everyone to Cleveland Cliffs first quarter 'twenty 'twenty, One earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' 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 for the private Securities Litigation Reform Act of 1095.
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 website.
Today's conference call is also available and being broadcast at Cleveland cliffs Dotcom.
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 cliffs executive Vice President and Chief Financial Officer, Keith Koci. Please go ahead.
Thanks Amy.
And good morning, everyone.
Going right into our results our first quarter adjusted EBITDA of $513 million represented a 79% increase over last quarter.
Selecting our first full quarter of results from the former AAM USA assets as well as stronger steel pricing.
Net reduced third party pellet sales due to the annual maintenance of the great Lakes blocks.
Steelmaking segment, we sold $4 1 million net tons of steel products, which included 28% hot rolled 18% cold rolled and 33% coated with the remaining 21% consisting of stainless electrical fleet slab and rail.
This mix is generally in line with what we expect to see going forward.
Our aggregate average selling price of 900 per tonne in Q1 is certainly the low point for the year and our forecast and is lower than our Q4 2020 average solely because of the different mix associated with the former am USA plants.
On the cost side, our performance came in as expected.
Relative to last year, we're seeing decreases in costs for coke and coal as well as benefits from decreasing scrap use and higher productivity from using our API products in house. This.
This has been offset by higher prices for scrap alloys and natural gas.
We also saw higher labor costs due to increased profit sharing.
DD&A was $217 million for the quarter, and we expect about $840 million on a full year basis now that purchase price accounting has been further refined.
An important moving piece this year on our cost structure will be iron ore costs, we certainly benefit on the former am USA side from transferring pellets at cost but.
During the first and second quarters, we are working through the pellet inventory previously purchased from legacy Cleveland cliffs. These.
These pellets were purchased at a margin prior to the acquisition.
And therefore, the higher cost runs through our income statement in 2021, and the resulting impact is not included in the add back for inventory step up.
This short term anomaly had a negative impact on our first quarter of approximately $50 million.
And we will be a $40 million headwind in Q2.
After that the impact will be negligible, creating nearly a 100 million EBITDA tailwind going forward in comparison to the first half of 2021.
We experienced the same anomaly in 2020 as a result of the AK acquisition.
As for synergies, we have already identified and set in motion a $100 million in cost synergies from the AAM USA acquisition.
Some of which will take effect later this year.
We are well positioned to reach our target of $150 million of annual run rate savings by the end of this year for a total of $310 million from the two combined acquisitions.
As far as cash flow.
Q1 contained several previously discussed one time items that will not recur going forward.
This was contemplated in the acquisition of <unk> USA, we had a significant investment in working capital of nearly $650 million during the quarter due first to the completion of the unwind of the Arcelormittal a our factoring agreement as.
As well as other acquisition related cash impacts we are now completely done with this and receivables have been rebuilt.
Second we saw working capital build related to receivables corresponding to the rising steel price environment.
Also we made our deferred pension contribution related to the cares act of $118 million in January.
With the passage of the most recent stimulus bill and the extended amortization feature.
Future cash pension contributions will be reduced by an average of $40 million per year over the next seven years.
For the remaining three quarters of this year, we will be generating record levels of free cash flow.
In future years, we expect certain cash outflow items to be lower than in 2021.
Sustaining capex will be approximately $525 million annually.
Interest expense will be lower due to reduced debt and.
And pension contributions will also be lower without deferral payments and with the new stimulus benefit.
In addition, working capital impacts will likely revert to neutral over time. Unlike the large build we project this year.
Upon releasing our Q4 earnings we guided to a substantial EBITDA improvement from Q1 to Q2 and by the end of March we had enough pricing visibility to disclose a $1 2 billion adjusted EBIT Guide for Q2.
The increase from the first quarter is driven primarily by pricing.
Offset by higher incentive compensation and profit sharing and higher raw material pricing for scrap and alloys.
On the liquidity side, we currently have $200 million in cash and $1 6 billion of availability under our current credit facility.
Our ABL debt balance is currently $1 6 billion and we expect to have this paid off by the end of the year. Our Paydown of this instrument will come penalty free and every dollar that is reduced and ABL debt will be added to our liquidity.
In closing, we find ourselves well positioned to take advantage of a healthy steel markets and also take care of a significant portion of our debt balance in very short order.
Based on what we're seeing in the market. We believe our estimates supporting 4 billion of adjusted EBITDA for the year, our conservative relative to today's forward curve.
And now I'll turn it over to Lorenzo.
Thank you Keith and good.
Morning, everyone.
I will start my prepared remarks, reminding our investors.
This first quarter of 2021, which we're currently reported results was the very first full quarter for Cleveland cliffs.
Moving to closing of the acquisition of AAM USA All day.
December nine 2020.
And it wasn't me massively successful quarter for our integration color.
Culture change Inc.
Clearly our profitability.
Our attitude towards commercial and the steel pricing is.
Is the main reason behind the massive numbers, we are showing for the quarter and guide for the balance of the year.
<unk> $513 million of EBITDA in Q1, $1 $2 billion EBITDA next quarter and $4 billion EBITDA for 2021.
The steel industry is capital intensive.
And return on invested capital as necessary.
If we lose track of that we would not be able to address the issues like equipment reliability workplace safety or day environment.
We are not really we.
We are realistic.
That's why as steel prices are where they are and that will continue going forward.
Right now the America consumers are consuming and therefore, assuming a lot.
The stimulus money provided for the majority of the population is being redirected right back into the economy.
And thats, great for flat rolled steel producers like Cleveland cliffs.
This money is being spent on consumer goods like HVAC and appliances and cars.
By day Sky Rocketing, Aldo Saar in March.
This will all the experts that wont predict the demise of the domestic steel industry had been moving completely wrong.
When Cleveland cliffs, AK steel and Aam's USA.
When the Covid recovery begun.
They had an easy window of opportunity to fix their field disease.
Unfortunately, their addiction to negativity is apparently the only think that they care about.
This force just don't want to see our industry thrive and they clearly don't care about the wealthy middle class jobs, we generate and sustain and United States.
For the record.
Our approximate tiers.
The median early pay off our 25, Cleveland cliffs employees is 100 and true.
Yes.
Because we are growing.
Make no mistake.
We are adding jobs.
Since December nine 2020, we have already added 710, new employees to our workforce.
As we always do SD Wan cash.
We are putting our money, where our mouth shifts and bringing back the America Thats, we love with a vibrant manufacturing sector thrive.
Thriving middle class and with opportunities for all people that believe in education and hard work.
The main factors supporting these new ways of doing business our defoliant.
First the industry consolidation.
Prior to our acquisitions up AK steel and am USA day.
We're both buying iron ore pellets from Cleveland cliffs under take or pay type of contracts.
As a result their top concern was filling up the order book so they could satisfy their portion of the requirements with us and in many cases that involves being aggressive on pricing and product. So they can move materially.
We and the businesses, we acquired are no longer burdened by this.
Which leads me to another true.
A more disciplined at supply approach.
As I have stated in the past, we can be flexible with our production and.
Can walk away from bad deals.
Alpha motive contract is spot or otherwise much more easily.
This industry has been plagued into past by volume for volume sake.
But with all the transformative acquisitions, we have all started to see rationality in the marketplace.
Don't forget the U S dominates the world and environmental performance.
Of all the World C O two emissions from this two industry day.
U S comprises just 2%.
China, either as Paul said, he is responsible for 64%.
We have also the lowest C O. Two initial spurt of steel produced a more benign largest steelmaking nations.
During two Boes day.
Prevalence of Eas production.
The m<expletive>ive views of pellets the black spaces.
This leads me to my final character.
One that will drive mid cycle hot rolled coil pricing high here for the long term.
These scarcity.
Ryan scrap.
Eas make up more than 70% of steel production in our country.
This reality is unique among all major is still making countries.
Apps have long taking advantage of the large pool of scrap here in our country.
However, with all of the new capacity coming from day Eas side of the business. There is scrap feedstock has become a stretch.
Net.
In order to make flat rolled product.
Yes.
Brian scrap and metallics, both of which actually originates from the integrated growth.
On top of that manufacturers have become more efficient at processing high grade steel generating less prime scrap to be sold back to the system.
The United States is a net exporter of scrap but it is also a net importer.
Brian scrap.
Combine that with China is growing needs for imported scrap which will outpace their own generation in the near term and the U S. EBITDA apps have a big problem.
Obsolete and lower grades of scrap we will likely be okay at higher prices and incentivize collection.
But that's not the case for prime scrap.
Lower grade scrap scrap is going for rebar, but its not good or not enough for the production of more sophisticated flat rolled steel products.
There is a scarcity points to significantly higher prices for scrap.
Meanwhile, we at Cleveland Cliffs will continue to enjoy day steady cost structure of our iron ore feedstock, our all 100% internal resources pellets with decades of iron ore reserves ahead, and our Ehow.
Production of <unk> fed by our own mine and pellet plant.
We formulated this view in 2016.
And that has been the driving force behind our strategy for the past five years, including the construction of our HDI plant and our true transformational acquisitions executed last year.
It is actually interesting to see other companies getting to the same conclusion five years later at the time Cleveland cliffs has already started to enjoy the benefits of our investments of the past years.
Our direct reduction plan.
Our remarkable fast few months since the start up in December of 2020.
Has already exceeded our expectations, thus far on <unk> production and shipments.
We produced 120000 tons of free cash in the months of March.
And expect to reach our annual run rate of $1 $90 million this quarter.
While we have already shifted some <unk> tonnage to select outside clients and Thats a very good prices.
We have thus far you used most of the product internally at our own apps blast furnaces and D O S. S planet.
Operational results have been on both our own expectations in all kinds of internal usage.
Our H b.
Particularly at our Eas <unk> currently makes up between 20 and 30% of their milk.
More importantly, our.
Our <unk> have effectively eliminated our needs to buy Brian scrap.
We only need to buy lower grades at this point substantially lowering our cost structure.
It has also lowered our greenhouse gases emissions and improved our IRA and chrome yields.
The original invitation for it to lead to a direct reduction plan Duane Cleveland cliffs was just on iron.
Company last to exclusively sell HBO too.
To third parties.
But that dynamic has changed with our two acquisitions of last year.
Given our expectations for the scrap market.
Our API is an incredibly important clinical and cliffs internal resource and differentiating factor.
Both now and going forward.
This is why I'm happy we did not sign long term contracts to supply <unk> to third parties.
I did not need them to build the plant.
Don't have them now and I don't want long term supply supply contract going forward.
For the record.
Consistent performance, we get out of our API in all of our plants both in quality and environmental is one of the most positive factors differentiate Inc. Cleveland cliffs from the rest of our competitors, both integrated and mini mills.
On the steel operations side things have been progressing nicely.
Our Middletown outage was a success, we completed the blast furnace repair in less than 14 days.
And then.
Vessel maintenance was finished ahead of schedule.
And we do not have any major outages scheduled in Q2.
We are focused on getting a few out of the door.
Despite all we hear about supply shortage.
Electronic parts and other components in automotive, we really have not seen a huge impact on volumes to this end market.
We have been running our coating lines at full capacity in response to outstanding demand.
And our restocking our Columbus Sculpeys Galvanizing line.
That will increase our output of galvanized product starting in this second quarter, and we will help our clients take care of their own high demand.
For the small amount of automotive tonnage that has been deferred.
We have been able to divert that service rate two higher margin customers linked to the spot market.
We completed all of our April 1st automotive contract renewals with nice price increases and plan to continue to see significant improvement in <unk> margins going forward.
All of our actions support immense cash flow generation for this year and beyond and.
And that cash will be used to pay down debt.
Under our latest forecast.
We expect to generate a record level of free cash flow in the last nine months of 2021.
Which will put us at a bigger up less than one time EBITDA leverage by the end of the year.
With that I'll turn it over to Amy for Q&A.
At this time, ladies and gentlemen, if you would like to ask a question. Please go ahead and question Star from the number one on your telephone keypad.
Again star one to ask a question.
Your first question today comes from the line of Lucas pipes with B Riley Securities.
Please proceed with your question.
Hey, good morning momentum and team good morning Lucas.
Congratulations on the continued success and thank you.
On prior calls Lorenzo and just now in fact.
There have been discussions about auto supply agreements and.
You could.
Do or what it could allow for in terms of improved value capture on your part.
And I appreciate that this is a little bit of a delicate matter, but I wanted to ask him what waste.
Any these relationships continue to evolve.
Thank you.
Lucas the relationship is great.
Because there is a relationship built on growth dependent.
They depend on us and we depend on net.
The good news is that since we acquired AAM USA.
Our percentage of automotive business and the overall business.
Dropped dramatically.
So even though automotive is still important.
It's not a make or break likely to us from <unk>.
AK steel when.
When it gets too wasn't Standalone company.
Another thing is that the real competition for their more sophisticated grades of steel that AK steel Cleveland cliffs on the case due for.
One for almost a year.
The only real competition.
Hey, Andrew <expletive>ay.
So now we own both.
So the automotive clients.
We have already realized net.
And there are no longer negotiating with our bagger there negotiate with the supplier that standard with a lot of respect and demands respect in retrospect.
So we are doing great. We havent had to shut down any clients yet Inc.
Contract negotiations.
But.
Every time, they think about playing hardball.
No doubt that this type of side of the day will there is someone that loves to play hardball.
So far for growth.
That's very helpful. Thank you momentum and then it.
Is there a day today in <unk>.
<unk> been buying President XI has been outbidding, each other with announcements on carbon reductions and you spent quite a bit of time.
Talking about.
This larger context in your prepared remarks, but I wonder if you could.
Could you maybe.
Go back.
On some of the details to what extend our carbon reductions in the U S. By 2030 for example, a risk or an opportunity from the U S. And then of course.
<unk> always had great perspectives on what's going on in China, and implications for global steel and iron ore markets.
And.
Of course defense major impacts for you as well and so kind of wrapping it all together if you could include that.
Those box in your response as well I would really appreciate it. Thank you.
Lots of BEC and on an answer for.
For you, but I will try to similar <expletive>ets.
Yes, I can.
First of all I believe that the fact that president by them.
Is.
Retaking the US leadership in this environmental conversation is a very welcome move and it's overdue.
Happy to hear it.
Way too much from countries and companies that don't have anything to say, but they are seeing anyway, David Leiker States can say a lot.
We have the most.
Stringent the most serious.
Laws and regulations regarding environmental throughout the entire world.
In order to operating in the United States, who need to comply with them day in day out that's this stock.
Other things that I love about President <unk> is doing is that the established.
Deadline for the reduction of 50% in 2013, and 2030 is around the corner.
Haynesville at IC companies, saying that data from companies and countries.
Whatever sales that there'll be carbon neutral by 2050 or in the case of China 2060 that is long and was certainly above 2016 all of US that are in this call will be debt.
The only certainty that we have that.
40 years down the road I don't think that we have too many two anti 25 years old and Nicole.
Hygiene basements.
Keyboards.
Come to learn so anyway, so book at 37 40.
Now that were at that time, that's the only certainty that we have.
By 2030 is around the corner.
Good day by day.
Talking about 2000, and he is putting out a target of 50% reduction from 2005 and Thats a good point to start if you will.
Look at our.
Environmental commitments.
They are talking about our commitment we are talking about.
30% reduction in 2030, taking as a base case in 2017, we havent checked yet with 2005, because theres announcements came this morning, but I believe that we're already net so that's good for us because we did not start counting 2005 were confident 2017 that was the big.
Any update Upi plant when do we start <unk>.
Going forward in our business.
The data will start to be realistic and we are going to start to see things. The way. They are China is responsible for 6% to 4% of greenhouse gas emissions from this new business. The logistics that are responsible for 2%.
<unk> had some states we have excellent performance from all Eas product, mainly from our <expletive>et Cleveland cliffs.
Also from blast furnaces that are all.
Fed with pellets, our Middletown blast furnace.
That is very similar to EMEA.
Our Dearborn blast furnace, you are looking to just stick to that number because of the core Gen arrangement that we have with Dearborn.
Energy.
DDI.
Sure.
Numbers that are below the aaas. So thats all I have I think that needs to be fixed our blast furnace and the board is not better than average.
Just the way things are accounted for and there are things NGL blood there not be accounted for as low as there are things in eas, there or not being accounted for for example, the usage of imported P. GAAP because imported pig iron goes against the scope three and everything Thats being reported scope, one and scope two so we are.
Long story short.
The involvement of president by net and present sheet things really start to be more into real side of the world in terms of being discussed between academics and funded 2000 people that are starting to sell consulting services in reality. If you think in and we are well prepared.
And Google Inc is reality.
Very very helpful. Thank you Lorenzo I have more questions, but I want to be respectful of everyone's I'll turn it all day. Thank you and continued best of luck appreciate it thanks a lot Lucas.
Your next question comes from the line of Sarah James with Keybanc capital markets.
Please proceed with your cash.
Hey, Lorenzo good morning, Mark.
Also behind my keyboard here, but not in the basement. So I've got that got that going for me, which is nice.
Capex this year Lorenzo any update on that.
I'll, let him handle that book when I talk about that.
Kansas deposits, certainly im not talking about Phil Gibbs.
Yeah.
Alright.
Hey, Phil No. We're still we're still looking at around 650 million from the current year that's necessary.
Sure.
Forecasting the last time, we talked about 600 to 650 were at the high end of that range now we're at 650.
Okay, and then do you have with Middletown restarted do you have an expectation for for higher steel volumes in the second quarter.
That's a good question because that will allow me to say something.
It's a bad Association, where do we do it in an outage of a blast furnace like new hotel Thats a major risks we prepare for that so we never have Amy.
Lower throughput because of the 14 days that little down 13 days, an app that Middletown blast furnace was down because we had enough we have enough hot band we had enough.
PMO has enough global force heart, we have enough everything as far as working process to keep all of the lifestyle and all delivered.
And then to say well what happened.
The clients are complaining that they are not receiving steel. Yes. These are the clients that were hot band was 440 day call to have lauded the truck.
<unk> have put their warehouses full through the roof.
Because you can't get much better than that actually we should have never been even close to that.
And we never will again.
And Thats Cleveland cliffs tell you saw.
So.
They didn't do it because they were they were waiting for another 10, 2030 books to drop to that quarter on quarter opportunistic.
So they are basically collecting what Dave pointed before.
And we are taking good care of some of them. Some others were not taken care because we don't believe that day, they really even belong.
We don't need all this.
Quarter on quarter opportunistic players in the marketplace day, just distort and destroy complicate gossip talk on the phone sales safety formation.
Do everything.
We don't need them in the marketplace, what we needed these businesses their stability, what we needed displaces profitability. There is no real company Inc.
This four months of 2021.
It's a real comfort desk complaining about higher price is doing the way because they are all making money. There is only one way for the supply chain for big profitable is to have price at a level that makes sense. This is a capital intensive industry fuel we need to have return on invested capital without return on.
The investment capital can't do anything we can't pay dividends to shareholders. We can based on that we can't do anything so thats what were working for it we are.
Doing our mandate, we are doing our job.
We're working on behalf of the shareholders of the Covid.
So essentially what youre, what youre, saying is that.
Your volume should be should be reasonably stable, perhaps maybe maybe up a little bit maybe down a little bit but kind of within this range but.
The automotive supply chain.
Certainly is a big is a big part of your business is a big part of the sheet industry here domestically.
I think we just want a better view if you could in terms of what's going on I mean, obviously there are shutdowns that are taking place but.
Our customers still taking steel on the prospects of ramping up in the back half of the year, where your shipments down do you expect them down in the second quarter and ramping back up again, it's just tough to know from our C. What's what's actually happening on just the volume side. Thanks for one day, Phil Little we supply pretty much everything to everyone.
Because of our size with supply growth.
Rough numbers $4 5 million tons, a year of carbon steel and another 500000 tons a year of stainless so all Ian will supply 5 million costs total border.
And I will be honest with you I haven't seen.
<unk> impact on these shortages, yes, we didn't have.
We are delivering a little less to customary plants.
Why.
But then the next week that plant catches up and then I'll add a plan for another OEM as well as Dow because they don't have chip because they won't have Robert because they don't have.
Our fall, but does it catch up and then we catch up with them and in the meantime true.
We have been able to take better care of spot orders for the good service centers and.
We are being able to increase our prices.
But this morning hot rolled prices were reported a growth 1400 dose for net and we're cutting deals.
Way above $500 per net zone. So we're in good shape and that's fantastic.
This trend will continue so there's no real impact.
From our standpoint, they are a supplier.
And I'm really talking about across the board.
The other big one would be it's not so big.
Pretty much everybody is taking care of their own respective businesses and we are supplying them.
No effect on us as far as well.
What producing less revenue.
Hey, Omar.
Why do I say that because we are bringing them back.
Although the schoolteacher and that's more galvanized in their marketplace, but lets just galvanize so other than that we're producing at capacity and I would say.
Three is not in operation and Ashland is not an operations. Yeah. There are appropriation for a long time and they will never come back net.
Excellent northern tier three.
We're done.
I'm going to come back.
They are not part of the picture.
And we have proven C more hot metal because we are using <unk> and inkjet hardware said, we're using <unk> in Dearborn.
So that's what we're doing and we will continue to produce more increased productivity increased throughput and not bringing antique gl<expletive> from inspector.
Thanks very much thank you.
Your next question comes from the line of Matt.
Think of America, Inc.
Proceed with your question.
Hey, Linda Hickey.
Hey, Matt.
Congratulations on the <unk>.
The great success this quarter and the continued momentum.
Now that you've been in your Arsenal metal <expletive>et for five months now just wondering if you've sort of taken a taken a review in cement.
Seeing that there is any kind of major projects that you might need to do in the next year or two or whether it's some of the older plants like steel from the Comstock and plate mill Burns harbor or any of the coke batteries.
Yes.
Yes.
We've learned the <expletive>ets flow into division and now we're really into the <expletive>ets for a few months and we.
We believe we know them extremely well, we compare the overall status of the <expletive>ets.
At a level that is not the same level that they found the <expletive>ets of AK steel. This being said everything that we need to do with those <expletive>ets has already been contemplated in the Capex numbers that we released.
With these results and to date during the quality scores.
Talked about so.
There is nothing really major could be for us to be expected and all of these ones that you mentioned specifically are all good niche businesses.
Which we are taking excellent care and we will continue to make them growth.
Like for example.
Great business.
We love doing business review from growth and of course, our Hawker with the military that's I think that we.
We used to do a lot of business.
Metals USA time.
<unk> with the.
The better growth in that.
Our relationship is perfect. We will continue to grow this business.
<unk>.
Those are appropriate.
The best pro forma fleet out there.
Set by the clients so the clients appreciate.
Taking accounts business in <unk> better than the competition and that's what the clients Inc.
No if they're seeing something different from my competition, but that's what they are seeing to our day in place.
<unk> also includes Gary fleet. So the student is a business that's in a very niche business as long as you price it right you make.
Make a lot of mine over there.
<unk> launched our API, we are no longer buying scrap over the net.
Lithia enormous savings you think.
We sell H b.
For the third party clients for a very high margin very good profitable business, but we are making more money by replacing scrap these stupid.
And Bob buying prime scrap in the marketplace using our HCI because debt servicing costs are better than the margins that we make selling HBO and we a day 90 service to the to the competition so perfect.
So all good net I don't know.
Sure.
That's helpful and then.
I, probably I know this is like not that important to the way you run your business, but a lot of a lot of folks in my world kind of pay attention to this stuff. So.
Your credit rating, but very mismatch between Moody's and S&P.
Is there any reason that S&P, just kind of doesn't get what's going on with steel prices in the steel environment or are they just two way behind what is it something that you're actively.
Actively can focus on or is it just they will come around when they come around.
And get you add in that Triple B rating would seem kind of observed at this point.
Look.
I also noticed that.
And Keith himself, so as well.
That's why.
<unk> yield.
Not use S&P.
There was a moody's and Fitch.
I must say moving Fitch are much better but.
I'm, just saying that S&P is just horrible.
Just a day or blind.
They don't get it so I don't know were going to ask them.
If that.
That day, the brain is working.
Unless otherwise they would just.
Received already a very blurred the next day so.
They're back rates.
Yes.
Let me, let me do a follow up with neural net.
When a visit day that <unk>.
Those investments will allow us to do a deal we don't have a rating.
Cause you guys all know that these folks don't know anything.
So.
Wide vessels like the C. The rating out there.
High price my Ddos.
Rent levels My range, our price my view is that used that don't match by my ratings, but I still need to print a rig.
I've always a b and a price to be low double b plus.
No.
That Matt have been following us for a loan growth done.
Well I think the high yield investors that sometimes smarter than the rating agencies I believe so true.
They are not finding enough to do adopt a freaking rating so anyway.
Lastly, <unk> been right about a lot of things, but I hope you're wrong about one thing.
I'd like to live past 77.
Okay.
Yeah.
I'm, sorry say it again.
<unk> been right about a lot of things, but I hope you're wrong about where all that in 2016, because I'd really like to make it past 77, yes look our stock free for you today.
And I feel that all of our EDA working overtime.
Thanks, a lot of the rent them. Good luck. Thanks a lot.
Your next question today comes from the line of Seth Rosenfeld.
Net claim. Please proceed with your question.
Good morning, Keith.
Thanks.
A couple of questions starting out on the carbonization and another one on working capital. Please.
De carbonization, obviously spoke quite significantly about the progress of the U S market made in cutting carbon emissions essentially versus peers in Asia wondering for cliffs <expletive>et mix in particular, how you view that progressing over the medium term.
<unk>, a very big positive here do you see opportunity to expand HDI or expand your capacity in order to reduce your carbon footprint further over what timeframe that might be considered.
Yes.
Sales were three.
Okay.
<unk> level.
Leveraging after which we could consider larger capex investment.
As you can understand the moving parts.
Large capex capex investments.
<unk> bye.
We will need.
Availability of castle, so keep in mind when I started building the HDI plant.
At the time with a budget of 700 million Boes to produce one 6 million metric tons of hei.
It was a m<expletive>ive investment for legacy global and cliffs.
And.
We've made it anyway.
Because that was the right thing to do.
If I have not done that to date.
I wouldn't be announcing an HBO plans.
And people would be telling me congratulations all around so you are thinking ahead, you are thinking about doing the <unk> plant.
It will be something really good for the environment gets one remember that plant that you said that was a widow maker that nobody can finish on time and fee income budget.
You said that.
We finished on time within Schlumberger to increase the size instead of spending 700 administered on day rate and now we havent announced hours and.
And are you using and Decarbonize.
In Europe, where you live.
Sure.
People are talking a lot about decarbonizing, we're talking about hydrogen the technology is not there. They are talking about breakthrough technologies that not even the universe is noteworthy are growing.
The ones that are talking about exceptional probably for Ottawa mill that they really do what it will do really know what they're talking about everybody else.
Fighting against bankruptcy dealing with lenders have go bankrupt.
Thanks.
Switzerland debt goes down when they released results and it is a free cash math in Europe as far as environmental.
First of all running the show and environmental.
Yes.
In Europe is a girl Thats, a key near zone here.
It's a 63 years old Guy that has been doing this for 41 years.
That's getting more attention.
Bedrock.
We also need to know about the type of organization.
Okay, that's very clear.
One more question. Please on shorter term cash flow working capital, obviously significant investment in Q1.
Can you give us a sense looking ahead into Q2, whether or not you think that given the cyclicality and price strength need from incremental working capital investment what have you.
<unk> been able to get.
Investment levels stable going into the second quarter of the year.
Keith.
Sure so we.
We will see a little more build here in Q2 prices our selling prices continue to go up therefore, our receivables are going to go up so.
Think embedded in our numbers through the two to 300 million working capital build on receivables in Q2, and then stable.
Obviously for the remainder.
Alright, great. Thank you.
And again, ladies and gentlemen, Thats star one to ask a question.
Our next question comes from the line of Sean Okay. Okay.
Thank you for your question.
Hey, guys good morning, and congratulations good morning. Thanks.
This is a free cash flow guidance is a far cry from the guidance. We got in April 2020, It's amazing to see this now and totally backs up the buyback that you did back in back at that time.
When you look at the $4 billion of EBITDA I'm, <expletive>uming that prices hold up.
$650 million of Capex.
Is there a incline billions of free cash flow is that right or are there other puts and takes like working capital.
Am I reading the guidance correctly.
Yes.
Europe really exclusively correctly.
We talk about $3 3 billion of free cash.
That's correct you were really right now and it will grow applied to pay down debt.
And when we get to the end of the year, we're going to be below one times leverage.
And guess, what I would continue to pay down debt.
Right.
We want to be debt free, yes, I want to be debt free.
Because.
What I don't know if one day, we are going to have another corvid.
I don't know whats going to happen next.
What I know is that if I have my footprint.
Producing 17.
Tons of steel a year, producing 4 billion plus of it.
EBITDA year.
Net free.
I am good.
Alright.
It's really impressive at this stage from the game and when we think about that.
You have roughly $1 6 billion and our ABL right now.
Aside from this day.
<unk> debt reduction there and do you expect the permanently repay any any other debt or do you think you'll just refi maybe take out the secured debt as the time comes.
We were going to start paying tranches in cash.
You said everything.
We have we have a day.
Plan lays out completely.
Between now and day end of 2020 true on what trenches were going to take and win.
And we're going to take them all dealt with cash.
Daryl.
Not even need.
<unk> from the rate case that will be day, the budget are really miss.
Well, yeah, when your bonds at pricing that Gary single B anyway, So I think people get the picture here.
Thank you very much for answering my questions.
Yes, it's nice to have from this rate is.
They need to start gives me one racing LG.
That's it.
D C.
LG rating, that's what the investors want to C.
They give me money all the time as we price the stock 200 to 150 basis points due low competition all day.
Thanks.
As you know.
Alright.
This is all very helpful. I appreciate it. Thank you very much and good luck going forward appreciate Sean.
Your next question comes from the line of Karl Blunden with Goldman Sachs.
Please proceed with your question.
Thanks, Hey, good morning, guys. Congrats from me strong results and guidance.
Paul.
This might be an extension of that question, but.
When you have quite a bit of that now you've got a lot of cash flow and bad debt come down yet make decisions with their cash flow where.
What do you think you would prioritize as you go into kind of 'twenty, two and 2003 timeframe based on when you see ability to.
Good economic returns or potentially shareholders want to see a line of sight to return, whether it's dividends or share buybacks.
Just be interested in thoughts on that.
All of the above all of the above.
This is a good product to have and we will address when we get there we will not compete with anything right now other than paying down debt every single dollar that we paid down on the debt for the same enterprise value goes to the other side most of the equity and the stock price will start to appreciate.
Right.
We are in a moment to here in the United States in which the economy is booming the consuming the consumers consuming like I said in my prepared remarks, we are selling everything we want and.
The stock price should continue to appreciate it's time for investors to expect to lose money to where companies are making money.
And the tech side.
What caused that and a lot of cash just to have a hard time delivered net Uber for example is a tech conference of cash company.
That doesn't have employees.
They explore contractors so anyway.
The real conference there was that generates jobs, they're ones that create middle cl<expletive> consumption, they're ones that generate.
The ability to move the economy.
First need to take notice because we are making money and we are starting to trade at the multiples that are absolutely absolutely.
What we will continue to do to continue to move numbers from the debt side. Good day average site.
<unk>.
Yes, I mean, it makes sense I think there is an argument that North America and the U S steel market has.
Material develop pretty quickly to be.
Their environment when you think about.
The options that you have an inorganic growth part of the equation as well or there maybe it's not immediate because you are integrating a pretty large investment but are there other opportunities like that to become bigger or more efficient.
I would never rule out anything, but it takes true to this.
When I acquired AK steel I went there to buy a furnace.
So the opportunity to buy a company then when that company was acquired therefore from <unk>.
<unk> showed up for us and we exited very swiftly.
So we will not rule out anything, but we are all of them in the loop.
Gulfport more efficiency.
We believe that our way of doing business is good our culture is good.
People that came from both AK steel and USA Theyre happy day are with US we pay people well, we don't take advantage advantage of people don't explore people.
And that's the most important takeaway.
So it creates a lot of momentum when we acquire a company because we don't go in and fight half of the.
The employees and say we are saving costs, we are doing to office.
We are eliminating overtime. So we are creating a workforce of people that really locked work for Cleveland cliffs. So yeah. Yes. There is a real possibility that we'll continue to do but I have no targets at this point and usually when I have a target so fast that day.
Between one quarter and another we're going to have something.
I have not improved and driver right now my focus is 100%, 100% on paying down debt and eliminating debt and creating equity and then the numbers have no other place to go except the stock price, that's what I'm doing right now.
Okay. Thanks for the time appreciate it appreciate it.
Your next question comes from the line of Emily.
Sorry, Chen with Goldman Sachs. Please proceed with your question.
And congratulations on an.
Excellent quarter.
Apologies if I missed this earlier, but I remember from the last call you previously outlined a plan to keep Inc.
Furnace blast furnaces online at any given time, it certainly looks like there's not much.
<unk>, which makes sense given with tightened topic, maybe one I'd love to get your views on how long do you think day supply tightness.
Ultimately locked in if you can point to.
Thanks, you can expect to be running for the remainder Danielle.
Look we.
We have.
Tim blast furnaces.
Yes.
So the 10 blast furnaces.
Let's go one by one.
We have one in Ashland, that's debt so pick it up.
We have one in Bureau accounts.
Right.
We have one in Dearborn, that's run we have <unk> seven.
The biggest strength in North America, it's running.
We have.
The other half for that smaller it's running well.
And then on hardwood three that's that is not going to come back ever.
We have two important driver.
CND.
And.
We have.
Two in Cleveland, five and six.
Both running for 1234567 years Thats it.
I said six to eight to eight because I was discussing the true.
That will never come back when I say never say never.
In order to produce pig iron to sell forgot note. So.
Please forget about that.
Aluminum in February so it's not going to happen now we are no longer a supplier for aaas were competitive so.
Im not going to supply them with vigor.
So.
Our day for sale no.
So that's not going to have their or under my control. They are now going to be supply pig.
And nobody will buy both.
To produce pig iron. So we have eight blast furnace. They are all running right now I'd say six to eight 6% to eight gigawatt at any given time I could have one.
We feel like I have middle zone for 14 day or may be true.
Yes.
The rule of thumb would be.
So if you understood what I was saying during my prepared remarks.
We are using HP, Inc. Blast furnace.
Most sophisticated use of HDI, that's actually why this sales team put their plant in Texas to supply their furnaces in Australia. So the difference that we've put in place until we're able to supply gl<expletive> first into great lakes, what's a lot cheaper a lot simpler.
So anyway. So that's what we're doing for increasing the throughput with our esports. We also have that people forget four yes, net are running at capacity and a little bit of both capacity and they are still to Butler.
Our goal still.
And the army as field, so running at the capacity of the market supports.
And we will continue to do exactly that so we're not going to order.
Produce stainless steel for gl<expletive> that bumped exist, we're not going to produce electrical steels to destroy product price. So that's the company.
And.
<unk>.
There was a fire at the very often at the very beginning of the full weighted.
Growth down to flow and you go through the hot strip mill and through the <unk> line and through the Galvanizing lines, then things become so more complicated but the from its doesn't define the throughput that's what I'm trying to say.
Got it that's very helpful. Thank you.
Thank you.
Yes.
And there are no further questions in queue at this time I'll turn the call back to the presenters for any closing remarks.
Thank you very much for a range or sell.
<unk> will be in touch thanks, a lot bye now.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].