Q2 2021 Cleveland-Cliffs Inc Earnings Call
[music].
Good morning, ladies and gentlemen.
My name is Diego and I Am your conference facilitator today.
I would like to welcome everyone to Cleveland Cliffs second quarter 2021 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the safe Harbor protections of the private Securities Litigation Reform Act of 1995.
Although the company believes that its forward looking statements are based on reasonable assumption and such.
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 and reports on forms 10-K, and 10-Q and news releases filed with the F. D C, which are available on the Companys website.
Today's conference call is also available and being broadcast at Cleveland cliffs Dot com.
At the conclusion of the call it will be archived and on the website and available for replay.
The company also discusses results.
Excluding certain special items.
Reconciliation for regulation G purposes can be found and 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.
Thanks, Diego and good morning, everyone.
Our second quarter numbers for revenue net income and EBITDA were all quarterly records.
Clearly demonstrate our operational and commercial success and integrating the 2 acquisitions and to Cleveland cliffs.
As well as a sustainable steel environment supported by strong and resilient demand for our products.
This being said our Q2 record numbers.
Revenue of $5 billion net.
Net income of $795 million and adjusted EBITDA of $1.4 billion.
Should not be are all time records for long.
With the lagged and fixed pricing mechanisms, we have in place with our customers. We have enough visibility to be confident that these records should be broken again here and the third quarter.
Drilling down and specifically on our adjusted EBITDA.
And $1.4 billion performance represented a 165% increase over the past quarter, primarily due to increased steel pricing.
Fixed price contract improvements favorable product mix and higher volumes.
Unlike most of the American steel industry, we have been relatively well shielded from inflationary forces, thus far due to our self sufficiency and raw materials, namely pellets and <unk>.
More specifically, our overall cost per ton barely moved compared to the first quarter.
And the steelmaking segment, we sold $4.2 million net tons of steel products, which included 33% hot rolled <unk>.
17% cold rolled and 30% coated with the remaining 20% consisting of stainless and electrical plate slab and rail.
Due to the lighter automotive demand pool related to the chip shortage, we were able to sell more tons of higher margin material and to the spot market.
Direct automotive shipments were about $1.2 million tons during the quarter.
About 300000 tons less than what we anticipated back in March.
This contributed to an inventory build of about $300 million during Q2, which along with rising receivables due to rising prices produced another working capital build during the second quarter.
Our free cash flow generation, we will certainly be further increased and the third quarter we.
We expect to generate $1.4 billion and cash from our expected $1.8 billion and adjusted EBITDA for the third quarter. These.
And these numbers results from continued ryzen prices on our HRC linked contracts and spot sales offset by higher employee related costs and the planned outage at our largest blast furnace, Indiana Harbor number 7.
Furthermore, we are increasing our full year adjusted EBITDA guidance to $5.5 billion.
Our free cash flow expectation still includes minimal federal cash tax disbursement as a result of our NOL position.
Given our immense profitability. So far this year, we've been able to effectively utilize our sizable NOL balance and we'll continue to utilize it for the rest of the year.
With these Nols and rapidly being used and we expect to become a federal cash taxpayer again at some point either later this year or early next year.
Our main priority with this free cash flow continues to be the pay down of debt.
The level of free cash flow, we are expecting has created a generational opportunity to completely de risk our balance sheet and we are taking full advantage.
And the second quarter, we made open market bond repurchases and completely redeemed the remaining $400 million of our 2025 unsecured notes the only bond we had that was callable this year.
Our debt to cap ratio is currently at a 9 year low and we have already repaid another $455 million and debt. During just the first 20 days of July.
As the year progresses and into next year, we will be rapidly and methodically, reducing our debt balance and we expect to reach net debt zero sometime next year.
With that I'll turn it to Lorenzo.
Thank you Keith and good.
Morning, everyone.
The best way to understand the new Cleveland cliffs.
He is by comparing Q2 results.
Q1.
Our revenue line increased by $1 billion.
And our cost of goods shorts, Inc.
And by just $100 million.
And this seemed glass and complete integration of both AK steel and Arcelormittal USA, Inc. To Cleveland cliffs has generated a new and very efficient business model geared toward value creation.
Demand for steel is very strong across all sectors and a strong demand supports strong prices.
Q4, 2020, what's supposed to be the peak 40 steel prices.
Dan Q1.2021.
And then again in Q2.
Well, we are in Q3 and the reality is demand is relentless.
Most of our customers are experiencing experiencing record profit and learning that higher prices are good for pretty much everyone in the supply chain.
Actually some of the customers who were complaining earlier this year about rising steel prices, then turned around and decided to accept the reality.
They've cut deals with Cleveland cliffs at that time and are now just plain happy.
Others, probably will be a happy for a long time.
Also as new electric arc furnace capacity continues to be broad cooperation and United States and abroad.
Moshe that's driving scrap is precious metal will be better understood.
Iron ore fundamentals are strong as well.
And the price of big Iron imported by the media views elevated and also pushing up the pricing of steel offered by foreign sources.
Russia is restricting exports is off bureaus and materials, including pig iron.
Of which they are the largest exported.
The United States.
China continues to say that they want to good conditions, which they can do by either <unk> steel production to reduce their usage.
And using more scrap or both.
With all that.
And on the price book, Brian scrap is also our board.
Separately.
Estimate stored data modernization, we will need our own.
Return on investment.
Last few operating in Europe, and Japan or in Canada.
And as steel companies and these countries.
And continent.
Our being awarded Gero subsidies and free money.
The grants Canadian and European steel producers are so happy to advertise.
If they get their gifts and a handout from their respective governments.
That's another compelling reason why imports need to be held in check.
And other countries take advantage of a totally uneven uneven playing field.
With their much worse, environmental performance and ours and major government services.
We had gone GAAP here in the United States.
China is not our only broaden.
Our so called.
Brands are bad true.
While all of our relevant Q2 figures represent company records revenue net income adjusted EBITDA.
Arc.
We haven't reached our full potential yet.
Due to a previously agreed upon sales contracts. So far this year, we have sold a significant chunk of our volume well below price levels that would make us comfortable.
Our most important commercial priority through the end of this year.
We will be to improve these contracts.
We know the real value, we provide to the clients and.
Including but not limited to our ability to manage complex just in time and requirements in.
Several different highly specified products.
We also know day unique technological capabilities that we have and the limitations of fibers in the steel industry that cannot match, what we do particularly ex the massive scale that we do.
Simply stated.
It's time to be awarded a better return on our capital invested to serve these clients and we are well underway to achieve that.
Being the largest supplier of SKU by a lot to the automotive industry.
And obviously affected by the supply chain issues, they have experienced all related to things other than steel.
Nevertheless, our Q2 results were actually better than our guidance.
And the reasons, because we're able to take advantage of the reduced demand from these customers and managed to divert automotive volume to spot buyers.
And also other contract clients, we need to pay market level price.
And as David like that it sounds simple.
But reorganizing both the melt schedules and deliveries of these materials was a challenge that our team did a great job overcoming during the quarter.
Even with all the difficulties in finding available railcars trucks and truck drivers during the quarter, we were still able and Q2 to increase our shipment volume in comparison to Q1.
1 thing that should not be holding up anything any longer is COVID-19.
Brilliant scientists have developed not 1 but several truly ground breaking vaccines that would stop the virus and extracts and any current variants.
But we need enough people taking their vaccines.
With the safety of our workforce always our top priority.
Earlier this month, we instituted a company wide vaccination bonus program that offers a cash bonus of $1500.
And 2 each vaccinated employee.
If the level of vaccination of their working site achieved 75%.
If the level of vaccination of the site achieved 85% the.
The cash bonus paid to each employee of their site doubled to $3000.
Upon announcement of the program, we saw and immediate uptake and <unk>.
<unk> right and some of the locations are already and the first threshold.
And through locations already and second track of 85%.
Protection from the virus is just as important as any other safety mandate, we have 8 of our locations.
And we are willing to spend real money to ensure each of our facilities rich herd immunity.
And in order to meet current market demand.
Our assets need to be aware of stacked.
And well maintained.
This process involves preplanned maintenance outages and included 1 taking place at Indiana Harbor later in this quarter from September 1 to October 15.
And the other hardware number 7 is the largest blast furnace and North America.
And for reference produced 33% more plus metal per day than our true blast furnaces at Cleveland works combined.
The outage includes repairs to true <unk>.
<unk> and the steel shop, and a partial rely and several upgrades.
Great and the blast furnace.
Some of these upgrades are related to our ongoing work toward decarbonization.
Such as Ford and enhancements to our ability to use massive amounts of both <unk> and feedstock and natural gas as supplemental reluctant at Asia, and our hardware number 7 blast furnace.
Another success story of the past quarter is ought to lead to direct reduction plant.
We reached our nominal capacity within 6 months of start up.
And thus far in July we are producing and at $2.1 million tonnes annualized rates well above nameplate of $1.9 billion tons per year.
Our timing could not be better.
Brian scrap is scarce and every day the price of scrap goes up.
Our cash savings from API become.
Becomes more significant.
And on top of that we have actually used the vast majority of our internally consumed Abi in our blast furnaces and.
And handsome hot metal output and allowing us to capture additional margin on incremental steel tonnage produced and sold to clients.
Along with the productivity benefits this action alone.
Reduced our implied carbon emissions by $163000 during the quarter.
Direct reduction and Dr grade pellets.
Critical to the future evolution of our clean and environmentally friendly steel industry.
Cleveland cliffs fifth de carbonization as part of our license to continue to exist.
And you can see and our recently published sustainability report.
Well on our way to achieving our targets through the combination of natural gas usage, HDI production and internal usage and carbon capture.
There is a lot of talk about hydrogen as a reduction in Europe with zero recognition that we already use hydrogen and the United States through the use of natural gas.
Natural gas composition is 95% CHF 4 <unk>.
<unk> and 4% Situate 618 net.
Total gas is used in our blast furnaces as a partial replacement for coke.
That means we amid good old <unk>, when we reduce our iron ore and steel true ambitions are good by more than half.
When compared to reduction exclusively by Coke or Coke plus PCI.
Also our direct reduction plant uses 100% of natural gas as a reduction.
The total amount of natural gas, we currently use and our eighth blast furnaces and in our direct reduction plant and eliminates the need for 1.5 million tons of coke per year.
Equivalents of true Coke batteries.
And we continue to explore and increase the use of natural gas throughout the entire footprint.
Hydrogen is promising.
Holly our direct reduction plan was designed and built to be able to use up to 70% hydrogen.
In order to make hydrogen or viable reduction.
Serious cost improvements and breakthrough technical development or is still needed.
Europe does not have abundant natural gas added and Russia. So they have embraced the hydrogen route.
Even with the current uncertainty surrounding the economical use of hydrogen.
That might not take them anywhere as far as emissions control, but is actually a great short clip, while free money and more subsidies from government to companies.
And we all know how these things and.
Replacing blast furnaces will EBITDA. So there is not a solution either.
Technical reasons, no major steelmaking nation runs entirely on Eas.
We're producing flat rolled steels.
Perhaps need a significant amount of Virgin materials like C Gardner private scrap the Orion and <unk>.
And even oxygen injection.
And to try to mimic the blast furnace <unk>.
The Realogy evening here in United States soon to achieve 75 patients of Eas, we may be near a peak, particularly if further investments and direct reduction or not meet.
Just don't count on Cleveland cliffs for DAP.
This shift has sales when we acquired Arcelormittal USA, Inc.
K steel and successfully integrated both and to a single unit company named Cleveland Cliffs.
At this point, we are very comfortable using our Dr grade pellets to exclusively supply our plant and to lead.
And our blast furnace, great pellets to supply our own blast furnaces.
To wrap up.
<unk> is doing well actually very well.
As of today, our leverage is already below 1 times EBITDA.
And we expect to be at net debt zero sometimes.
Next year.
With that I'll turn it over to Guillermo for.
And the Q&A.
We have a clue.
Thank you.
And at this time, we'll be conducting our question and answer session.
If you would like to ask a question. Please press star 1 on your telephone keypad.
A confirmation tone will indicate that your line is and the question queue.
You May also press the star key followed by the number 2 if you would like to remove your question from the queue.
And for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Once again and ask the question Press Star 1 on your telephone keypad.
Our first question comes from Phil Gibbs with Keybanc capital markets. Please state your question.
Hey, good morning.
Financial and <unk>.
And so I had a question just on the automotive.
So the equation I think the revenues decline there a little bit and you mentioned, some some chip issues impacting production.
How is that evolving as you look into the back half of the year, the automotive supply chain and kind of tough to read from our vantage point.
Yes, I agree.
And you can only read to us and get Cushing formation and.
They're not really sharing value with information because we.
At this point.
And here at Glu on cliffs, no longer rely on buying a lot of course, theyre etcetera. Some of our clients are better than others, but by and large muni and rely on our own assessment of how they are going to to pull from the adjusted time.
Inventory.
Because they are from.
The oxide standpoint, overly optimistic, but actually they're hedging their position just in case, they get what they need and identity.
And they will need this deal but on the other hand, our commitment.
Primarily with our shareholders and we cant just play with that so that's why we moved a lot of total and in Q2 for auto board of 2 other clients and that was a good thing for us something that took and wholly accomplish if you're managing a fully integrated and.
Synergetic company like the new Google and cliffs.
So what's my view, yes things will get better.
And will not get to we're still get that but.
You always stick.
<unk> from situations and this.
Yes.
Serious things that they put themselves on with <unk>.
Micro shifts.
And the microchips and even the tip of the iceberg.
And all that the supply chain is pretty weak and it's too complex. So I assume that going forward and they will day many of the automotive Oems and they will start to manage this day or supply chain, a little better with more emphasis on real things like being close to the to this.
Supplier understanding that shorter is better not rely on board to this mandatory so I'm very optimistic that things will get their true.
Okay, Lorenzo and then as we look at the third quarter I know you've got some some scheduled maintenance is that from an incremental standpoint versus the second quarter kind of a transitory cost headwind for you. All as you you have more maintenance and there or is that really not a factor.
It's minor.
Miner and.
And of the day to web net or is that all the numbers that we gave.
His guidance <unk>.
Randy and embedding all of these things so we're talking about 1.8 day.
EBITDA in Q3, and Keith growth suggest.
<unk> released our full year guidance of $5.5 billion for 2021, so that implies another $1.8 billion EBITDA.
EBITDA in Q4, so all this dual numbers Q3, Q4 EBITDA growth.
And.
Our southeast zone at this point the way, we normally do our our assessments and.
And all this cause fluctuations are taking into consideration and the important thing is that.
A lot of the reliability of that the clients are seeing right now and do we supply from our big footprint is already a consequence of how we approach maintenance. We are taking very good care of the assets that we acquired and we have play extremely well and.
And we will production planning and making sure that we are prepared.
And for all of their planned outages. For example, this 1 is in the latter half of <unk> with a 45 day duration.
And force already built a lot of slab inventory and a lot of what you see cash flow is related to that cash flow and Q2, because we had to prepare for this outage otherwise the client should not be taken care of so our holistic approach to the footprint our way our technical and.
Matter of fact approach or how to deal with the assets is a big change I think is a very.
And welcome change to this industry since we acquired the assets that we did last year.
Thanks, and if I could ask just a.
A follow up just on the guidance that you guys had provided the 5.5.
And Theres some theres some puts and takes what's what's the expectation for <unk> for the rest of the year and that.
And that equation, thanks, guys youre using the <unk>.
Curve that we have available to us.
And from the commodity index of the big banks and.
We are sticking with and build the same way and assessments that we used before and so.
And nothing.
A very negative about not being overly positive about adjusted losing the forecast the same forecast that you and other research analyst probably use using the fourth curve of the.
The net commodity desktop.
And as of the Big banks.
Thanks, Lawrence and I appreciate it alright. Thank you.
And our next question comes from Lucas pipes with B Riley Securities. Please go ahead with your question.
Hey, good morning, everybody and congratulations on another really strong quarter and and.
Very positive outlook.
And from my perspective.
Thanks Laurence.
I wanted to touch a little bit on the net debt target of <unk>.
And so it makes all of a sense and the world to me, but maybe.
And maybe the market to benefit from.
And getting them and.
And explanation from yes, what is the strategic rationale for 4.4 net net zero target. Thank you very much from your perspective.
Well look.
First of all.
Net debt zero.
Cyclical industry.
Is something that should not cause and it was a price that's a very first day.
And I have been this and this beautiful for decades.
I have seen every day.
The good the bad day early data surprising the day.
Boring Eric.
And I think that is you can't deny if we're in a position of strength from a balance sheet standpoint, you are a lot better and you are a lot more likely to survive any doubts.
Through the ups and downs I am not anticipating any doubts but that doesn't mean, a thing because I was not anticipate and COVID-19.
Mobile was and I was not EBIT.
I just tried to put myself prepare to take advantage when others will freeze <unk>, we've proven that in 2000 and brand with a true acquisition.
Also prove that we don't fight the reality.
Like when I realized that I could continue to operate the plants I had to reduce output that's why it shutdown and Dearborn blast furnace.
But I could not continue to build the.
The plant and to leave with people working in confined space. So we have to shift upwards, Russia, So take a reality.
The backdrop net debt zero is always a good thing if we can accomplish that we are heavy and opportunity of a lifetime to accomplish that and that's why net debt zero is our growth.
This being said.
We are always open to other things I'll give you an example, Lucas.
Total debt stock price performance during the last several day.
I am now considering a full redemption book there.
So long adult preferred for cash.
And never done that before have never thought about that but when I realized that.
The market is skeptical of both a lot of things that I know that the market's wrong and I knew about the cash flow that is coming.
$1.4 billion and cash coming in Q3 and real do we our prices are.
Pricing structure is construed as well as the Q4, another $1.8 billion. So I know the cash that's coming in and I can't use that cash and based on the way that calculation is.
And to be a good thing for us from here.
I think for us along with Dol, So I'll, not say up and going to do it but then considering redeeming the preferreds and cash at this point so don't feel like.
Net debt zero is.
What we are going to accomplish and on megawatt and ignoring all the rest is just a.
Reasonable.
Go to accomplish coming from a company that has been reasonable all the way.
Sorry for the longest.
Thats very very helpful.
Appreciate that perspective very much.
And my second question question Lorenzo and.
To the fixed price contracts.
Touched on dose and the remarks and and the release this morning, and I'm wondering just in terms of contract structure.
What does that what is on the table here we'd be.
Seeing some inc.
Index pricing.
And with some of your auto customers later this year and Scott is that a possibility here.
How would you describe your lease negotiations at this point, thank you very much.
Lucas I think you appreciate that I'm not going to talk to.
And to say publicly or any outside conversation.
About how we are actually negotiate with the clients that is off limits.
We are now going to talk about that.
And just I would just say that.
People still talk about.
Synergies and things like that if theres, 1 synergy that.
People campaign.
To accomplish our commercial synergies.
So we are now.
Much stronger commercial animal than either of the 3 companies that.
Behind the new Cleveland cliffs and <unk>.
Ever been.
We are in good shape and we do.
And everything we need to do to the business and the shareholders to the balance sheet and from the debt holders. So at the end of the day, everybody will be happy putting the clients.
Say that all clients, who will be happy and.
Baird to dump a client if I need to that's another thing that in the past I am 100% sure that AK steel have never considered because they believe that if they do arcelormittal USA go dairy and grabbed and business.
And vice versa.
That opportunity is gone.
And I'll leave it at that.
Alright, Thank you very much and.
Best of luck.
Thank you.
Thank you. Our next question comes from Tristan <unk> with Exane BNP Paribas. Please go ahead with your question.
Yes, hi, good morning, Thank you for taking my question.
Thank you Chris a quick 1 on the outlook for working capital and it's true.
Yes.
And as you mentioned compared to EBIT.
And what should we expect to.
Yes.
And more neutral.
And the outage and also if you can touch from.
Okay, that's changed regarding Capex and as well thank you.
Yes, sure interest and.
So the working capital and 2 big factors, our receivables and inventory receivables and really just be dependent upon pricing. So whatever pricing assumption is used for the rest of the year is the way the receivables will go because volumes are likely to remain similar to where they are now so.
Probably.
And it depends and prices go up receivables will go up and.
If prices were to move down we don't expect that but if they were and the receivables will come down so but more than likely or just looking at flat for the rest of the year on receivables and inventory same thing, it's going to depend on if and when the automakers can pull pull and the additional demand to catch up for the chip shortage, we do have.
A small inventory build for them ready to go sales that you've taken pull we can we can probably release a couple hundred million dollars out of inventory.
And with the chip shortage goes into next year, then that might that might sit and go into next year. So it's again, it's going to depend on how our customers.
Produce here and the second half.
As far as Capex, we would.
We haven't developed our 'twenty 2 capex forecast yet at this point.
For modeling purposes, we would assume just to use a similar numbers, where we're heading this year, we're heading of about $6.50 number this year. So at this point.
And that's probably a good number as well to use for 'twenty, 2 but we will be updating that number as we as we continue our analysis and our budget process for 'twenty, 2 and we will.
And we'll make an update and in the coming quarters.
Alright, Thank you if I may.
Regarding environmental targets.
Okay.
25 by 2030.
You talked about and true.
And use of natural gas, but also I. Thank you and thank you.
Efficiency.
Carbon capture and storage between all of those options.
And what's it and.
That would enable us to achieve most.
The gains in terms of Q2 reduction and also when you look at this timeframe.
Growth capex associated with those efforts.
And why.
Yes.
So kind of preparing to help the industry to Decarbonize do you expect to achieve some kind of formal helpful.
And as soon as well.
Sorry.
And to achieve what sales data 1 water.
And your carbon emission reduction.
25% by 2030.
Yes, we are totally confident that where we are getting there and.
We also.
And we'll continue to refine this numbers toward.
Targets for 2035, 2040, 2015 were going to get there but.
Don't feel like at this point there is any need either then 4 press release purposes to be Stacy and that will be carbon neutral by 2015, because nobody knows.
At this point, let's face every single Cup and depth committed with that just telling what people would like to EBITDA.
<unk> thousand 30 number is real as real as my.
Our net debt zero attack as real as my $9 billion and revenues year to date as real as my.
EBITDA.
Year to date.
There is a number that nobody could ever imagine 6 months ago, that's how we do things.
We are in the United States recently, you guys in Europe, you guys talking with game.
But the best contribution that Europe can gain related to the de carbonization of the world stopped subsidizing losers.
And Maverick that come with proposal just to keep people employed so Europe socks from there.
The environmental standpoint, so we are real here in the United States, we have the best footprint, we have the best governance compliance and that's our World Europe is.
Light years behind <unk>.
Japan is light years behind.
Corey is light years behind and China doesn't even mix too.
And the picture yet that's the reality people will start to see depth and the very near future.
Did I answer your question.
Hi.
Yes got it.
So just from a quick follow up.
And when you look at the last part of it is not understood.
And I'm, telling you that the plants that are talking a good game should be shut down by now.
Spain. This what you are and Uruguay, Europe and yeah, Yeah, So youll know what im talking about.
Yes.
Europe and went.
And recall, but you guys. The fan so I'll keep doing they might get.
1 follow up I had was just from the elements you can leverage too.
To Decarbonize and you talk about natural gas and what's really interesting.
And your targets would you say that natural gas will be I don't know more than 50% of all the redemption.
Zone carbon capture and storage is also a part to play and energy efficiency as well just trying to figure out the different elements.
And that target.
Thank you.
Yes.
<unk> gas.
Hydrogen at.
And at the end of duty.
Look at the proportion of cargo and hydrogen and the CH board and seek to think big about the chemical reaction to reduce iron ore and.
And a blast furnace or in a direct reduction reduction reactor.
And when you use.
Coke alone produces fuel as a reduction or reformed and natural gas. When you produced a lot of age true and they're a little bit of steel that will be transformed and <unk> already and minor proportion.
Natural gas is the way to Decarbonize.
Industry.
The only technologically dominated way at this point and.
Body else that's talking about anything is just technologically.
<unk>.
That's the story, we are doing right here.
People are talking about I put $1 billion and planned that nobody believed that would be a game changer. So much of a game changer that made us <unk>.
And to change the landscape of the American steel industry by consolidating the true best.
Our mills.
And the integrated route and supply and then <unk> hei.
There was never consider feedstock for blast furnaces, either then.
Attempted by Vista Op, Inc. That I don't know if it plays out or not because nobody here is about because of the problems that I have just mentioned to you of both European and us to abuse and so it takes time for people to sit Inc.
I am a patient Guy I never fight the take from.
Always ready to take advantage of the weakness of Investor's day give me money I'll take it.
And I'll leave it at that alright, Thanks, I appreciate it.
Who is ex.
Thank you and our next question comes from Matthew Fields with Bank of America. Please go ahead.
Hey, Lorenzo and Keith a.
Couple of questions on the on the cash flow our balance our balance sheet side of the house.
Clarification on the $455 million of debt retired in July is that mostly ABL is that some additional market repurchases of bonds.
And then how do you anticipate using that kind of free cash flow that you're telegraphing for debt reduction on ABL versus open market repurchases and none of the bonds are callable until 2022. So just wanted to get a sense and the trajectory there for the rest of the year.
Yeah sure Matt Yeah, so far the hole.
And tier $4.55 went to the ABL this quarter.
And.
We will look at open market repurchases from time to time when they are available Jeff.
Generally we can only get so much going that route. So so ABL is obviously the priority and then we are the majority is going to go but we will always be a little bit opportunistic at times to pick off some some stuff and the open market.
Okay, Great. That's very helpful. Thank you and then second on the empty and a preferred stake.
You know you don't have to do anything until December 2022, I guess, you have a free option on deciding what to do then.
Before that starts paying dividends, but you know now that you are considering paying it in cash.
And I guess it you know.
20 Bucks a share roughly that's 1 billion 1 billion to proceed.
And if I'm if I'm correct does that effect the net debt zero target in 2022, if that's now considered to be paid in cash versus retired with equity.
Based on our current projections.
If we decide to do the debt pay down the pay off of the redemption.
Of the entire tranche of preferred and Q3.
That would delay our net debt zero accomplished by.
1 quarter.
So.
We said that we would.
GAAP net debt to within 2022 that doesn't change.
It might change might delay 1 quarter. So instead of accomplished that by let's call Q3 record breakthrough for it so what during 2020 true.
That's the scale of things right now.
But Pete.
And the preferred out.
And standard of $1.1 billion debt to have just said is true.
And again.
G and not fighting to take because of.
If I try not to do it.
And having the opportunity to do the same thing instead of paying $1, 2 and have to pay $2.2 billion.
Because.
If you believe that they were going to continue to trade that is ridiculous and oil price be my guest.
Actually.
You'll know that.
And that's not just things will play right Europe from Bank of America right. So [laughter].
Well I I know not to fight Lorenzo and the tape so.
Thanks for the clarity on that and.
Just a stunning and kind of.
C where the.
And he is now versus a few years ago. So thanks very much for the questions I appreciate it and good luck and the rest of the year.
And I appreciate that very much the support and you are and the bonds and it's always great to have a good partner with <unk> Bank of America.
Net.
Thank you. Our next question comes from Karl Blunden with Goldman Sachs. Please state your question.
Hi, good morning, Thanks for the time, maybe just a follow up here on the net debt zero position that you anticipate getting to in 2022 gives you a lot of options and you've outlined a couple of different options available to you.
And at what point do you consider accelerating your de carbonization investments or potentially also reducing pension obligations.
Let's start with the Duke of accelerating the carbonization.
We continue to work with a plan that was put in place and 2017.
So.
I don't know where you're coming from.
But we are the only ones that instead of talking about we have already done things.
You understand that we are using 54% of our internal usage of <unk> and blast furnace right. So you understand and when you put more hei inside the blast furnace you are putting more brief reduced iron inside the blast furnace.
Free and reduced Youll need less reduction if you need less reduction.
Lord and less carbon so you are.
As a consequence generating less steel so it's happening as we speak I also I sad that.
1 of the guidelines for the Indiana Harbor, 7 audits that Scummy and.
Stocking.
September 1st is true.
Enhance our ability to use mortgage book.
More natural gas.
Through the lawyers.
So that will reduce scope and to reduce fuel and so what else am I missing here.
You feel like you are not doing enough for decouple organization.
I think you guys are a leader on the HP I at least as far as blast furnaces are concerned but at some point you might have an opportunity to make another big investment either yeah, yeah, 4 additional H b and capacity.
In order to to invest and HDI capacity I need to be.
Sure <unk> I.
Im not shorting HDI just yet so.
We still pretty much in line.
Standard this year I'll have zero <unk> to sell to the market, because Michael and internal consumption will be pretty much equivalent to Mike 2 point something.
Minimum gross production a year.
And I'm going to be.
Even in terms of our internal consumption flow at that point, we might consider it as far as investing eas.
David what I need to have to invest on <unk>, because this will follow and my line of thought the script shortage and they're making particularly for highly.
Specified products' net.
And what's kind of ignored by others.
The other thing that I can't prove right now youre going to have to bear with me.
1 more year, 2 more years to be crystal clear, but that the Easter of my life.
And.
And im not surprised that we're not there with me just yet and I had to.
Thank last but not least we are very comfortable with the footprint that we have we are generating a lot less.
And then any other integrated.
And I still view in the entire world right now as we speak.
Talking about Nippon steel <unk> decent growth good growth.
And we are going to continue to reduce.
C O 2 generation and we're going to implement carbon capture and no we're not planning to go.
I'm not going to tell you if you'd like to hear.
And the Goldman Sachs is to move on from these concepts that are W. R E and G rock.
Good day.
No I got you I mean, you guys are doing a lot and a lot of different areas and I'm just thinking about different.
Cash and GAAP.
And 6 months of idea to reduce you and Goldman Sachs.
Yes.
Yeah, and a lot of that makes sense in terms of what youre using cash for you you discussed the preferreds is there any.
Intended use for potential use of cash for pension obligations from the acquired obligations for example.
And Keith we'll take that day.
Carl right now.
Our balance sheet has the pension and the <unk> right now that the pension obligations are shrinking.
Shrinking as we speak our asset returns are.
Performing all other costs on pensions right now we're in a position now where we don't even we see we see pension cash pension funding requirements of almost less than $20 million a year going forward and so it's basically a zero going forward. So we are there on pension.
As far as the retiree health and OPEC and its less than $200 million, a year to fund and cash.
And with a company of our size, that's we consider that to be negligible and we can handle that going forward.
It's a $40.50 year run out on those obligations. So theres no theres no reason to pre fund or do anything like that it would be probably not the best use of our capital to pre fund anything like that.
That's such a long run out.
That's helpful. I guess, 1 quick follow up is on <unk>.
And seen a gross debt target and it sounds like you could continue being flexible there.
And you wouldn't really want to put that out there because I think.
Would commit you to taking out bonds at given points in time, but is there anything you can share around growth.
Yes.
<unk> oil growth yes.
Alright, Thanks, Paul Thanks, Dear who is net.
Yes.
Our next question comes from Lucas pipes with B Riley Securities. Please go ahead.
Hey, Thanks, very much for taking my follow up.
And so and team and.
And somewhat of a higher level question, but.
Kind of from.
And second half guidance here.
Multiply it by to annualize it and.
On a forward basis with your net debt target.
It's 1.5 times EV to EBITDA and <unk>.
So clearly what market and place a rapid deteriorate.
And and.
And steel prices and Lorenzo I wondered if you could.
Share your views.
And how steel markets, specifically in North America are different and how.
And it might be.
A comparison to other commodities that have rolled over.
You may not be reasonable here.
Thank you very much for your perspective.
Well.
Exactly what other commodities you have in mind, but if you have and micro stuff local loan growth and things like that it's night and day. So it's just not it doesn't apply.
The other thing that you need to understand.
A lot of what schools commodity and our market is actually highly specified material.
Net cannot be.
Yeah.
Interchangeable and cannot be just replace it.
Yeah.
Even though that the perception that sold into the market.
Actually a very relevant thing that's coming from our.
M&A.
Move last year.
Achy Arcelormittal USA is to show just that.
Because we deal with situations that.
We have a lot of leverage and as negotiations not.
Book Force.
And the fact that we are in control of things that can make or break for these clients because we're not dealing with commodity.
We are dealing with highly specified parts that can derail development.
I'm, not saying that we're going to put this to good use but it's real and exists.
Big difference between book Bally and <unk> specified.
And the high strength steels for specific uses and.
Another point to consider is that 1 thing is when you are talking about the ability to do something.
I don't really questioned the ability of a plant or a furnace or.
Our company to do something.
<unk>.
Yes.
And more scale.
But to manage our supply chain.
And 5 million tons give or take a year of complex parts.
In a way that keep the flow of metal into the assembly lines on time and on quality debts and enormous desk and knowing that every 3 to 4 years, we need to redo everything to comply with new models and things like that we are working now.
And things that will happen in 2025.2006 2027.
So it's a beast that keeps feeding on itself.
And then the follow up question would be and Lucas.
This was never done before and.
The question.
And as good but the answer for me is that I don't know because I always thought it would be possible and since we.
It is what we did last year I am proving every day that is possible.
And we are doing.
But the proof is in the pudding and again I don't fight the tape, so and prepared for any type of.
Outcome and a marketplace they like great they don't like it.
And so something too.
And good for my shareholders and from our bondholders for my clients.
And whatever the market gives me.
Very very helpful. Lorenzo I really appreciate that additional color and.
And your best of luck.
Thanks Lucas.
Thank you. Our next question comes from Sean <unk> with Deutsche Bank. Please go ahead.
Hey, guys really strong winter again.
My first question, just and you take a look and see the 970 and secured notes you have outstanding.
Are there any other means.
And open market purchases, where you can redeem that tranche below the make whole price at this point and time.
Yes, Sean they're callable next year. So the call periods opens up I think and the first quarter of next year. So between now and then not a whole lot of options that true.
Got it.
Okay. Thank you.
And then just with the Ah and Nash.
And net reduction that's ongoing right now.
I know this is probably a hard question to answer but.
Is there a rough idea of and the potential interest savings and be there.
I think you painted a pretty considerable amount of interest and obviously, that's going to come down and time.
Yes.
And it depends on where we go so the ABL is obviously, our lowest lowest cost of debt. So as we pay down the ABL, we're saying we're saving about 2%.
On that and then as we took down the 20 fives and the second quarter and that was those were 5 and 3 quarter percent. So it depends on the order and how we do it but yeah youre going to see a sizable reduction.
And it'll it'll show up more kind of <unk>.
Starting early next year than it will this year, but yes, there will be a sizable reduction and our cash interest costs starting in <unk>.
And to say at this point.
We are pan and all of ammonia and entered into interest expense is not really reflecting the reality of the numbers.
Look we are talking about a company that will have revenues and the $20 billion level.
So we have 1 <unk> debt to I don't like.
And that's the trust that we've put in place.
And peak of the pandemic.
And that 1 is not callable and Thats, 1 and the biggest candidate for me too.
And to bite the bullet and the.
And they the make whole and everything else will manage because.
All other tranches are.
Price and perfection.
And remember, we have a pricing and that won't be level, when we were behind us.
We are now pricing at.
Triple B level, when where and double b.
And we have no plans to issue and.
And we know that distribution that right now it will be very cheap.
And so now we are in good shape, our debt is not a problem right now.
That is good.
Right now and that makes a lot of attention and kind of help from screening.
And the gross to net side and you'd want to keep time and capital outstanding cost, which makes sense.
And just my last question, if I may and in the M&A market.
And we saw Nucor and made a small balance between acquisition and that's okay.
Okay.
Another 1 of your competitors recently mentioned that and potential.
And for pickup and the M&A market.
Obviously, you've got way ahead and occur.
And your transaction volume and here I'm, not showing up and the P&L.
Can you just maybe provide some thoughts.
After you get through your debt reduction goal and sort.
And what your capital allocation priorities all day.
Yeah, our estimation 1 the redemption of the day.
Arcelor Mittal preferred.
And the very first 1 and.
And I am glad to see other companies doing M&A is good.
Not to the level and to the extent that we did but it's still good.
And as more things are good true.
And.
We will only talk about our own plants. When they are done. So we don't have anything to discuss right now share.
Okay. Thank you very much Frank and my question. Thank you and thank you.
Thank you there are no further questions at this time I'll turn it back to management for closing remarks.
Thank you very much I appreciate the interest and though we will keep in touch bye now.
Okay.
This concludes today's conference all parties may disconnect have a great day.