Q1 2022 Cleveland-Cliffs Inc Earnings Call
Good morning, Ladies and gentlemen, my name is Kevin and I'm Your conference facilitator today I'd like to welcome everyone to Cleveland Cliffs first quarter 2022 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 of the private Securities Litigation Reform Act of 1995.
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 Form 10-K , and 10-Q and news releases filed with the SEC, which are available on the company's website.
Today's conference.
This call is also available and being broadcast on Cleveland cliffs Dot com.
At the conclusion of the call it will be archived on the website and available for replay.
The company will also discuss results, including certain special items reconciliation for regulation G purposes can be found in the earnings release, which was published this morning at <unk>.
This time I'd like to introduce self service.
Executive Vice President and Chief Financial Officer.
Thank you, Kevin and thanks to everyone for joining us this morning, let.
Let me start by summarizing the key highlights from our Q1 results and then I'll provide some additional context around our increased outlook for the remainder of the year.
Our adjusted EBITDA of $1 5 billion in Q1 of 2022 is three times higher than the year over year adjusted EBITDA in Q1 of 2021, boosting our last 12 months EBITDA to $6 2 billion.
Which is a record for any 12 month period in our company's history.
Relative to last quarter, our sequential Q1, EBITDA was essentially steady with Q4, despite the sharp drop in spot steel prices that started around September of last year and lasted into early March of this year before rebounding higher.
In late Q4, and early Q1, we also saw relatively weak service center demand due to generally elevated inventory levels. Despite this unfavorable backdrop of falling HRC prices and weak service center demand, we were still able to maintain a steady quarterly EBITDA level from Q4 to Q1 <unk>.
Merrily due to the magnitude of our fixed contract price increases that went into effect at the beginning of this calendar year 2022, ultimately more than offsetting the spot price weakness backdrop, and resulting in higher overall average selling prices for cliffs quarter over quarter from Q4 to Q1.
We've been foreshadowing that the strength in fixed price contract renewals would eventually materialize in our numbers and that has now been clearly demonstrated through our Q1 results.
From a volume standpoint, we also achieved a 200000 tons sequential improvement in direct volumes to the automotive industry, our best shipment quarter to this end market since the semiconductor shortage began in the first quarter of last year.
This resulted in improved sales volumes to $3 6 million tonnes in Q1.
Going forward as we expect the automotive sector to continue to improve and the distributors and converters market to replenish inventories, we anticipate sales volumes to increase further on a quarterly basis.
During Q1, we.
We also concluded negotiations on all of our remaining fixed price automotive renewals that reset on April one.
With significant further price increases executed on all one 5 million tons of annualized volumes that matured on that date.
We are already benefiting from this price increase here in Q2.
Beyond that our next round of fixed price contract renewals will be negotiated this summer and repriced on October one and we look forward to continuing this favorable pricing momentum on those negotiations as well.
Now, adding additional context around our updated favorable outlook for the remainder of the year, we are increasing our expected average selling price by $200 $220 per ton compared to our prior guidance in February .
Our expectation is now for a full year average selling price of <unk> hundred $45 per ton at the current curve compared to our previous guidance two months ago of $225 per ton based on the curve at that time.
This improved outlook is driven by three things one our successful fixed contract renewals as I've just explained.
Two a higher futures curve today compared to February .
And three wider than historical spreads between hot rolled and cold rolled steel prices.
On the cost side, we are better positioned than any of our competitors to mitigate pressures from the current inflationary environment, given our vertically integrated and internally sourced iron ore pellets, hei and scrap as well as annual fixed price contracts for met coal.
Our Q1 unit cost moved up sequentially as expected due primarily to coal alloys and energy cost increases.
We also took a $111 million and onetime accounting charges related to some operational and financial decisions that we executed during the quarter, namely the closure of mountain state carbon and the idling of the Indiana Harbor number four blast furnace as well as the redemption of our convertible notes.
Looking into Q2, we expect our unit cost to increase sequentially due to our Cleveland number five outage and generally higher scrap and energy costs.
Although these will not impact us nearly as much as others in our industry that are much more exposed to high scrap prices and need to buy slabs externally.
From a cash flow standpoint, our inventory build of $372 million. During the first quarter was more reflective of costs than actual units as our total tonnage of steel inventory actually declined over the past quarter.
With this onetime inventory build out of the way our Q1 free cash flow of $297 million should be the trough in quarterly free cash flow generation for the year with much higher rates of EBITDA to free cash flow yield conversion in Q2, Q3 and Q4.
At the current steel forward curve, we expect our total 2022 free cash flow to exceed the record that we set last year.
And that is even as we become a substantial cash taxpayer this year, which we were not in 2021.
Speaking of cash flow and capital allocation, we continue to clean up our capital structure and favor debt reduction over other uses of capital at this time.
This year, we have already redeemed our convertible notes and our $9, 875% secured notes, which we completed this week well ahead of its 2025 maturity.
With this proactive approach our most expensive bonds are now completely gone and our annual cash interest expense is significantly reduced.
Looking ahead, we have a few more tranches of debt that we can pay down with our cash flow prioritizing our 675% secured notes as our next target.
In a few quarters, our debt should be so low that it will no longer even be a discussion point and I look forward to talking about other ways of returning capital to our shareholders at that time.
Our LTM EBITDA of $6 2 billion already implies leverage.
Of 0.8 times, the lowest level for cliffs and over 12 years.
As you can also see from this morning's release, we only spent $20 million in share repurchases during Q1 executed opportunistically at very attractive prices.
Other than this we used most of our remaining free cash flow generated during the quarter toward paying down debt as discussed joined.
Going forward, we will continue to favor debt reduction over share repurchases in the near term and buybacks will continue to be only opportunistic.
In closing.
Because of our domestically sourced raw materials supply chain as well as our heavy weighting towards fixed price contracts. Our 2022 financial outlook is very compelling with strong margins and record levels of free cash flow and equity value creation through a massive conversion of total enterprise value to market value via debt reduction.
With that I'll turn the call over to Lorenzo.
Thank you.
Morning, everyone.
I was addressing the most significant developments we are facing at this time.
The Russia engaged all Green is barbaric Act.
Its impact on the civilian population of Ukraine has made these advanced above all else.
A human tragedy.
As a matter of fact.
Russia, and Ukraine has been at war boots.
Boots and invaded Crimea newsletter in February of 2014, our.
A few months before we have begun to turnaround process at Cleveland cliffs.
Our business at that time was to supply raw materials to the North American steelmakers.
And you identified the massive share of pig iron coming to United States.
Russia, and Ukraine, as a reliable and at risk.
Representing two thirds of all U S imports of pig iron at the time. It was remarkable that no one was really concerned about it.
While working to reduce their dependence on both grain and Russia.
This helped us formulate our decision made in 2017.
After we had already fixed the financial situation.
Company to build a domestic source of Virgin Metallics, we go to legal direct reduction HDI plants.
That was an attempt to provide the U S electric arc furnace market.
A more reliable in Kabul friendly source of metallics, which they absolutely need to make higher spec of flat roll steel.
In the seven years following visual Crimea.
We're the only company to act on this.
Potential to re shore or metallic supply.
United States.
Okay.
We're exploring now that we are a steel producing company, we are better off using our hei niehaus.
That has allowed us to reduce our blast furnace footprint.
Two seven units, while maintaining similar level of steel production or output. Following our recent idle updating you on our hardware number four lastly this.
This has also created a huge competitive advantage for us.
With our all in house pellets.
Relatively cheap natural gas our cost to produce HDI has been just over $200 at all.
And that compares very favorably to the $1000 per ton price tag for pig iron imported into the United States. These days.
The ongoing importance, we've placed on prime metallics.
Not stop with HDI.
Member of last year, we acquired <unk>, the leading private scrap company in the United States.
Since acquiring <unk> just like most of the growth we have already increased our access to another 400.
1000, <unk>, Brian scrap for EES.
Our market share in merchant, Brian scrap around.
Around 50% of the time of the acquisition to 20% now.
Both of these strategic moves SVT and HDI each underscored by our forward looking view all the necessity of domestically sources high quality iron units.
Beg off in very short order.
These actions were based on our view of the World and we are benefiting now.
I don't metallics are absolutely necessary to make high quality flat rolled steel.
We at Cleveland cliffs are logged all metallic.
In a country that is short of that.
Eas cannot meet high quality flat rolled steel just by melting scrap.
They need metallics, that's why the imports so much bigger.
Vast majority from Russia and Ukraine.
However, imported pig iron comes from some of the least environmentally friendly plants in the world.
Reaching a level of Cotwo emissions.
With them out of business here in the United States.
But that is the scope three emissions.
And importantly, you got it.
And so far.
The important piece is ignored when a company reports the mission.
We have Cleveland cliffs, we will continue to educate investors members of Congress and government officials all the importance of accounting for scope three emissions.
If we're serious about emissions scope three can no longer do.
Ignore.
As a result of the invasion of Ukraine by Russia.
February wait before.
More than 4 million tons per year of imported Vega supply had been disrupted.
Why would the new situation very late in Q1.
Particularly due to vessels already savings in material already on boarded on domestic routes.
4 million tons out of the close of euro more than $6 million is a full blow disaster.
Companies, depending on imported <unk>.
What these folks do June should be very challenging.
Supply for Ukraine, we will likely be out of the market for a very long time due to the significant damage to blast furnaces.
Batteries and other equipment.
Must be fixed.
Quickly.
As far as Russia pig iron well.
Sure.
<unk> will not be discontinued.
Due to our data trade laws and powerful lobbying efforts.
Russia can still come into our country with effectively zero restrictions ease and aster, Russia, losing.
The MTR permanent normal trade relations status.
United States.
The relocation of RP NTR status.
<unk> with Hep tariffs of 25% or above on most steel products from Russia.
But the tariff on pig Iron is you are meaning less one dollar for Netflix.
These dates back to the 19 thirties.
<unk> was not even a broader imported by the United States and certainly not for them versus predecessor, the Soviet Union.
Again as far as Russia pig iron production will not be discontinued.
Even if American companies decide to stop by our Russia pig iron.
He is right now in Q2.
Russia next move of the International trade Arena is very predictable.
First shipment of Russian PR.
Russia frankly.
As usual type of countries, such as China, India, Brazil, and a few others.
Cleveland cliffs, we will be watching the developments around the international trade of Russian PR in Q2.
And we fully expect.
The U S government, you'll be on the lookout to block such predictable moves on first shipments of pig Iron Pro Russia through third parties.
<unk>.
Take one step back and learning.
Current events.
Impact on supply chain should have been a lot worse.
If we're talking about these visual Taiwan by China.
But the ongoing visual who claimed by Russia should be enough.
A clear call for the end of globalization.
We call it deep globalization.
I believe the globalization is the most important game changer of this.
His decade need United States and for the American people.
The globalization is not just relevant for our industry, but for our customers as well.
The automotive Oems had not set themselves up to be so reliant on imported semiconductors.
They would have the demand.
The board the production of 18 million cost both last year and this year.
Rather than the 14% to 15 million units. They are currently able to produce.
We are encouraged by investments made in all Shorty this reduction, including a major $20 billion of factory down the road in Columbus, Ohio.
Cleveland Cliffs is an automotive supplier first and foremost.
Hi, Bob.
We are the largest supplier of steel to the sector.
Also note that Q1 was our best shipments quarter to the automotive sector in a year.
But we will be able to do much more in a fully utilized the business environment.
That day is coming and the amazing results, we have shown over the past year, we will only be further equally side once we get there.
Looking ahead to the rest of the year based on the rationale I have tried to lay out today.
First the benefits roll out perfectly constructed business model.
There are seven real producers.
<unk> steel in the United States, and we are all well above that seven that.
<unk> does not rely on imported pig iron ore is less.
In simple terms the high cost there are competitors are facing from sourcing as much euros will force them to keep it steel prices elevated.
And we will benefit through higher margins as our cost structure is not near as impacted.
Also very important.
New flat rolled the mini mills ramping up capacity.
All the exacerbate their current issues with sourcing priced scrap and metallics.
Which just further widen the competitive advantage we have.
While I have focused the majority of my remarks on raw materials and sub straight.
The Russell Green conflict removed a lot of finished SKU on the global marketplace as well.
<unk> is labs really rolled in Europe .
The award in June .
S pushed global steel prices.
Making imports less appealing in the United States.
We continue to read the same headlines above inflation rising rates driving lower growth and the increasing likelihood of a recession, we long for the days that federal officials will just keep quiet and do their job rather than give you don't stay interviews a loop.
Almost every day.
US underlying demand is good.
Customer inventories have begun to decline.
Issues related to sourcing labor or critical materials are showing signs of easing.
The panic buying of 2021 is behind us.
But we still have a lot of hungry mouths to feed and that will only increase as the same conductor shortages gets progressively better.
Wrapping up we did not wish for the Russia, Ukraine situation.
And when two Cp's soon.
Russia should be published.
Vicious acts in the steel industry around the world, particularly the American steel industry can play an important role inflicting maximum pain to the perpetrators of this despicable act against the civilian population of Ukraine.
We have geared our strategy around the importance of a domestic supply chain.
And it's unfortunate that we took this situation to be in the wake up call for the world that we're not paying attention.
We are proud to provide our customers with steel free of association with Russia.
With that I'll turn it over to Kevin.
Thank you will now be conducting a question and answer session, if you'd like to be placed in the queue. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue.
You May press star two if he'd like to move your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one our first question today is coming from Lucas pipes from B Riley Securities. Your line is now live.
Thank you very much and good morning, everyone Lorenzo and the team a great great quarter.
Sure.
Lorenzo.
There's a lot of concern and in your prepared remarks, you touched on this that 2022 will be another challenging year for automakers from from the supply chain Fosun.
As the largest automotive steel supplier how are you engaging with your customers to manage these product flows and inventory. Thank thank you very much.
Thanks Lucas.
As we showed numbers are numbers, who can deny.
Q1.
Was better was.
Our best quarter of automotive delivered since the probably start.
So Cisco.
So we are in better shape now than we were in Q4, that's a good sign.
So we are moving in the right direction. They are moving in the right direction.
The thing is that I have been in direct discussions with the Ceos of each one of these companies.
Clients of US we are the biggest supplier of each one of them.
We're the biggest supplier and we are in direct discussions with them about how we're going to do next.
Each one of them is also on the brink of developing new products and the EV.
This arena in the EV space in the electric vehicle space and this is very important to that.
We are the sole suppliers of lower you entered the electrical steels for the engines of these cars we are developing.
Body and the exposed parts of these cars, we are improving the quality of these materials for these cars. So we are seeing their effort. We appreciate their efforts and we are working together with them to improve their ability to forecast to us when you delivered the amount of tools that we deliver every quarter.
There is no other way to go so we appreciate the direction, we are seeing improvements in their number the shipment numbers are starting to show.
That's terrific to hear thanks, Thank you for that detail.
And Lorenzo you have been prophetic about multiple supply chains of the North American steel industry.
Appreciate it.
The detailed comments in your prepared remarks.
I wondered if you could speak on.
The numbers for both metallics and steel imports.
And a little bit more detail.
What amount of.
Pig iron is still coming to the U S. Today.
What other sources, how do you expect that to change over the course of this year and I'm just finished steel side or slap side a similar question.
Sure.
What are the levels of imports today in and how would you expect that.
Impacts there on European suppliers for example to recur shaped back to the U S. Over the course of this year. Thank you very much.
Lucas first of all there is no such a thing as well.
Ready available and.
No.
Toward the big Iron everywhere in the world.
That's not true.
There is a need to greater competitor of us.
Big Iron.
<unk>.
Now.
They are important to you garland buying out there.
Honestly stutesman from third parties and now they are going to supply that won't be got you take that one year to be able to produce pig iron. So there is no such a thing.
Someone of several parties and it'll be ready tools.
I mean, who will replace Russia, and Ukraine, and Vega, well, let's go to the numbers.
The importation of the Guy in the United States has been above 6 million give or take.
More than four coming from Russia and Ukraine.
Great.
Of course, it is likely to continue to be able to producing and provide for their people, but that's not the case when you'll have bombarded plants. So we create is out in Russia should be outs, but not only Russia of course, they are not going to be up they are going to sell these things too.
Zero to India to China, South Africa, Middle Eastern countries, and just began to come yet.
So it's up to us to not allow the Russians to do that and not to turn a blind eye to print.
That these things are these big guys coming for different it's not so we will see I would be watching Q2 will be interesting.
Thank you.
On the steel side.
Well on the steel side, the biggest impact in Europe and.
And there is less because the Russian as labs are part of the due date.
The picture.
In Europe now.
Finally, acknowledging the fact that they make themselves.
Dependent on Russia.
Gas and we'd see it theres a lot of still being rerolled in Western Europe that really comes from Russia.
We were able to educate the administration on that thing and.
It was reflected in the trade agreement that we cut with Europe , but again, it's a loss.
Available.
So a lot of steel that needs to be replaced in Europe . So overall in the international trade in the merchant market 40 steel. This is out so I believe that the pressure on imports of steel into the United States will decrease based on the fact that the.
Russia is now outlawed in Europe .
Alright. Thank you very much and continued best of luck really appreciate the shifts thanks Lucas.
Thank you. Our next question today is coming from Michael Glick from Jpmorgan. Your line is now live.
Good morning, just on the raw material side do you guys have an interest in pursuing incremental third party sell sales wood pellets since it looks like Europe is going to need a lot of those.
And then on scrap specifically how much do you think you can grow the closed loop process with some of your larger customers on the auto side.
Yeah.
Michael.
First on the sale of pellets.
We produce pellets, we have a spare.
We are treating.
Sure.
In Minnesota, as our swing producer well we are not.
I'm not blaming run.
North shore at this time, because we feel that that would not be there.
The right thing to do this being said I sell belts to third party I felt those two companies.
Our commitment to sell beyond what we have contracted but at this point you still sell pellets.
<unk> clients, so it's not like.
We will do we already do that we could be certainly more yes, absolutely do it.
A compelling reason to do that no iron ores.
Finite resource I keep saying that there's no point in selling just to beef up a quart.
I want this company for the long run and shareholders.
Eight years that I'm doing the same.
Same way they are now understand.
So I can make a lot of book yes.
I want to make another book no.
On pellets.
But what I'm, sorry, I missed the other one just closed loop recycling on glue Ralph Thanks for auto yes, yes.
Yeah, well look as you know.
Yeah.
Bushnell scrap Brian scrap is extremely relevant for Cleveland cliffs.
We believe and we are proving that everyday and choice to our clients every day that we can improve the environment. We can absolutely reduce emissions and we can use a lot less carbon intensive raw materials, if you lose more emotionally slab so.
With the clients that understand that in the vast majority understates it right away.
For us to gain control over that Bryan scrap that bushnell scrap that is generated.
Inside their facilities.
And remember the biggest source of Bushnell scrap is off the board we are by far the biggest supplier of automotive so it's not a big.
Stretch.
To realize that our conversations and are in negotiation with our automotive clients go through scrap and I believe that any car manufacturing in this country would deny access to branch that so far so good we are growing our excess to prime scrap I said in my prepared remarks.
When we acquired <unk> it was already.
The biggest neither in prime scrap with 50% market share now is 20%. So it's good to know that my competition doesn't care about prime scrap did I heard this week that.
They are re decreasing their use of brand scrapping their own.
Furnaces.
I will continue to use even these arguments to continue to convince my plan is to give more gives me more and more prime scrap.
Continue to grow our prime scrap continues to grow the use of <unk> in our blast furnaces reduce coke rate reduce emissions do all the right things one thing scope three emissions will be accounted for.
These days coming and we are ready.
I'm not.
Understood and then from a capital allocation perspective been very clear.
It is the key priority near term, but could you also just remind us your thinking on building, an eas versus doing a blast furnace rely on in the future.
Look at this point.
Beauty and yeah.
As a possibility for the future.
We will analyze when the time's right.
We are right now.
<unk>.
Cleveland number five less place so where the process is ongoing.
We are fully committed to supply you still to the automotive industry. We are not a supplier of steel for the construction markets.
Our supplier for steel for the automotive market. That's the biggest difference between us and our competition, it's not Eas I guess Westwood is the market that we serve.
We are designed to supply automotive automotive has been not so great, but it's getting better.
Cleveland cliffs.
Future is bright for us will position.
Is geared towards construction and construction has this a moment ago.
I'm not sure is with inflation and stuff like that.
Our cost structure will be good in the near and mid term future.
So therefore, there is no incentive for me to do a absolute on Eas and try to nibble and cost structure I don't have.
That confidence that the.
The type of market.
Basically cost structure would be a good move for us we have enough scrap to produce.
White plains beans to produce rebar, that's easy melty scrap to produce rebar sort of walk in the park.
Things do make is producing automotive steel exports parts, that's Cleveland cliffs and the clients.
Understood and thanks for all the candor.
<unk>.
Thank you. Our next question is coming from Emily Chang from Goldman Sachs. Your line is now live.
Good morning, Lorenzo and telephone. Thank you for taking my question. My first one is just around the contract renegotiation process.
I'd like to provide some color around the contract renewals that will reset in April perhaps.
How did they compare relative to your previous contracts that were already late last year and earlier this year in terms of the contract length and pricing to the extent that you can provide color there.
Any early indication.
Re contracting season over the summer.
As to what themes are particularly important as you're discussing globalization shortening of supply chains.
Good morning, Emily Thanks for the question first of all the April contracts were a big success.
We're able to achieve.
Achieve everything.
We're planning for and we are very thankful that our clients that we're at the other side of the negotiating table understood our proposals and our good intentions. So we're all good and we are.
In partnership going into or not.
Just to help them navigate their own problems with the supply chain, but also to help them grow into so that's good vehicles. That's the biggest challenge that they have.
As far as the negotiations that will come into the summer tour was that we have.
Negotiate.
Cobra first.
This is.
Something that for US now he said ongoing thing and we.
We believe based on what we have been in a daily basis discussing wages clients.
It will be a no brainer to be.
No problem type of situations in other words, the same level of high success.
Got it.
In the Eagle Ford contract, we believe we're going to get in the October 1st contract with the additional debt now.
The story in the proposition around prime scrap has been completely understood.
Even now even more now than the competitions out loud that they don't need private script, we do as we do in order to provide the closed loop will improve there.
The environmental impact of our work together with them they understand and things will be fine.
Understood that's very clear and my second question is just around supply discipline. That's certainly been a lot of news from you in your piece as well all around.
Being more disciplined around not putting tons into the market for the sake of putting volume out.
And you also had the island of Indiana Harbor for Ah.
A couple of months ago could you, perhaps talk about the cost benefit you could potentially see here and perhaps how you think about the broadest suite of domestic assets being sustainably run at much higher utilization rates going forward.
Yes, there are two things in your question. The one is the supply discipline that one is Indiana hub before it.
Indiana Harbor before.
Being taken out of operation.
It was not to produce fewer tons.
It was because now we have a lot of scrap a lot of HDI.
We can produce the same amount of SKU.
Fewer blast furnace, which is a remarkable accomplishment.
In terms of emissions give me my Big Iron is four 5% Scott.
45%, Scott will produce a certain amount of future.
Steel is 0.3% copper this stool that really.
<unk> scrap.
We moved them out of Europe , with 10 times less or more than 10 times less carbon.
Look last year or two as well.
Using more scrap in the U S is the right thing as far as ambitious.
Stretches our liquid pig iron it makes us able to.
Shut down last month and for the remaining blast furnaces, because we're using a lot of HDI, that's pre reduce ARIA inside the blast furnace.
Less coke and coal is carbon and carbon produced Soo Choo, So last glaucoma lower gold grades.
Lower levels of C O two so that's the Indiana hub before it.
It was our environmental decision and it was our way to produce fewer emissions with the same amount of steel.
Use up less than we could save on costs by reducing one blast furnace as far as supply discipline. We appreciate what the pretty much everybody is doing in terms of not overproduce. It I think it's the right thing without board my competition.
To at least say that they agree what were doing.
Check our volumes against our own volumes in previous quarters, you'll see that we really have supply recently would you have been selling more footage absolutely.
Selling more 24 lower prices look at our results so tonnage is not.
The average profitability.
So it is cash grow the answer is generating shareholder value. That's what we're doing at Cleveland cliffs.
Alright, Thanks, Lauren Sir thanks.
Thanks Emily.
Thank you next question is coming from Seth Rosenfeld from BNP Paribas. Your line is now live.
Alright, good morning, Lorenzo and sell some things taking our questions.
So I got a follow up please with regards to supply discipline and the shipment outlook.
Obviously, Q1 chip and bonds are quite modest down very sharply year over year.
How much should we expect a bonds potentially recover in coming quarters.
Assume that by Q2, you could return to stable year over year run rate with respect to more gradual rebound in shipment volume is can either push better discipline.
For higher prices.
Please.
Well supporting higher price for it.
Under negotiation all of our countries, that's what supports higher prices.
So I believe I really believe.
That the way things are set right now.
You have a chance that the spot.
Spot prices will fluctuate.
Go up they go down, but what I do know is that our contract prices continue to go higher.
That's our business model.
We do not go basically nowhere massive participation of automotive.
And the way, we are dealing even with clients outside of automotive.
We are going to be exposed to these fluctuations as much as we were in the past.
What others will do you see.
I think that will be inflation in terms of price ones that shortage of pig iron throughout the world and as I tried to explain.
My prepared remark is the other one is the fact that more capacity in the United States will force people to buy more pig iron to buy more bushnell scrap by more scrapping general as these will have an impact on the price of feedstock.
That's a positive for steel price is not a problem for us because we have our iron ore plus fixed so we're in good shape.
And maybe this is cell. So let me set if I may maybe to add some numbers to what Lorenzo explain just so you have them our volume.
Clarify on the volume point, our volume picked up from $3 4 million to $3 6 million in Q1 and looking into Q2, we do expect another increase in Q2 of at least another 100 to 200000.
Here in Q2, particularly as automotive continues to recover.
But as Lorenzo stated, we're still taking a disciplined approach.
On price.
But just wanted to add some some numbers around that.
100 to 200000 going into Q2 and potentially higher for Q3 and Q4.
Great. Thank you very much.
So on the significant investment in inventory values in working capital in Q1 could you give us a bit of color on how we should expect that progressing throughout the course of the year. Obviously 2021 saw very meaningful investment over the 12 months on your current forecast and your guidance would you expect working capital to be a source of cash in 'twenty two.
So I'll take that.
Yes, sure so just to comment on Q1 first.
The working capital build in Q1 was largely driven by by inventory.
And that cost not units.
Going forward.
Receivables and payables were generally kind of trend with prices as you would expect.
But we do expect that going forward, we will see.
Any full release of working capital from an inventory standpoint.
And that will be.
Baked into our guidance of free cash flow for the year.
Great. Thank you very much.
Thank you. Our next question today is coming from Carlos de Alba from Morgan Stanley . Your line is now live.
Thank you very much good morning reinsurance also the members of the team.
The first question is you.
Looked like significantly about auto sector, but I wonder if you can give us more color on the other end markets that you also serve particular distribution is an important share of that.
Your volumes and what are you seeing there what are the conversations that you're having with them given that you have there.
Sort of Destocking that they went through in Q1 that impacted volumes is that changing how are they reacting to the increase in in prices that we can see in recently.
And then I.
For the second.
Second question would be on.
On your balance sheet, and we're clearly seeing it.
Second free cash flow generation, this quarter and improving throughout the year.
You have been buying back shares.
You bet.
Most expensive debt.
Is there a level of net debt or net debt to EBITDA.
You pause and maybe start to consider.
More cash going to other uses of cash return to shareholders.
Yeah, Let me start from this second window that I'll address.
The rest of the other markets beyond automotive.
Look.
We are always at 0.8 leverage.
So we are in a.
Very comfortable.
We will continue to pay down debt. So there's no rule.
Continue to be.
Reduced towards the end of the year.
And then a certain voids.
Going to seriously consider.
Reached.
At this point.
Dividend.
Not being instituted right now because we feel like we are getting more bang for the buck by paying down debt as simple as that our.
Goal of generating shareholder value is easily.
Usually accomplished by continuing to pay down debt and self explained soil. During his prepared remarks, we will continue to do that.
And.
As I said the moment no.
We're going to commit.
Right now we are going to be reinstituted.
We still have the.
The buyback authorization in place, which will be used as an insurance policy we are not.
Try to.
Prioritize share buybacks or paying down debt paid down debt is the priority and.
After that after we get to a level that we are getting there. While we are not there yet I want to pay more debt now before recent to the dividend.
Uh huh.
Do what we do we're talking here in terms of.
As far as down analysis on other markets.
<unk>.
Yes.
The Oems outside of.
Automotive they are going through the same process multiple will.
<unk> the same way we.
Want their scrap.
We are getting their scrap we are.
Right to work on fixed prices like automotive has its working well we are making progress on that they are just starting to see the benefits of having a piece of the price.
Working everyday.
Going to be published shortly are you wonder if things are going up or down in timbuktu window, what the impact we're going to have a year that's not the way it should work its benefiting very few not the broad market. So we are going towards that everybody can make money in an environment that we have the stability and high.
Bryce.
As far as service centers, some decided not to buy and.
Their strategy was waiting for lower prices. There now seems confronting to the reality that prices are not going down and what we have been saying about scrap is materializing starting to frame. What we we have always been concerned about in terms of metallics happening theres a shortage in the world. So.
The backdrop, the underlying conditions for higher prices.
In place so they are coming back and buying so things are getting better in those other sectors going because that's all I can tell you at this point.
Alright fair enough. Thank you very much good color. Thank you.
Thank you. Our next question today is coming from Timna Tanners from Wolfe Research. Your line is now live.
Yeah, Hey, good morning, guys.
Good morning.
One cast a little bit more about the right inventory levels and then ask you about your footprint.
Tori.
Just obviously prices are higher input costs are higher but can you remind us how much tonnage you have in inventory and how to think about what that can look like even at flat prices. You know if we have flat prices from here how that unwind.
And how that contributes to volumes.
Yeah, we have not.
With our growing inventories in Q1.
<unk>.
The value of the inventory increase but not the tonnage of inventory. So we are loaded in Q1.
We will continue to do that.
We are no longer taking the forecast of our class a space that we are negotiating with them, they're all forecasts.
Has been good for us and good for them, but we are not adding tolls on the ground.
They are an uptake.
And as the inventory is moving faster because we are pushing them to take those dorms.
And the numbers show that so we're not adding costs through inventory.
They continue to improve their performance as we continue to fine tune their forecast with dollar only input on what they are taking the tendency is to continue to reducing vessel, but one more time, we did by increasing inventories in Q1 the value of the inventory increase.
Got it that's helpful.
But you don't have that kind of do that you can share with us on how much is there and how that how that should reduce over the year.
No no.
Got it.
Sure.
The trend is good.
The numbers.
With you on the Street Jackup Andrew.
And we will make people comfortable when they get to their numbers. They believe that they accomplish something they did it. They can always do that that's why I don't have numbers.
Okay and then.
Fair enough. The second question is just that since we saw and application comes through for an electric arc furnace permit I think in Middletown, and I think you've said that that would be a long term strategy, but just wanted a little more color around how youre thinking about your current footprint.
That aside with it and what it would take to think about converting 20 I have down the road.
I'll give you a very objective answer let's see how many of my clients.
We'll be really doing what they are saying they are going to do in terms of electric vehicles.
If they're very successful all of them.
And we need a lot more no oriented electrical steels will supply the aging electrical vehicles.
This will materialize.
Now, it's just a permit for now it's just the power issue or something that might happen.
Only if clients perform as they are seeing that they are going to before remember we are the sole producers of electrical steels.
The Americas and we are seeing.
Every single car motor factors, saying going into that direction.
I don't believe that all of them will be successful one of the things that I've been discussing with the Ceos that I'm talking to is to gauge how much real.
Yeah really.
Controlling what they are talking about.
If this thing starts to materialize well that'll be the first wants to jump in but that's what it's about.
So yes. This is part of electrical steel or is it for that yet.
Hi, Nate.
Mainly to increase our ability to produce more electrical steels. We're sold out right now we already started to auction electrical steels.
Kelly, the electrical steels, both gray oriented than oriented to auctions.
So there was a big the highest price, we'll take because they don't have capacity for more.
And restaurants that make supplier of that too. Okay. Alright. Thank you sorry say it again, Russia is a big rush is a big electrical steel supplier historically.
No they're not.
The biggest supplier of that type of steel that I'm talking about South Korea, South Korea, among the friends and the biggest ended.
Hum.
Yeah, good luck to them, but that's a different ballgame, but Russia is.
On the electrical steels that are not really that relevant.
Irrelevant, because they are better with the lower quality stuff.
Mm Hmm, okay. Thanks again thank.
Thank you.
Thank you. Our final question today is coming from Matthew fields from Bank of America. Your line is now live.
Oh, Hey, Lorenzo and yourself sorry, good morning.
Morning, Matt.
I know you you sort of outlined.
<unk> to your guidance with kind of three aspects about the forward curve for the new auto contracts and current sort of hot rolled cold rolled spreads.
But I just wanted to sort of drill down the guidance is up on sales price of $2 20, a ton from last quarter, but the hot rolled curve is up well over 300, a tonne so not to sound.
Not meaning to be a brown knows or anything but does this bake in some conservatism to your guide or is there something else. There that's sort of the mix of the contract implying that the spot. The contracting is it sort of dragging down your average realized pricing due to not participating in the spot market.
Hello Luca.
It's all blended it's all blended on the curve all the the reality of the contracts that we have already renewed.
It is.
Very concrete spec dish on the contracts that were about to renew so it's all yet but at the end of the day, we're not sandbagging.
Your concern.
We are being as realistic as we can like I'm always yeah.
I'm always very real and very realistic about do things I try to give you guys and leads is the best approach the best Bunched view or how the business is taking care of another company I think that the.
Take away of this new price guidance is that well.
Well.
The curve change than they do.
Disappointed.
The way they reassess.
Reassess the Cook.
That's one point to positive second.
The contract that will renew their better than much better than the numbers that they had at home when they supplied the previous got cool that helped increase as well if it changes we will change of course, but that's our best view at this point I don't know if social as well.
That's pretty much it.
Yes, no sure I think the important thing to note too Matt.
Matt.
Is the lagged impact of our of our of our pricing contracts. So Q1 benefited from contracts and the pricing that was happening in Q4.
And going forward prices suffered a little bit in Q1, and that's going to impact the results in Q2.
But five months.
Of actuals are already set in our new full year guide.
This conservative curve that we're using has pricing trending down a little bit too in the second half so.
Even though Q2 is going to have this negative impact from lower Q1 pricing.
The $220 per ton increase so the way to think about it is basically $3 $5 billion in revenues. In addition, with very limited cost offsets. So that's kind of the best way to think about it.
Okay, Great. That's very helpful. And then last question for me I know you've spent a lot of time talking about necessarily global metallics sourcing and your insight there and very valuable.
On the other side of the coin.
Blast furnaces have you thought more about maybe vertically integrating more on the coal side.
With prices the way. They are now does that change your thinking about being more of a vertically integrated.
Having more sort of domestic supply chain in house for coal.
Not really.
Not really actually because we are going the opposite direction, we continue to.
Privilege they use of H b.
<unk> reduced the world through our natural gas.
God sand for the United States, we have Europe doesn't have Japan.
Japan doesn't happen.
South Korea doesn't happen.
All in Russia, yes.
The Russians rush so.
We are in a differentiated position as far as pickup organization here.
Because we have natural gas so because of that natural gas my priority has been direct reduction <unk> is a great broad high quality metallics high quality mid docs always there was that.
Haven't got good H B I can not appreciated.
I appreciate the benefit of an HDR several times of HDI.
So far has been using at home at Cleveland Cliffs is for a moment. It has been allow us to reduce glaucoma coke rate and increase the <unk>.
The figure of the blast furnace, while reducing C. O two emissions, that's just perfect, but if I'm reducing corporate.
Going into coal will be going in the wrong direction. So I believe in natural gas as well.
The environmentally friendly.
Reductions and we are going to try hydro Jim just to prove that the plant works with the hydrogen and then I'll go back to the natural gas, but there's no economic or feasibility to use hydrogen at this point in time, but we are going in that direction not towards cool.
Okay fair enough.
Alright, thanks, very much and good luck the rest of the year.
Thanks, Matt appreciate it.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Thank you so much for being with US today, and we look forward to speaking with you in three months.
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The.
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