Q2 2022 Cleveland-Cliffs Inc Earnings Call
Okay.
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 second 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, although the company believes that its forward looking statements are based on reasonable assumptions such statements are subject to risks and.
Is that could cause actual results to differ materially important factors that could cause results to differ materially are set forth in reports on forms 10-K, and 10-Q and news releases filed within the SEC, which are available on the company 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 on the website and available for replay. The company will also discuss results excluding certain special items reconciliation for regulation G purposes can be found in the earnings release, which was published this morning at this time I'd like to introduce sell cellphones, others Executive Vice President and Chief financial.
Annual officer.
Good morning, everyone.
Our second quarter marked the continued execution of our key capital allocation objectives, including the largest free cash flow driven that reduction in company history.
During the quarter, we generated $633 million in free cash flow on $1 1 billion of adjusted EBITDA.
This cash generation in Q2 is more than double what we generated in Q1, even after paying around $300 million of cash taxes in the second quarter.
Consistent with our stated priorities, we use this cash to aggressively pay down debt and Opportunistically buy back stock.
During the quarter, we fully redeemed the remaining $607 million of our most expensive secured notes well in advance of its maturity.
And took advantage of volatility in the debt markets to attack other tranches of bonds in the open market repurchasing another $307 million in principal outstanding notes at an average discount of 8% to par.
These repurchases focused on our 2029 and 2031 guaranteed unsecured bonds as well as our 2026 secured notes.
On the revenue front, our volumes and selling prices were both up sequentially from Q1 to Q2, leading to a record quarterly sales revenue of $6 3 billion.
Our Q2 steel selling price averaged <unk> hundred $87 per net ton representing over $40 quarter over quarter increase primarily driven by substantially higher slab prices sold to other steel mills and favorable April fixed price sales contract renewals as well as continued robust spreads for <unk>.
Cold rolled and coated and plate products sold on an index basis.
Looking ahead in the third quarter, although pricing will likely be impacted by falling commodity index prices lower spot prices will be heavily mitigated by our industry, leading use of fixed price contractual arrangements.
Our next round of fixed price contract resets will occur on October one with roughly $1 7 million annualized tons up for renewal.
Given our unique product offering and technical capabilities, we expect to see continued substantial increases in fixed contract prices in this upcoming renewal even with the recent downtrend in commodity steel prices as a backdrop.
From an operating standpoint, our Q2, adjusted EBITDA was down sequentially quarter over quarter, primarily due to the increased cost that we foreshadowed on our last earnings call.
With over $200 million <unk> use of annual consumption Cleveland cliffs is one of the largest direct consumers of natural gas in the U S.
Even though we're meaningfully hedged at all times, we still experienced a substantial impact from elevated natural gas prices throughout the entire quarter.
Other rising input costs included electricity scrapping alloys, as well as higher repair and maintenance spending.
Cost increase was also driven by higher idle costs.
Up nearly $200 million from Q1, which was driven in large part part by the expanded scope of the outage at our Cleveland works facility.
Along with the realign of blast furnace number five in Cleveland, which is generally only done. Once every 20 years, we took advantage of the downtime to perform other important repairs and maintenance and related areas of Cleveland works, including the wastewater treatment plant in the onsite powerhouse.
With the additional work being done we now plan to have Cleveland works back at full capacity in August aligning with improved automotive steel demand.
With the bulk of the work behind US, we expect our excess and idle costs to decline meaningfully in the third quarter.
In terms of working capital, while our gross inventory values increased as a result of higher cost during Q2, our total steel inventory volumes were actually reduced by 230000 tonnes in the second quarter and has declined about 400000 tons. So far this year.
Yes.
As costs for several of our primary inputs have declined recently since the end of Q2 and with Cleveland works back in full operation in Q3, we expect working capital to be a meaningful source of cash in the second half of the year.
Even with the current lower price of commodity grade steel in the market. We expect to continue generating strong free cash flow for the remainder of the year there.
There are several factors that will continue to support our cash generation going forward under the current environment.
One the fixed price nature of nearly half of our order book will keep our average selling price elevated despite lower spot prices.
To fixed.
Fixed price contract resets occurring on October 1st are going up not down.
Three.
Lower operating repair and maintenance and idle costs going forward.
Four.
The expected release of working capital that we have built up over the past 18 months.
And five lower Capex spending as we have no major capital projects on the horizon for the foreseeable future.
This will all allow for continued robust free cash flow generation opportunistic share buybacks and aggressive debt reduction.
With net debt well below one time of our last 12 months adjusted EBITDA, we continue to be focused on maintaining conservative leverage levels going forward.
With that I'll now turn the call over to our CEO rest of himself.
Thank you Michelle and good morning, everyone.
Cleveland Cliffs became a steel company on March 13, 2020.
The day, we completed our acquisition of AK steel.
Sure Dave.
Favre things up both AK steel, where its industry, leading weighting toward Delta award of end market.
And it is leading capabilities in research and development.
Automotive not all consumes a lot of highly customized flat rolled steel, but also demand the strict specifications and a long approval process to qualify materials.
There is no such a thing as commodity steel and automotive.
That's true in Europe , and Japan, and South Korea, and obviously here in the United States as well.
That being said the supplier base of steel to automotive clients everywhere in the entire world is limited to fuel the steel companies really able to support all the specs the car manufacturers need usually walbrook country or geographic region.
Thanks, Rhonda side we.
Within a week of the completion of our AK steel acquisition in March of 2020, the entire automotive production of ecosystem shut down for the first time ever and its century plus long history.
After a three months long interruption automotive production began to resume but not nearly to the levels. We had seen for the prior decade. Despite a very strong demand for cost associated with the restrictions imposed by COVID-19.
While the automotive sector was is slowly coming back to life.
Acquired Arcelormittal USA.
The other major steel player in the automotive space, making Cleveland cliffs.
As the largest supplier of automotive or steel in North America by a very wide margin.
Next a wave of supply chain issues began to hit the sector with widespread shortage of microchips being the most visible problem.
Reversing the initial peso recovery and have hampered automotive production to this date.
In the six years, leading up to 2020.
North American light vehicle production averaged more than 17 million units per year.
Comparably in the past two years the industry has only produced 13 million units per year up 24% decline era, a time when consumers demand forecast was growing.
During this time period other steel consuming markets have grown most notably construction and we have benefit from that.
As evidenced by our record earnings results in 2021.
That said our medium your peers.
Much more leverage to the construction market than we are and they have benefits from that more than we have particularly in the downstream businesses.
This is now about to change.
As you read through the current economic conditions in the country.
Which include 40 year high inflation levels and rising interest rates.
Consistently low unemployment.
We have all the ingredients for the dynamics of the past two years to shift in our favor.
It has been over two years of construction outpacing automotive.
That's no longer the case.
The North America automotive industry could have reduced eight to 10 million more vehicles than they actually did over the past two years.
And as a result, our relentlessly growing pent up demand for cars trucks and Suvs has developed.
The best indicator of this trend is the main high used car price index, which has nearly doubled in that time period and remains near all time highs.
On top of that.
Average age of our light vehicle on the road in the U S has grown to 12.2 years the highest it has ever been.
Also very importantly.
Unemployment rate has remained low at three 6% about the lowest it has been in 53 years.
This means that individuals not only have the income to buy a new car, but in most cases, they also need that car to commute to work.
A car is not a house and a loan to buy a car is less sensitive to interest rates than that of a mortgage if you will.
Have a paycheck you can buy a laser car and make their monthly payments.
Unless the fight against the inflation lead zinc to high levels of unemployment.
Every card that can be produced over the next several years as a buyer.
Just a matter of having the materials needed to produce their cars.
The most prevalent material in a car is steel, which makes up roughly half the weight of the vehicle.
Over the past two years, we added polyvalent cliffs has made the investments necessary to meet this gummy <unk> loss of demand and we are ready with the most advanced technical capabilities the industry can offer.
Our brand new blast furnace at our Cleveland works operation.
All of our automotive customers have indicated to us that there are supply chain issues are easy and we are seeing tangible proof of this trough on our own channel checks.
The production pace of the first half of this year has been nowhere near its full potential let alone. The prior decades average is starting the second half of 2022, we expect to get more out of order volume and with more volume and base.
Rules for all our mills, our costs should naturally improve.
The incoming volume improvement comes from both internal combustion engine vehicles and electric vehicles.
We are not only the largest supplier of steel to the automotive sector, but we're also the largest supplier of each one of the individual car manufacturers currently transitioning drawn.
Ice's vehicles to Evs.
Higher fuel prices have all increased the consumer's appetite for Evs.
If you as an investor believes in this EV transition.
Cleveland Cliffs is who you need to deal with.
That's not just because of the longstanding quality products. We have historically supplied for ice's vehicles, but also because our broad offerings of advanced high strength steels is the perfect solution for battery powered <unk>.
In addition, we are the only domestic producer of non oriented electrical steel in the United States.
Roughly 150 pounds are required for a vehicle for using their modal.
Because of the growing demand of these skus, we are investing $30 million in our Zanesville, Ohio facility, a small investment to allow us to add another 70000 tons of production of new oriented electrical steels loss.
Effectively double doubling our <unk> capacity.
Without impacting our industry, leading capabilities on growth grain oriented electrical steels.
With that we will also be generating another 100, good pay middle class Union jobs at Zanesville Wednesday's edition comes online in 2023.
Going forward.
These types of low dollars high impact capital projects, we will be focused on.
That is a clear differentiation between Cleveland cliffs and other companies in our space.
In their multi year commitments to massive capex. Each one of these other companies has announced several billions of dollars to build new news.
Steel mills and EMEA aluminum is.
Google on cliffs does not and will not announce any of these mega investments.
When we acquired Arcelormittal USA and based on our experience immediately after we acquired AK steel we knew we would have to spend significant money to bring in the access to our own higher standards.
That has been done and done very well.
By now we have all the equipment and technology in place to meet the needs of our most demanding customers.
Promoter and other sectors.
Actually our capital spending in 2023 should decline when compared to 2022.
Our last Big capital project was the Cleveland works revamp.
And we do not have any other capital project of this magnitude.
Till at least 2025.
Outside of automotive, it's clear that destocking activities underway at service centers and a simply will let their inventories were very low.
Other steel consuming sectors have picked for now.
The board has not.
A significant 45% of our sales are on fixed prices.
And those prices are not directly correlated with the latest market prices.
We have the leading market share in automotive not because of price, but rather because of our technical capabilities and ability to deliver on time.
This is why we expect more price increases in our upcoming renewal cycle, where we can get closer to a proper value for the full service and solution package.
Provide the automotive industry.
These fixed prices will keep our cash flow is strong through the rest of the year, our long awaited the release of at least a portion of the $2 billion in working capital we have built over the past 18 months.
These working capital release should come not just from lower input costs, but also for our own proactive management of raw materials.
For example, we have now extended the ongoing idle at our Northshore shrink facility through at least April of next year.
We had to increase the use of scrap companywide in our steelmaking operations made possible by the acquisition of FCT last year.
Alex from Northshore are not needed at this time.
Rather than deplete this finite resource for the benefit benefit of Delta Savvy Trust.
So quality unit holders will keep northshore idle until we decide otherwise.
On a final note.
We have begun our union negotiations with the United Steelworkers to renew our current labor agreement.
The agreement expires September one.
Covers approximately half of our companywide workforce.
We have always valued the relationship with our unions.
It's clear that we appreciate working together with them.
Differently from others in our industry, we remain committed to our existing plant sites and to our unionized workforce.
With all of that we expect with the negotiation process to result in a fair and equitable agreement for both parties.
Cleveland cliffs is about more than just making steel our mission is deeper.
To Revitalised revitalized manufacturing in the United States.
And through that support and enable a vibrant American middle class.
We are not a steel company of the past we are the present and the future of our industry.
And we have the right people.
With me and capabilities to prove that out going forward.
I will now turn it back to the operator for Q&A.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'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 one moment, please while we pull for questions. Our first question is coming from Curt Woodworth from Credit Suisse. Your line is now live.
Yeah. Thanks, Good morning, Lorenzo in Tulsa.
The first question.
Two cost progression going forward.
You outlined the $200 million of costs for Cleveland This quarter and it seems like the remaining $42 million.
It's more on the energy side. So would you expect to get most of that 200 million back in that $200 million also include the implied loss of volume as well from the facility.
In the first quarter.
Look.
<unk>.
I'll give you a generic.
A few of the answer and then I'll, let social handle the specifics okay Kurt.
Yes.
We acquired assets.
Particularly the set the vessels Cape for Arcelormittal.
That we're not in great shape, we knew that Permian.
That's why we paid a price that was.
Much more than the actual value of the asset to I'm sure you recognize that.
It's not like we did not know.
The West Coast. So this being said all of this big costs are behind US Cleveland was the last one.
And.
When we shutdown of less plus we saw the opportunities due to a market that was less than ideal let's call like that to do things that are overdue elective powerhouse into water treatment we have.
Africa Haga Ribeiro.
Closer link here, so we need to be very careful with distinction.
Our environmental commitment very seriously as you know.
But these are onetime stakes that.
Don't happen off like I said, our next big deal.
Might come in 2025 between now and then we have nothing but anyway. So please go ahead and complement to the point that the growth with us I think you've covered it.
When you shut down a facility like Cleveland, you have the opportunity to fix.
Fixed everything so we took advantage of that in Q2.
And the fact that automotive has been slower here to start the year has given us time to catch up on maintenance.
As you stated the facilities we acquired needs.
Needed to be brought up to our standard.
And then so.
On top of that we had some inflationary pressures like natural gas as we all know electricity scrap and alloys those all spike during the quarter, but have since come down, but I would say that the biggest cost impacts are now behind us.
You might have some flow through in inventory in Q3, but we don't have any more of these major outages like Cleveland until 2025.
So would you expect to recoup most of the $200 million. This quarter I'm, just trying to kind of get a little bit more color on the unit cost progression in the quarter.
Yes, this cost will run through inventory in Q3.
That's your question.
Okay.
And then maybe just on a couple of cash flow item questions.
No.
If we assume that.
Steel pricing stays roughly where it is even though the forward curve is actually.
At the back into contango.
What would you expect for working capital will be used in the back half of the year and then you can give us update on your estimate for Capex. This year and next year as well as cash taxes for this year.
Yes, I'll do the Capex and social due to working capital.
Capex.
Next year, we will be.
No more than $800 million.
And that should be a good guidance going forward. So we're not going to start with.
Our views.
For Capex blackout.
Before.
And.
The consultants way is different.
Yes.
And we take care of our equipment instead of being concerned about this specific quarter. We did what we had to do in future period full stop that's good management.
Going forward, we are not going to do big Capex thing because we don't need anymore, we already did so.
A number of quarters and I know you do two plug in New York.
Your model I would plug on eight eight.
<unk> handled.
Slide 800 handle type of number for Capex something between 880 feet 880 $850 million.
Going forward basis.
Okay.
Capex working capital social again in terms of working capital.
Built a lot of working capital since we acquired Am USA.
Now starting to reverse so working capital is going to provide a sale, even even as pricing falls risk.
Receivables for example will accelerate.
Q2 was probably the peak in terms of of inventory cost.
We're replacing higher cost now with lower cost inventory. So this is all going to support healthy free cash flow generation going forward from this release of working capital.
Okay. Thanks very much.
Thank you Kurt.
Thank you next question is coming from Lucas pipes from B Riley Securities. Your line is now live.
Thank you very much and good morning, everyone.
Good morning Lucas.
Lorenzo I believe in your prepared remarks, you commented on automotive volumes being up and I'm wondering if you can maybe put.
Put some numbers around that for Q3 and Q4.
And then also on total volumes, what do you think might be a good ballpark for the remainder of the year. Thank you very much.
I can't put those numbers.
Various vary.
Firstly it is.
Very difficult at this point to to narrow down to a number but I can see trends.
The orders are starting to come more.
Consistently.
The.
Should unexpected shutdowns are gone.
The announcements of new Evs from <unk> so far.
Our clients each one of them you pick one and we are there we are the biggest supplier of don't want that to peak.
Consistent with what they are already in terms of steel.
There is a lot of development the background.
And our R&D Department.
<unk> advanced high strength steels for Inc.
Closures of a battery.
For Tvs as well as the specification of materials for the skins and the structure of these same evs.
So.
Things are really moving back where they should move one.
Short term indication is also that.
There is a big.
A trend right now of car manufacturers being kind of the.
The reality is sinking in in Europe .
It's clear that all of these speak of the Europeans is just that speech. They don't have natural gas to heat. The houses. So we're starting to see real location of microchips. Another thanks from Europe to the United States and we are also seeing the growth in August .
As a consequence of that so even though im not give you a number Lucas I can give you a lot of good indications that things are starting to turn and we are ready for that.
That's very good to hear thank you for that color.
Im Lorenzo <unk>.
To hear that.
<unk> pricing is going to be up.
Right.
I'm sure there are a lot of different.
Components to this negotiation and resetting these prices, but when I think back to yes.
Late last summer pricing, where.
Their record highs and so you would think.
That bled into October pricing last year.
Whats maybe the biggest factor this year for the higher pricing reset in Kansas carryforward into the churn in April negotiations as well.
Because.
Basically Lucas what people see him on the spot price.
Don't really there are a lot of.
A lot of contact points with what we are dealing in a daily basis with our common factors evaluate pretty mature to talk about.
Our Gulf of worthy industry, when I say that Cleveland cliffs is the largest let's put numbers on that last year, we supplied $6 8 million tons of steel to the automotive industry and automotive industry produced 13 million cars.
All six eight is bigger than $6 5 billion behalf. So we supplied more than half of the steel that the automotive industry acquired so we are really affected by the automotive industry. The results. We have brought to this company since we built this company couple of years ago.
No.
Are not short of a miracle, particularly because we are going against the backdrop of our main markets. This is not working properly. So that's about to change at this point so they know that they can't just.
Try to negotiate the last penny in a moment that they are fighting for their own survival.
They have one big competitor that came.
Brand new to the sector.
And to cover the electrical vehicles.
Chunk of the market now theyre playing catch up.
I am telling you definitely catch up pretty fast and we're helping them to play catch up and the price conversation exists, but it's not front and center.
When we are negotiating the bulk of their their needs.
There's a mic for hot rolled to stop that.
Has.
It has less restrictions and thinks that Boeing and less.
Critical parts of the car they still have the ability to buy from us but for the for the real deal they buy from Cleveland cliffs. They know that we know that that's the negotiation that's going on.
Great.
Really appreciate the color.
Thank you very much best of luck I'll turn it over for now thanks Lucas.
Thank you next question today is coming from Michael Glick from Jpmorgan. Your line is now live.
Hey, good morning.
The market's obviously focused heavily on demand right now I mean, I guess beyond the auto could you just talk about how the order book has been shaping up in recent weeks and.
Have you seen any pockets of weakness in demand in any of your non automotive end markets.
Yes look.
Our promoter is different and I think I havent spoken enough about automotive at this time.
Let's move to the other sectors.
These centers service centers like bullish they are still ended Destocking mode.
So.
It's not really.
Debt, but it's opportunistic.
Just.
What they need.
Bodies through the inventories.
And.
Destocking has named game, you wind up with dilutive stock. So it's coming soon and when Facebook was really low while they do that they buy so my optimism for the latter part of Q3 is it like the other companies that pre announced said the same thing so that's service centers.
I have a factory that is so.
Big.
Broad sector, when it's safe manufacturing their box a benefactor of that.
Red Hawk and buy a lot and we will supply some of them.
And there are other parts of the.
The matter of fact in the spectrum that are much lower.
Particularly the things that are related to construction.
So we are not a major player by any stretch, but we are starting to see.
Things are slowing down and construction.
So it's a mixed bag.
The good thing for Us Michael is that automotive.
Has less to do with recession, and a lot more to do with employment.
Assuming that we don't go into a deep.
Deep recession, and we still keep employment at decent levels deviate either.
Even if unemployment increases a little bit.
We still have enough.
Middle class type of bias and above to continue to buy the cars they want.
Continue to see people that are really upset with a few higher fuel prices to try to move and buy their first electrical vehicles and these are all things that will benefit cliffs going forward. So I really encourage you to.
Going forward the step of just looking right now.
What you see in the results or the.
The branch or the negativity.
Or a political football the fact of the matter is that we.
We are at this point in the United States.
A moment of people really considering buying cars.
If the cars are made available you're going to see a wave of acquisitions of cars.
Is unprecedented.
But.
It could be a real it looks like they are becoming available.
Understood and.
Maybe as we think about the balance sheet.
How should we think about your net or maybe even absolute debt target.
In this environment.
I think we've gone through what we have to get.
We are consistently below one times EBITDA.
And we will continue to manage down this debt with cash flow.
Clearly our our main priority to continue to knock down that I don't know if you lost about $6 3 billion in revenues is a record quarter.
And our conversion.
Sure.
Free cash flow was also outstanding and we've put the vast majority of the cash generated to pay down debt.
We started by his stock until the silly season started and then we stopped buying stock and then we'll focus only on deck.
We will continue to focus on on that like <unk> said.
B.
A focus on paying down debt as always.
We buy stock if other opportunities arise, but I really believe that at this point my opportunity to buy stock we will start to be Rev.
Rarified.
It'd be really focus on that.
Understood. Thank you very much.
Thank you.
Thank you next question is coming from Emily Chang from Goldman Sachs. Your line is now live.
Good morning, Lorenzo cellphone, that's the update this morning.
Last question is just around the asset portfolio and following the closure of Indiana Harbor fall and I know you did mentioned this in your prepared remarks ongoing commitment to each of your assets just to reconfirm do you feel at the size of your portfolio is right sized at this point with assets now running more efficiently than they were before.
Yes, good morning, Emily look first and foremost the shutdown of Indiana Harbor, four was driven by our commitment to reduce.
Our carbon footprint, we can only do.
That because <unk> seven is a massive consumer of HCI.
And.
We use.
Lower coke rate over there, we generate a lot less <unk> per ton of steel produced and.
We are able to serve the entire Indiana Harbor complex blows Riverdale, just operating the Indiana Harbor seven points. That's also because we built a lot of scrap in Indiana Harbor in Riverdale.
No.
That's basically adapting.
The hot end to the size of the market.
Has been there and we will be there in the future and doing that in the most environmentally friendly way.
So I believe that we are pre optimized at this point, we don't have any intentions to reduce our footprint or grow our footprint. That's a footprint to have gains will be margin like the one I just announced this investment in zanesville.
$30 million investment to bring back essentially mirror view to produce more knows no oriented electrical steels. That's the one that goes on on the agent update electrical vehicles. So we are doing that is Andrew. So we are not doing blood disorder, preserving our ability to continue to.
Produce goes in Butler, because the market for Transformers is also fantastic.
These are markets that are extremely hot right now and we are the sole supplier of this type of steels electrical steels, so real good.
Great that's very clear and a follow up is just around gas and energy and electricity costs.
That's clearly being elevated in the second quarter.
How do you see that trending in the third quarter, then maybe if you could share how you think about sort of the hedging program in place.
Spot exposure you might have there.
Yeah, I'll, let social yeah.
Hey, Emlen.
So.
Gas prices I think reached a 14 year high and they stayed at those levels throughout the entire three months during the quarter.
So the Q2 I think market price for gas average was like 750 per btu.
Btu.
Compared to less than five in Q1.
We've seen those prices come down here in Q3.
So that's a benefit to us as I stated, we consume $200 million and then b to you across the NMB to use across our footprint per year.
Our philosophy is to remain 50% hedged at all times. So if you look forward to the back half of this year, we're already 50% hedged at much lower levels than spot.
We're not trying to speculate on price, we're not trying to make money off of hedging we just want to kind of mute the impact of these swings in volatility.
So that's kind of how we look at it.
And then we're exposed on the other half, but at least for mitigated.
The half that we're hedged.
Alright, Thanks Alastair.
Thank you Emily.
The next question is coming from Timna Tanners from Wolfe Research. Your line is now live.
Yeah, Hey, good morning.
Good morning, I wanted to dial down a little bit more if I could on on your utilization in your volume outlook for the second half I know in the past you had said that to get above 4 million tonnes shipments per quarter you'd need auto to come back so with the restart of Cleveland could we be at that run rate by the end of the year and into next year and.
Cleveland do you also see a bit of continued.
Outage costs until those roll off into the fourth quarter.
Yes, the answer to your first question is yes.
We.
One of the reasons why.
Yes.
<unk>.
Revamped.
Number five.
As automotive demand, we are seeing demand shaping up.
Cleveland works is one of the slides.
One the flagship.
<unk> in the country to produce high strength steels for structural portions of the vehicle. So.
And some exposed as well, but we have other locations that are more dedicated to explore spot.
So our automotive volume, yes, 4 million tons, yes, what was the rest of the.
Utilization. These things are we don't we don't we don't deal with distinct desire our statistics statistics.
Very little to do with operational metrics.
Volume, absolutely you're absolutely right.
4 million tons is target, but I kind of missed one portion of your just the lingering outage costs given youre talking about in August restart some stimuli, perhaps some lingering.
The efficiencies into July I guess.
Yes, we're going to have some sales.
Be able to give you a little more color, but the bulk has been going through the tank.
I don't know if it will be back up and running in August .
<unk> seen some booked it.
Legally impact of good numbers.
Fluids through the through the quarter, yes, it will flow through here in Q3.
But the biggest cost impacts are behind us.
Okay helpful and if I could a follow up on I know last quarter, you talked a lot about the benefit of having your own raw materials and I just would love to get your perspective on kind of how quickly that.
That that.
Prime scrap price seem to have abated I mean do you expect that that's temporary in that it will still be.
To get.
Prime grade material and alternative iron units going forward in that that can be an advantage.
Some of this excess buildup in materials in the panic time Isabel Dos, Yes look out we are seeing a lot less.
Competition for prime scrap our ability to do closed loop because without the border continues to continues to increase.
At the beginning we have really fight to get these deals done but now apparently the the competition is not really looking for a prime scrap they should have their reasons.
To be honest with you I don't care.
For us Brian script is important.
We prefer to use prime scrap Brian scrap allows me to use less coke and.
And we're using less coca generate less youre too and that's a good thing.
Prime scrap that I.
Use going for automotive to go backdrop awarded this should produce.
It's great to create a closed loop solution with our clients and there is a value on that and this value is being translated in our ability to renegotiate the higher prices and the prices that were currently negotiating.
Negotiations are already negotiated with our automotive clients. So that's a positive that's good.
Okay, great. Thanks for the update.
Timna.
Thank you next question is coming from Seth Rosenfeld from BNP powered by your line is not a lot.
Hi, good morning, Thanks for taking our questions.
One final one please what's the outlook for electrical Steel Creek, I'd love to hear a bit more about zanesville.
Very low capex for meaningful expansion of your non oriented capacity.
More color with regards to the expected EBITDA contribution and ramp up timeline about.
Thinking about that facility is there opportunity for additional kind of debottlenecking, our low cost expansion looking forward.
Yes, good morning.
Mrs.
Zanesville, Ohio.
<unk> is the.
Currently the location.
That finishes some types of electrical steels that are.
<unk> produced in Butler.
Pennsylvania.
<unk>.
That was a key skus way of doing business.
Concentrated production Butler and the finished unfortunately buster itself.
Another portion.
And so what we're doing with this investment we are bringing back to operation the main piece of it.
In your view to produce this due east Haynesville and a few.
Auxiliary equipment to finish that.
Produced at the mill to make sense, you'll pretty much independent for this type of moves the specs. So as you will become.
Producing facility by bringing back our view, that's there and it was.
Idaho for I don't know how many years when we acquired AK steel is already either but we'll bring it back that's why the investments not big we're not building a view we have basically.
Bringing back to life, a mill that was there, but it was not being utilized so and I gave you the investment and I gave you the $30 million for $70000.
Pretty damn good.
Our religion.
The next thing that's going to happen.
Demand for electrical steels continues to grow we are going to do something similar in main street.
Sure.
Our facilities that produces stainless steel.
We continue to like and do well with stainless but we're seeing more and more they're meant for electrical steels, and we might be able not Mike.
We are able to alleviate butler, even more by creating electrical steels capability remains fluid, but we are talking again, a small investment.
These returns so, but we're not done with that part yet so thats views reality.
Sure.
Thank you I just wanted to follow up on that front for Mansfield, If you were to expand more into electrical steel.
Expense of lower stainless volumes no.
That's the key because doing it that would be easy.
We are like we did and James you we are.
Create capacity without giving away anything.
That's where the science is.
Great. Thank you very much thank you.
Thank you next question is coming from Carlos de Alba.
Morgan Stanley Your line is now live.
Yes, good morning, gentlemen.
So we discuss.
The fact that your capex is going to remain around $800 million.
And cash flow generation should be quite robust, even if prices continue to go lower.
You will buy back maybe shares your net debt is already quite low what about dividends is that anywhere in your plans for the foreseeable future.
Good morning look.
Of course.
In our in our region, but it's not a priority.
It's not a priority for the Investor standpoint.
If they really want dividends or other companies in our space.
Great companies by the way that offer a consistent dividend.
They have stable business bosses are strongly recommend.
Then.
Hungry investors to go to these companies, they're good companies there you're going to do well there on the other hand, if it was growth.
And if you believe.
In the electric vehicle Revolution that is coming and I am talking about the names that everybody knows.
General Motors.
Sport.
Sure.
Nissan.
All of that.
Keep going I am the biggest supplier of each one of these names that I just missed by a lot.
And what I'm, telling you they are going towards electric vehicles take it at face of it they are going towards electric vehicles.
And we are working with them to go toward debt.
So that's growth.
And we will continue to grow and we will continue to generate cash and we will continue to.
Marginally I.
I would say minor because when were dumped onetime EBITDA you were there you got it I appreciate you recognize that our debt is low right now.
We will continue to buy back stock because.
Not for a second I believe that investors.
We all of a sudden all because big fans of Cleveland cliffs understand the everything we are doing so our stock price, we will continue to be restricted by the market.
The opportunities are that's how I built this powerhouse here in the last two years.
Think about think about where we were two years ago.
Where we are right now so.
So think about where we're going to be two years.
Is that a dividend.
With me that no.
Execution day in and day out.
Business commercially operations and in the financial side.
And all of that.
What else goes.
The other question is regarding your end markets given that this is something that is going to become increasingly important.
In the second quarter around 26% of your sales went into infrastructure and manufacturing could you break this down how much was infrastructure on how much was the manufacturing given the comment that you made earlier on infrastructure, it's trying to maybe slow down a little bit.
Yes.
Yeah.
Primarily matter of factory because.
Infrastructure.
Particularly for related infrastructure to the infrastructure built this thing is not.
Not really.
Kiki yet.
Places infrastructure.
We are doing well with fleet and desktop.
Part of the business that we really appreciate but it's pretty much what we had before and things that we are.
Commentary in our dealings with our clients.
Not the infrastructure Bill yet.
We believe that this will come but hasnt hit yet so it's basically manufacturing.
Alright, and then finally, if I can and then Lisa just maybe to address a little bit of the elephant in the room. When the story. So when you said that you are known to me a major investment until at least 2025, so that potential electric arc furnace.
As discussed in the last quarter is not going to come before that no no.
We have done.
<unk> already revamped <unk> acquired AK steel, we already revamped the 1234 blast furnace.
Our blast furnace two years, we have gone through at least 2025.
So we are in great shape as far as our big investments and just because you are mentioning big investments I want to make abundantly clear we have no intention to do that.
Plenty of immunotherapy.
But we are working to get our permits yes.
<unk> <unk> to minus stock in Minnesota going through 2015.
So that's all of them long term mindset, that's how I manage that.
Yes.
My entire life.
But there is no eas come.
And now we are good with the footprint that we have we are probably the most environmentally friendly blast furnace operators in the entire world.
And when I say blast furnace operators.
Major supplier of automotive major supplier of automotive automotive equals blast furnace operators keep this in mind think about Japan think about Europe think about South Korea, I think about the United States when you get to the United States, who get to Cleveland cliffs.
Alright, Thanks, John Thank you very much good luck gentlemen, thanks, Carlos Thank you.
Thank you next question is coming from Karl Blunden from Goldman Sachs. Your line is now live.
Hi, good morning.
On debt reduction and the limited capex needs going forward.
Just to be a bit more granular on the debt reduction front should we continue to expect full redemption of the 26 secured this year.
Just getting back to your comments from the <unk> call or when you look at the lower dollar price bonds like the unsecured could that be a better use of cash for you.
I guess finally, maybe you don't have to choose you have enough cash flow based on what you've outlined to do both.
Hey, Carl good question so.
My goal is to take out those six and three quarter secured notes due 2026 at the earliest.
But when we saw that our 29% and 30 ones, which are our largest and most liquid unsecured bonds were trading at such a discount we sort of redirect dollars towards that in the open market.
And were really successful at picking those off you know in aggregate 300 million plus of those at a pretty good discount. So if we continue to see things like that this strategy can shift because we get more bang for our Buck targeting those.
But absent those opportunities.
Our 2026 secured notes remain our main priority for full redemption.
Okay that makes sense and then just with regards to the other.
Senior debt in the structure of secured debt in the structure at least when you think about the ABL and.
Using that though and say where does that come into the list of priorities do you anticipate over time getting that to be largely undrawn.
Any comments there would be helpful.
Yes, so the ABL is still pretty cheap so we use that as liquidity.
And we have other bonds that are more expensive and that are already callable.
So to the extent that those are available to be picked off.
We'll continue to do that especially if it's on a discount.
And then we also manage our liquidity to keep our liquidity at least $2 billion.
So those are sort of the all the levers that we play with.
Absent other opportunities.
On bonds in the open market and we will just use cash towards lowering the ABL amendment.
Thanks for clarifying appreciate the time.
I 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 closing comments.
Just I appreciate the continued interest.
Sure.
About our company and our both of our business.
Please remember that Idaho manage this company to get to the quarter results.
And.
The only good news sometimes of lab and I have to report.
Maintenance, we're going to have to report expenses.
Thanks glad I have.
I haven't had to report any accidents, because we take care of our equipment. So we don't have that so.
That's a very predictable and boring company, but it's a very predictable and boring company that continues to to B C.
Head of the curve and around the corner. So right now, it's not even that difficult to see around the corner. The future is in automotive and automotive is electrical vehicles and we're working on that.
It's pretty much <unk>.
Our industry going up toward that and they're all buying from us. So things are getting exciting here at Glu Olympics, we'll talk again in three months. Thanks, a lot bye now.
Okay.
Yeah.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.