Q3 2022 Cleveland-Cliffs Inc Earnings Call
Good morning, Ladies and gentlemen, my name is Maria and I'm Your conference facilitator today.
Like to welcome everyone to Cleveland Cliffs third quarter 2022 earnings conference call all lines have been placed on mute.
Any background noise.
After the Speakers' remarks, there'll be a question and answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the safe Harbor protections of the private Securities Litigation Reform Act of 1995, although the company believes that its forward looking statements are based on reasonable assumptions.
Such statements statements are subject to risks and uncertainties that could cause actual results to differ materially.
Important factors that could cause results to differ materially are set forth in reports on forms 10-K, 10-Q, and news releases filed with S&P, which are available on the company's 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 would like to introduce Celso, <unk> executive Vice President and Chief Financial Officer.
Thank you Maria and thanks to everyone for joining us this morning.
Before going through our Q3 results, let me start by highlighting the $1 8 billion improvement to our balance sheet that was outlined in our earnings release. This morning.
During the quarter, we signed two new labor agreements covering approximately 14000 USW represented employees.
Pushing more than half of our workforce. These.
These agreements also cover benefits for over 22000 retirees.
The ratification of these labor agreements triggered a re measurement for the associated pension and OPEC plans essentially requiring a refresh to all the assumptions that go into calculating the value of those liabilities, including primarily interest rates asset returns and most importantly, the premiums that we pay for retiree health care expense.
Yes.
With interest rates higher this year and asset returns lower those two first factors effectively offset each other.
But the third factor the updated health care premiums resulted in a significant reduction to our overall liabilities.
Using our size and scale to our advantage, we were able to proactively renegotiate significantly lower premiums with our health insurance providers at much lower costs.
All in all these updates reduce our net pension and <unk> liabilities on our books by $1 $8 billion relative to the end of 2021, 63% reduction.
Our pro forma net liability for pension and <unk> is now only $1 1 billion.
Compared to $2 9 billion at the end of 2021 and $4 2 billion at the end of 2020 after we acquired Arcelormittal USA.
In less than two years, we have reduced this liability by over $3 billion.
As you may recall, the pension and <unk> liabilities, we assumed we're by far the largest piece of the enterprise value of the AAM USA acquisition and now most of those liabilities have moved over to equity on our balance sheet.
Going forward. These changes will also reduce our OPEC cash funding obligations by more than $100 million per year cutting this use of cash by more than half.
Since the larger of the two labor agreements was not ratified until October 12, meaning after the end of Q3.
Full impact of this change was not reflected on the actual 930 balance sheet. That's why we provided the pro forma calculation in our press release this morning.
Furthermore, the impact of these renegotiated health care premiums is also applicable applicable to other plans that will not be re measured until December 31.
As a result, when we report the Q4 and year end 2022 financials. We expect these liabilities to be even lower on the 12 31 balance sheet.
Also to be clear the benefit we have gotten just comes from reduced premiums from health care providers and does not reflect any reduced benefits for our retirees. This was truly a win win for both the company and the Union and we think the USW for their partnership to make it happen.
Now moving onto our results in Q3, we generated $5 7 billion of revenues $452 million of adjusted EBITDA and $288 million of free cash flow.
On the revenue front steel sales volumes of $3 6 million net tons held roughly steady with the prior two quarters as lower demand from service centers and distributors was offset by higher automotive volumes.
Very importantly, Q3 of 2022 was our best quarter to the automotive market since the semiconductor shortage began.
But it's still well below what we would consider normalized compared with the period from 2014 to 2019.
Going forward in Q4, we expect total volumes to increase as a result of further improved automotive service center in slab demand.
On the pricing side, our sequentially lower average selling price was driven by the index linked portion of our business with declines in the hot rolled cold rolled and slab indices we.
We also had declines in EBITDA for our third party pellet and scrap businesses as a result of lower pricing.
Looking into the fourth quarter the improvements we achieved on the contractual fixed prices that reset in October will help to mitigate the lagged impact of continued falling index prices, but a product mix heavier in slabs and HRC will be a negative factor on our realized price.
Our adjusted EBITDA performance was also impacted by higher reported operating costs, which on a unit basis trended upward in Q3 due to the lag effects of higher cost inventory that we foreshadowed on our previous call.
Compared to 2021.
Our 2022 cost have been up meaningfully due to inflationary pressures on input and energy costs as well as lower production volume and higher repair and maintenance spending.
From a cash cost standpoint, though these costs peaked in Q2, but the impact on our results was not fully flushed through EBITDA until Q3.
A dynamic that can be seen when comparing the Q3 and Q2 cash flow statements.
With all big repairs behind us our repair and maintenance expenses have begun to decline rapidly here in Q4.
Going forward increased production volumes will also further dilute our fixed costs.
From a free cash flow standpoint, we generated almost $300 million of free cash flow in Q3, largely driven by a significant amount of working capital released during the quarter.
Price declines combined with lower cost of inventory should lead to continued release of working capital in Q4 and into next year supporting strong free cash flow generation and partially offsetting the cash flow impact of declining EBITDA.
Also our capital expenditures should decline in Q4, and even further into next year, where we expect total capex to be between 700 $800 million in 2023.
We also expect cash taxes to be negligible for the rest of this year with a substantial refund coming in early 2023.
And of course pension and <unk> cash needs will decline substantially as discussed earlier.
Consistent with our previously stated capital allocation priorities, we continue to use the majority of our free cash flow to pay down debt.
During Q3, we reduced net debt by $200 million and on a year to date basis through today, we have reduced our net debt by $1 billion.
Bringing our current net debt level below where it was before we completed the acquisition of Arcelormittal USA.
Our capital allocation priority remains to continue reducing our overall debt and beyond that we still have around $800 million remaining under our current share repurchase authorization.
With almost $2 5 billion of liquidity, a much cleaner balance sheet with meaningfully reduced pension and <unk> obligations lower operating costs going forward less capex next year minimal cash taxes for the remainder of this year cash coming in from working capital and no major bond maturities until 2026 were in <unk>.
Right shaped to navigate any potential recessionary environment.
Very importantly, our automotive shipment levels in Q3 have indicated that our largest end market has been counter cyclical due to the massive backlog from lower production over the past two years.
The strength of our automotive franchise with our unique product offering and ability to lock in fixed price contracts will reduce volatility, especially now that our major maintenance repair and capital expenditures are behind us and cost begin to trend meaningfully lower.
I will now turn the call over to our CEO Lorenzo consultants.
Thank you Michelle and good morning, everyone.
Throughout my several years with cliffs, our company has transformed and adapt to several different challenges.
But two elements have remained constant throughout.
Our commitment and full support for manufacturing of United States is one.
And the importance we place on our people because they either.
This is not just a speech we have backed this up with actions our latest labor agreement with our USW represented workforce is their most recent demonstration of that.
The deal provides increased wages.
<unk> better insurance.
Gifts improved patient benefits, and then enhances vacation or holiday provisions.
We also agreed to continue to invest in our facilities at $4 billion over four years.
Mining Capex and Opex, we just consistent with typical spending on these types of investments for our footprint.
We also have capped the retiree benefits is strong.
We were able to negotiate lower rates across the board.
So as already explained it.
Together with our Union partners, we have integrated or Standalone companies in a span of just two years.
It overcame difficult pandemic.
The construction of a state of the art direct reduction plant.
You invested to keep our views at that note the motive level standard.
<unk> significant amount of debt and drastically reduced our pension and <unk> liabilities, we assumed as two years ago in order to make the entire transformation possible.
Our third quarter results were unique in that they reflect.
Normally elevated costs there.
A portion of which was incurred in the second quarter, but did not flow all the way through until Q3.
We have the pre opening since day, one that this set of assets, we acquired particularly those from AAM USA, we're a bit underinvested and at some point would need some catch up repair and maintenance, we got great value on this asset on these two acquisitions.
And in fact over the past two years, we have already paid ourselves back with profits from the business, even with the persistent underperformance of the automotive industry during that timeframe.
That said embedded into a lower acquisition price wasn't implied catch up repair and maintenance cost.
<unk> is now behind us.
As a major supplier to the automotive sector the quality standard for our equipment must be pristine.
We wrap it up repairs beginning of the fourth quarter of last year reinvesting a portion of our record profits.
Throughout the year.
It was around that time that we're signing new fixed contracts with our automotive customers at higher prices. So it was even more important that our equipment capability us taking care of us.
As our spending picked up both capex and Opex in many cases with more work to do than we initially anticipated. Divest example of this was the outage.
Cleveland works facility, we philosophy from March through August .
The original scope of the blast furnace reliant expanded.
Secondly, improve the rebuilt of the wastewater treatment plant and the powerhouse located off site as well as several other smaller jobs fair.
Fast forward to the present moment.
We are now at the point, where the major maintenance cycle has been concluded.
Due to the work we have done already.
Equipment is in great shape, Andrew of Prime to meet the unique needs of our customers, particularly in automotive.
The most common feedback we consistently hear from these automotive question.
Customers is about our perfect as to quality and our ability to keep denny's steel during that time that the entire automotive sector has been deeply affected by underperformance from several suppliers throughout their supply chain.
Not the case with what day by Cleveland cliffs.
It is clients know that.
Throughout this year and particularly during the big repairs, we have seen the negative impact of lower production volume, reducing our ability to dilute our fixed costs.
The first nine months of 2021, we sold 12 5 million tons of finished steel compared to $10 9 million tonnes of finished steel so far this year.
That being said our automotive steel demand has started to improve in Q3.
And we expect our volumes to increase further in Q4.
That will result in improved cost going forward.
The remaining drivers of higher cost, including increasing natural gas electricity and alloys are not unique to us.
And we have also seen some relief in this areas.
All in based on our inventory status.
Outlook for input costs, we expect our reported unit cost in Q4 to fall.
$80 per ton compared to Q3 with further reductions into the first half of 2023.
Even after factoring the increased wages in the USW labor agreements that were recently ratified.
As for demand.
We're encouraged by the 100000 tonnes volume improvement from our automotive customers from Q2 to Q3 and while there is still not back to normalized levels.
The worst impact of the cheap shortage seems to be behind us.
In our view.
Automotive is now in position to carry their markets.
Despite the feds best efforts to damage the drug market, earning employment at three 5% is at a 50 year low and that means people both need cars to go to work and can't qualify to buy cars because they have dropped.
<unk> and paychex.
Inventory levels at current dealers remained so remarkably low that even if there is a consumer slowdown at the end user level. There is still be a lag acting as a buffer.
He was slowed down in the production of cars Suvs and trucks eventually falls.
The current average age of light vehicles on the road.
Of over 12 years, India is the highest on record.
Also for those of you that have rented a car in the past year. There is clear evidence that fleet inventories need to be replenished as well.
Meaningful 20% of the light vehicle market with a healthy backlog.
Our October fixed contract renewals, where another success and the weighted average of the price increase that we achieved would represent the second best October renewal cycle in our legacy company's history only behind last year.
As we come to the table, where are renewals cycling Jerry our customers are being reminded that what we offer them cannot be compared to our CRE you spot price.
The difference between what makes up our CRM of price and how we do business in automotive is night and day.
We manage our production schedules based on the auto Oems needs.
We have to reserve our available capacity to align with their production forecast.
We hold their inventory if they have production issues, which by the way it happens a lot.
We have a fully dedicated customer service group that manages this complicated just in time inventory system to the <unk>.
<unk> that our customers don't even have to think about steel.
Is there when they need automatic.
And it is all before we even consider the cost of technical support research and development and of course quality.
Materials that we provide.
And some in the United States automotive steel mis clips.
Now that they have micro chips.
We want each one of our automotive clients to be successful in 2023.
They have a unique opportunity 2023 as alto motive may be the only sector with pent up demand to taking care of.
The last thing they need now is not having access to all the specs of steel they need to produce cars.
That can be a lot more devastating than not heavy microchips.
On the distributor and service center portion of the business customers have been following this typical herd mentality.
And two miles in recent months.
The strengthening of the dollar has not helped it helped the price either.
The economics of overseas imports no longer makes sense supporting demand from domestic suppliers as we close out the year.
Our August price increase announcement brought some buyers off the sidelines and we secured additional Q4 orders as a result.
As long as underlying demand stays this way in the coming quarters.
<unk> stock will need to happen.
Our grain oriented and oriented electrical steels continued to see very strong demand and we anticipate the rapid price increase in the fixed price for those products.
We have an infrastructure bill that should finally start to drive still demand into next year, we expect automotive thinking up more as do share.
And we have manufacturing re short.
Wednesday <unk>.
Around eight will turn around sharply.
We've got ongoing war.
Multi decade highs in inflation.
Absolutely rising interest rates.
On mitigating climate change we are living in a difficult time in the world in transition.
But we have already proven that Cleveland cliffs escape of overcoming difficulties.
Key to that is having the right people.
People is the foundation of ESG, you cannot pretend to care about the environment. If you neglect your people.
And Cleveland cliffs will never do that.
Several companies.
The majority of it actually fly.
Slice of their ESG challenges with Mou letters of intent and press release, why our Cleveland cliffs, and very few others take concrete action.
We built a direct reduction plan before <unk> trend.
We adopt <unk> using blast furnaces.
And we will remain on the cutting edge.
Next for us will be the use of hydrogen.
First in our director reduction plant and then in our blast furnaces.
Blast furnaces have always been on the fore front of technological innovation in iron making into steelmaking.
Our current utilization of hei as part of the broader in our blast.
Blast furnaces is further confirmation of offset.
The future use of hydrogen and carbon capture will be the next example is of American blast furnaces in the vanguard of zero emissions reduction.
Other companies in the United States and abroad are building new plants.
And new plants.
Add fuel to emissions, regardless, regardless of the process utilized.
Cleveland cliffs is not adding capacity and we will not add capacity.
We are reducing emissions within our existing installed capacity and that they will ultimate goal.
After we completed two years ago, a transformational once in a generation of consolidation of the American steel industry. Some outsiders were fixated on the resulting pension and <unk> liabilities.
Fast forward in less than two years those liabilities have been made irrelevant.
With our major repair and maintenance impacts behind us no ongoing or planned new construction projects and improving our promotive sector and most importantly labor piece throughout our organization.
We're ready to continue to execute like we have been doing for eight years.
With that I will turn it over to Maria for Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press <unk>.
One on your telephone keypad, a confirmation tone will indicate your line is open the questions.
You May press Star two if you would like to remove your question from a kit for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for question.
Our first question comes from Lucas pipes with B Riley Securities. Please go ahead.
Hey, good morning, everyone, Glenn Your reservation Sunday on the OPEC obligation reduction.
Lorenzo I remember during Covid can you use some common sense and common sense incentives to drive vaccination participation and I imagine maybe use similar common sense approaches to drive this really significant reduction in health care premiums now would appreciate it if you could comment on some of the factors that that drove that.
Great. Thank you very much.
Yes.
Thanks Luke.
Yes.
This is a negotiation.
It's extremely complex is not just the scale is going to be.
Booze because that.
Yes.
Actually.
Fix cooperation.
With the unions in order to get accomplished.
Divest majority of the U S.
Which we consider partners and we consider that we are better because we have them with us, but they do and dilute the machines all the unions and our company and that gives us the ability to include the non union personnel as well. So we present, a very unified front when we negotiate with is <unk>.
Scare monsters.
I think.
First in our lifetime that a company of our size was able to accomplish.
What we got it as.
Of course.
The person that was cut in half.
And I.
Im not talking about steel companies talk about companies.
In general.
It is a unique thing.
This code management.
Of course, I know that.
Everybody is looking to the quarter results and I am looking through and I don't like it but costs are necessary and prices.
With the weapons we have.
And we accomplish the best it can get and eventually youre going to have a quarter like Q3 that was not fantastic in terms of profitability, but it will take one step back and see what we have accomplished not just having the contract done with the union, but using the fact that we have a railroad dedication to our culture.
A bigger picture type of thing that will kind of change the landscape in terms of our health care is taken care.
At this point at cliffs, maybe later and a brother is still industry and maybe later broader into the United States I think that's how investors really investors should look into this thing.
That's very very good to hear.
Lorenzo switching topic and you touched on on pricing.
Three months ago.
Able to comment.
On the October contract resets with auto customers for <unk>.
January .
An indication at this point, what direction pricing might might take on the fixed portion. Thank you. Thank you very much for your perspective, thanks Lucas for the <unk>.
But.
As you know October .
As a result of October negotiation reflect into the numbers just yet because we are reporting Q3 of course no debt, but what we are going to have going forward is a much better number coming from our October crunch that.
Debt.
Negotiated.
The accomplishment is good of course, I'm not going to give.
Any numbers, but.
We are in good shape remember we are the only ones.
Older ones supplying exposed parts for example, we though that they know that.
We.
Compete.
Zero with the ones that can produce the more.
Plain vanilla type of grades, but we also keep reminding the car manufacturers that the cars are complicated puzzle and we are the only ones that have all the piece of the puzzle so that gives us leverage in the negotiation.
Kent.
Stress that enough.
In the past, we had Bethlehem LTV 8-K.
Our inland deployed there our prism calypso.
So I'm gonna factors no debt.
And that.
A very important part of our negotiation I think I have it.
Giving you enough quality Youtube.
Okay.
The Rins and I appreciate the color very much.
Turn it over for now but continued best of luck. Thank you. Thanks.
Our next question comes from Emily Chang with Goldman Sachs. Please proceed with your question.
Good morning, Lorenzo on cell phone. Thank you for taking my questions. My first one is just around that.
Hi, My first question is just around cost and.
And understandably you youre looking at $80 per ton lower costs into the fourth quarter, but perhaps could you share maybe what youre seeing them moving pieces to be that would drive 2023 costs below that mark as well.
Yes, I'll, let <unk> answer that this way.
Please go ahead, yes, sure Hey, Emlen.
As we as we stated on our prepared remarks, there was a lot of repair and maintenance that we have to do here in 2022, and as we look to next year a lot of those repairs and maintenance.
Costs are going to come down significantly you can expect them to be down in the area of $400 million for next year.
We'll have a lot lower idle cost next year relative to this year, we don't have any major outages.
Like we did this year, so there's a lot of tailwind.
<unk> that are going to start dropping our costs here rapidly.
And as we increase our volumes.
This year, we've been kind of at that $3 6 million ton level every quarter, and we're really pushing to get up to 384 million tons again, and thats going to further dilute our fixed costs.
Going forward as well.
And then you have other things like energy cost natural gas has come down a lot.
And things like that.
We are also going to be a tailwind next year.
Great. Thanks also just a follow up can you remind us on your.
Gas and coal costs.
On the gas side, Youll still hedging 50% of that in the remaining 50% of spot and with our KOL piece of it how should we think about the the upcoming contract renegotiations that thank you.
Yeah on natural gas you are correct, we're hedged 50% through through the end of next year at this point.
If you look at the futures curve for gas it's around.
Around five Bucks per program Btu compared to almost $7 that were realizing here this year.
So those costs are coming down.
And then on the met coal side, you can you can probably model.
Coal costs to be up call it 5% to 7% next year, so it's still not meaningful.
Great. Thank you.
Our next question is from Kristen <unk> with BNP Paribas. Please proceed with your question.
Yes, hi, Thank you for taking my question. The first one is on the plate market.
Can you discuss a bit the market dynamics there.
The premium elevated compared to herc, but also.
The sustainability of that and moving forward with new core competitor wrapping up capacity.
How do you prepare for the arrival of increased competition.
In the market and how its strategic plate shipments are.
Thank you.
Interested to sustainability.
Our impression of replacement market.
As just a bulk fewer participants in all of their responsible.
In the light flat rose we have at least one in United States totally responsible and two in Canada. They are completely irresponsible.
So you're responsible players destroyed the market.
The market structure effect as everybody else.
Situations like that management matters.
So don't believe that we are here in the receiving end of this bad behavior.
Compare that to a new well and we are not going to do the same thing and retaliate and create issues for them.
Markets will have that.
Because everybody is in the market to make money everybody is in the market to do the best for the company and for their shareholders.
Why we have a much better market.
Right.
In light collateral as far as new capacity, the new capacity Thats coming is overdue.
<unk> has been a playground for imports for a long long time and I'm happy that Nucor.
The capital too to to deploy capacity, where capacity is needed and pushing towards out thats a good mentality.
One sector that will be good for us Cleveland cliffs as far as split going forward. It is military.
Not just U S. Military of course, you asked me to tell it goes without saying.
But we are receiving orders from lots of.
Good to see that our friends of the United States.
Paul.
Stepping up the expenditures.
Blitt related business and we are the ones in the United States are of course, Youre, mainly out of course.
But also that can produce.
Quality.
Terry level fleet that will be one of the the superstars of 2023 I Hope I gave you the picture were asking for it.
Yes.
That's very interesting thank you.
My second question is a bit more on something you touched on in your remarks and about de carbonization in general.
We're starting to see steelmakers in Europe .
Getting large sums of money to Decarbonize, the guilty right capacity and electric arc furnace capacity as well.
How do you view that global perspective.
Those filmmakers can be competitors sometimes.
Is that a signal for you to go to U S government and also do the same or do you believe that there may be room for more aggressive maybe trade actions.
Regarding Europe .
Yes. It is a organization in the United States is not at.
At least so far has not been done through subsidies.
Through action.
And couple of responsible companies are doing.
Very serious things that to be no.
Built in <unk> plant and we use our H b.
In our blast furnaces, and because we use of HB INR blast furnace, our coke rate is 50% of the coke rates in Europe .
So 50% group rate less coke usage means 50% less.
Franco.
One to one.
Stinker imagine can relation so we are really nicely in the United States.
Europe , there's a lot of talk.
Talk about the couple of decision, but I think that the property in Europe right now is.
Currency hitting homes.
Find a way around the lack of gas from Russia I think.
Europe right now.
A lot more important fish to fry the carbonization will be left for the ones that can do it that's United States. We are doing and we will continue to do our own way.
Alright, thank you.
No question about cash Opex.
Your your Institute financial institution.
Our of Europe is the most <unk>.
Further both national Pet medallion knock off and you don't you've asked me a question.
Well, it's pretty clear so we take note.
We just thank you very good.
Right.
Our.
Next question is from Curt Woodworth with credit Suisse. Please proceed with your question.
Thank you good morning, So I just wanted to follow up with respect to the cost guidance for next year, you know around the $400 million because I think this year you outlined in the 200 million of relying costs I think there was other.
Kind of inventory absorption issues and high cost inventory.
Impacting the P&L I believe there's another 100 to 150, so is the apples to apples kind of comparison for next year.
Would that be more like a $100 million down.
Just want make sure I'm understanding kind of the cadence of cost relative to this year.
Yes, So let me add some more color there Kurt thanks for the question. So as we tried to explain in the prepared remarks.
Costs that we're seeing here in Q3 were largely a function of elevated spend from Q2, I think everyone kind of understands that right.
You can see in our cash flow statement that inventory was a $250 million inflow and there was this time than it was a 250 million outflow last time.
But almost everything that drove costs up this year is coming down.
Like I said.
Not only the kind of inflationary pressures that we're seeing on input costs, but also.
Repairs and maintenance as I stated.
<unk> to be lower by $400 million next year.
So everything that is driven.
Costs up this year is starting to materially come off a cliff. So we're going to see the benefit of that in the quarters to come I don't know if I specifically answered your question, but happy to add more color if needed.
Okay. So MRO apples to apples would be down 400, and then should we assume then because of I don't think you have the major realigned next year that would give you. Another two to 300, so kind of the total cost out potential of 700 for next year is that correct thats.
That's correct Yep Okay.
And then just a follow up on trade policy in the United States are still Russian pig iron coming into the country.
Just kind of curious just in general what communications you've been having.
We've made the department of Commerce, and just kind of any updates on how you see trade policy in the U S. Thank you.
Yes.
Good Lord absolutely thereof.
We will communicate.
With them, but.
Pig iron that comes into the country directly or indirectly through rerouting.
And the third shipment.
It doesn't happen.
Yes.
It had been because.
There was that the important PR imported pig iron and they know what they are doing so.
We are not clubs, we're getting four really important but that's pretty much it.
And.
If a company imports pig iron from Russia don't play.
Nice Guy.
Supporting a dictator.
<unk>.
A butcher, that's 50 years rollout will be put at the same level.
So the company is in Germany.
Still as of today paid a price for supporting the Nazi regime.
And there was less import pig iron.
Setting ourselves up for future scrutiny it might look good for the quarter.
It might not look good in five to 10 or 20 years.
Understood. Thank you.
Our next question is from Alex hacking with Citi. Please proceed with your question.
Yes, thanks, good morning, Lorenzo and sell so so on the automotive side, if I look at the U S and what they saw.
It seems like it's been running maybe 20% below where it should be a $30 million worth of 16% to 17.
Is that how we should think about the impact on your volume because if I sort of run it through your relative volumes.
It would seem like you have been shipping 300 to 350000 tons below what you would normally expect to and so that would be the amount of volume that we could potentially see recover every quarter has the automotive market recovers if my maths there kind of correct.
Yes, you are Directionally correct, yes, we are still in the 13 to 14 less than 2014.
We've seen the 13th.
And in automotive and.
It was kind of expected by now that this level would be.
A lot closer to what was normalized level between 14 and.
19.
I would like that.
So we are still running behind they are still running behind.
This being said, it's encouraging to see a quarter that was.
Great.
We have a concrete number destroyed and say look we're a 100000 pump that is not anything to throw a party off.
But is.
Encourage stephan.
A step in the right direction.
Crop prices are increasing.
So the car manufacturers are making money.
So the biggest supplier we still to the car manufacturers is.
It's making money as well on that sale on both sales in place to continue to make money on those six.
We might have too many car manufacturers into United States.
So the other thing that we need to think about.
We are taking that into consideration in our strategic cut out.
Okay. Thank you and then I think you mentioned in your remarks, but you would not be paying cash taxes.
For the rest of the year.
Would you expect to pay full cash taxes in 2023. Thank you.
Yes.
That's right.
In Q4.
Cash taxes are going to be minimal.
And then.
For 2023, obviously, it's going to depend on profitability.
But depending on how things play out and we could even have a big tax refund coming so that could be a source of cash early in 'twenty three as well.
Thanks, and what would what would be the driver of the tax refunds I apologize for asking them.
Yes, I mean, we've made some overpayments here this year. So some of that would be reversed back and we get some cash inflow from that.
Got it thank you very much.
No problem.
Our next question comes from Carlos de Alba with Morgan Stanley . Please proceed with your question.
Yes. Thank you very much good morning.
Regarding prices.
Know that you don't want to give us.
A number and Nissan understandable, but maybe just talking about the outlook for January reset of your contracts.
Not mistaken there is a bigger chunk of renegotiation for you guys. So how is that progressing given the trend that we have seen in the spot market down, but the recovery in auto sector volumes that should potentially offset that maybe maybe more than offset that so any color for the January .
Reset the lost contract there'll be there'll be great. Yes look the trend will be the same.
We are just <unk>.
<unk> actually so theres not a lot of details are available on the.
Automotive contract.
Negotiation on this.
Specifics like we have for October .
But.
Youre right Carlos it's the vast majority.
But.
The threat has been put in place.
Our conversations with.
With the January crowd for Veeva.
Ball facilitated by one <unk>.
Yes.
As clients.
We deal lifting generally tend to be a little more reasonable.
And second.
Because.
DRC, what we're doing with others because.
It's funny all these prices are extremely confidential.
They know a lot more than we released because we respect the radiation so.
So at this point they know that we're not blessing.
No that were real.
At the beginning to have kind of a new Cleveland cliffs. Thank.
Okay.
So.
I believe it to be.
Alright.
In terms of volumes.
To clarify so it's clear that production in the fourth quarter is going to improve.
Shipments to the automotive.
Sales volumes to the automotive sector will also increase.
But just to.
To double check the overall volumes shipments sales volumes in the fourth quarter. You also expect them to move higher yes.
Yes, we are look.
We no longer have a repair.
Big repairs in place. So we are expecting to recover all back our usual form.
Median dose of.
Shipments of 43 $9 million to $4 million a quarter. It all depends on how much slabs.
We are going to add to the mix.
And that's why I've seen three nine to four.
But actually more than less.
Even though the health.
The fixed cost they're not exactly our.
Yes, Brendan Baker.
Well, because it's lower value added and hot dip galvanized for exposed part of or withdraw the warm or anything like that.
Alright, and then finally this is a play between.
The mix and the volume.
The higher volume helps cost, but eventually there.
Higher volume comes from projects.
Our lower margin embedded.
Right No that's great. Okay, and then if I may just one final question.
With the cost coming down Capex.
$700 million to $100 million range next year, even contemplating lower steel prices. It seems that your free cash flow generation is going to be quite interesting quite good.
And any changes on the capital allocation front, you continue to prioritize debt reduction and maybe some share buybacks and dividends.
Yep.
They are proud of their priority continues to be paying down debt, we continue to do that.
Quarter after quarter after quarter after quarter.
And.
Even though.
Underlying EBITDA was lower cash flow is not.
Because I remember the priorities.
So as not to press the street.
But it is not too.
And in number of subscribers like this.
When the courts, our approach to pay down debt, so we're going to generate cash.
So, it's probably going to renegotiate with our healthcare context, because we'd like to be nice because it would like to reduce cost to generate cash to pay down debt. So we are doing exactly what we told you guys that would be doing.
And the investors that understand that will stay with us actually they will take the opportunity of the shares on sale to buy more.
We are going to be able to buy more we have the authorization.
That's my priority Carlos my priority is to pay down debt.
Not too.
Pay a dividend.
So based on that when we get to a point to say, yes, that's good.
That's the level that I feel like it's sustainable going forward Theres no inflation. The fed is not no longer crazy. They are not trying to destroy the economy. They are not trying to generate unemployment.
That's what they are doing.
And we are in a much more stable world.
And again do whatever we need to do to continue to grow toward.
Returning capital to the shareholders, but don't neglect. The fact that you bought a lot of stock so far.
We did a desk returning money to the shareholders.
All right excellent. Thank you very much thanks Carlos.
Our next question is from Timna Tanners with Wolfe Research. Please proceed with your question.
Yeah, Hey, good morning.
Like <unk> pointed out on the mills that carbon emissions. That's fun I wanted to just ask a follow up on the volume side, if I could.
Looking ahead.
Seen a mix of philosophies out there.
We're adding capacity and running at some are cutting capacity in setting cliffs.
Chris obviously benefits as you point out from running more volumes and you have Cleveland back running you have automotive improving but yet your steel production is still below year ago levels and I'm. Just wondering how do we think into next year on the.
The mix of your potential volume and how that can help continue to cut your average cost.
David for the question Tim that look.
We will continue to.
Export.
Maximize due to utilization of the assets that we have.
And we are not.
Going through.
Big equipment, Dow just too.
Implement discipline in the market.
If others are completely unanticipated.
The others feel like the business model is predicated on destroying the marketplace.
Because they feel that they can put this scrap prices wherever they want and they might be right.
But we just don't agree with that type of approach, but we will run all of our assets.
<unk> costs as long as it can make money, we will run and I think that it's a big.
Balanced because we can't generate cash that way so don't count on me two.
Two to take my capacity out.
To make the life of this better that happened in Q2, and a portion of Q3, because I had to make a real big repaired Cleveland works with Cleveland works was done we came back.
But we also remember Cleveland works.
I don't know if you know that but this is the biggest producer of advanced and highest skus.
For automotive no exposed users.
So.
The one reason that we fixed that thing is because they have a lot of confidence that automotive will pick up and the orders that come from Cleveland works. So we will start to borrow up and actually we are seeing that as we speak.
Others cannot do that that's why Orca best can't come back.
Come back because it's serving markets that I believe in 2023 might be the only ones that will be.
Exciting.
Automotive being the biggest one.
Got it so is it reasonable to assume that continued progress in automotive recovery can result in cliffs, producing over 4 million tons again per quarter and can that mix there'll be kind of sway to automotive or is it going to be you know also shipping into some of those other other businesses because I think we've seen that.
A bit of mix deterioration into fourth quarter, just how do you see that going forward yes.
Yes.
I think our unexplained this mix deterioration but.
Open water.
Is the reason why we are back to Fort Meade impose a court.
And it.
It will be that going forward.
That's helpful.
The motive is supporting this growth.
Okay I'll leave it there, but what I have just said no I would just correct you said $4 million.
I'm sorry.
The old man.
Nick.
Okay.
Yeah.
Ladies and gentlemen, there are no further questions. At this time. This concludes today's presentation. You may disconnect. Your lines at this time. Thank you for your participation.
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