Q4 2022 Cleveland-Cliffs Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen my name is Maria and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliff's full-year and fourth quarter 2022 earnings conference call. All lines that have been placed on mute to present any background noise. After the speakers remark there'll be a question and their session.
Speaker 2: 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 Harbors protection of the Private Security's 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 uncertainties that could cause actual results to
Speaker 2: of the call will be archived on the website and available for replay.
Speaker 2: 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 yesterday. At this time, I would like to introduce SELSO GONFOLDERS by Executive Vice President and Chief Financial Officer. Please go ahead, sir.
Speaker 3: Thank you, Maria, and thanks to everyone for joining us this morning.
Speaker 3: 2022 was the 175th year for Cleveland Cliffs, and we celebrated this milestone by generating record revenues of $23 billion.
Speaker 3: From a profitability standpoint, our adjusted EBITDA of $3.2 billion and free cash flow of 1.5 billion were each the second highest in company history only exceeded by 2021.
Speaker 3: That said, our most significant financial accomplishment in 2022 was the dramatic improvement to our balance sheet, where we eliminated over $3 billion in liabilities via debt pay down and pension and OPEB obligation reductions.
Speaker 3: I have been clear since day one that de-risking the balance sheet is my top priority, and we will remain consistent in deploying the majority of free cash flow toward debt repayment.
Speaker 3: In 2022, Cliff's average selling price for steel increased by almost $200 per ton, despite index hot rolled prices dropping around $600 per ton year over year.
Speaker 3: This was the primary driver of our record revenues and a testament to the improvements in the fixed price contracts we negotiated, which by the way have only strengthened into 2023.
Speaker 3: We spent the majority of 2022 reinvesting in our facilities, which along with inflationary pressures, led to an uptick in operating and capital costs.
Speaker 3: With these initiatives now behind us and certain inflationary pressures easing significantly in 2023, we expect to see meaningful cost reductions going forward.
Speaker 3: We are already operating in much lower cost than what our recent COGS would indicate.
Speaker 3: which will be more and more evident as we report continued sequential cost decreases in the coming quarters.
Speaker 3: In the fourth quarter of 2022, we generated a adjusted EBITDA of $123 million, which we believe is a trough in quarterly adjusted EBITDA going forward.
Speaker 3: Consistent with our guidance, we achieved our target unit cost reduction of $80 per ton of steel sold in Q4, which helped to partially offset the lower index pricing environment in the back half of last year.
Speaker 3: During the quarter, we shipped 3.8 million tons of steel, giving us our best shipment quarter in over a year.
Speaker 3: From a free cash flow standpoint, we generated $262 million, more than two times our EBITDA in the quarter, affirming our prior commentary that working capital would be a meaningful source of cash for us as real-time costs declined in the second half of the year.
Speaker 3: Consistent with our ongoing strategy, we deployed this cash to pay down $200 million of debt and used another $30 million to buy back two million shares at about 15 bucks a share.
Speaker 3: Looking ahead to the first quarter of 2023, our shipments should rise to the 4 million time level, unvisibly improved demand.
Speaker 3: In addition, our unit cost should decline another $50 per net ton, due to one higher production volumes, two lower energy costs, and three normalized repair maintenance levels.
Speaker 3: Our Q1 selling price will be impacted by lower surcharges, some lags on lower priced index deals, and higher CRU discounts on spot-based contracts.
Speaker 3: But our improved fixed price contracts will help to mitigate this impact.
Speaker 3: Overall, the first quarter decline in average selling price is expected to be less than the decline in unit costs.
Speaker 3: driving margin accretion compared to Q4.
Speaker 3: Beyond that, we expect costs to continue to fall into the second quarter and prices to accelerate much higher, generating a considerable further EBITDA improvement from Q1 to Q2.
Speaker 3: So, to be clear, as far as we can see, Q1 EBITDA should be higher than Q4, and Q2 EBITDA should be significantly higher than Q1.
Speaker 3: As noted in our release, we expect our steelmaking costs to decline by approximately $2 billion in 2023 compared to 2022, normalized for volumes.
Speaker 3: To provide further context and quantify certain components of that $2 billion,
Speaker 3: We expect an $800 million year-over-year reduction in maintenance and idle cost.
Speaker 3: A $400 million cost improvement related to higher production volumes.
Speaker 3: A $300 million reduction in natural gas costs at today's curve, including hedges.
Speaker 3: A $300 million improvement in alloy costs at today's levels.
Speaker 3: and a $200 million decrease related to supplies and other inputs.
Speaker 3: We do expect an uptick in coal and coke costs, but that will likely be offset by a decline in scrap costs based on today's curve.
Speaker 3: Our capital expenditure should also take a meaningful step down in 2023 with an expected range of 700 to 750 million dollars compared to the 943 million we spent in 2022.
Speaker 3: Last year, we had spending related to catch-up maintenance and the realign of our Cleveland number five blasts first.
Speaker 3: We are now running closer to a sustaining level of capex.
Speaker 3: with the only major projects above $25.9 being an IT upgrade.
Speaker 3: and a new line at our Coshocton facility, which will modernize the production of our Brighten Yield stainless trim, one of our highest price and highest margin products.
Speaker 3: With our pension and OPEB liabilities reduced by $3.4 billion over the last two years, we will also see relief on mandatory cash contributions related to these plans, which we expect to decline from $200 million in 2022 to $100 million in 2023.
Speaker 3: portion of which is liquidity neutral as some related letters of credits are released.
Speaker 3: Under our current outlook, we expect further reductions in working capital to drive an additional source of cash.
Speaker 3: We also expect a federal cash tax refund of $140 million.
Speaker 3: in the first half of the year.
Speaker 3: And our SGNA expense in 2023 should be around $500 million split evenly by quarter.
Speaker 3: In the back half of 2022, we were able to weather through market volatility in lower prices, while remaining a healthy cash flow generator.
Speaker 3: With business fundamentals improving further this year, we are in an even better position to benefit with lower costs and fewer cash obligations, along with much better fixed price
Speaker 3: With that, I'll turn it over to Lorenzo for his remarks.
Speaker 4: Take a selfie and good morning everyone.
Speaker 4: Transformational acquisitions, such as the ones we executed in 2020.
Speaker 4: I have not done to build an empire or just so we could call ourselves the largest flat role of the steel company.
Speaker 4: We actually do these things to unlock value through synergies.
Speaker 4: Not only the obvious synergies that anyone can identify.
Speaker 4: But also in mainly.
Speaker 4: Also, in mainly, the ones that are not so obvious.
Speaker 4: but actually create real value from situations never identified before.
Speaker 4: or never explored before by others.
Speaker 4: That's exactly what we have demonstrated in our latest round of fixed price contract renegotiations.
Speaker 4: For the full year 2022, our weighted average realized price for our carbon steel automotive contract was about...
Speaker 4: $1,300 per neton on a mix that consisted of about 70% coated products.
Speaker 4: 15% cold-roll steel and 15% hot-roll.
Speaker 4: For the majority of the past two years, the margins on those sales to automotive were lower than the margins obtained on sales of less technically challenging and much less customer service intensive products.
Speaker 4: Executed with our non-automotive end users and service center clients.
Speaker 4: Entering 2023, this situation has been fixed by Cleveland Cliffs.
Speaker 4: The ability of our company to service the automores of industry is at our deepest core.
Speaker 4: Our team's knowledge of automotive clients enables us to effectively anticipate their needs. We have a proven track record of consistent performance, even with the supply changes and disruptions. All of our clients in the automotive sector have been through during the past couple years.
Speaker 4: During that time,
Speaker 4: During that time, the clients had to worry about a lot of things.
Speaker 4: But they never had a single disruption caused by steel from Cleveland cliffs.
Speaker 4: It still was always there, automatic.
Speaker 4: We are good at that and the clients know we are.
Speaker 4: That's why Cleveland Cliff supplies over 7 million tons of steel to the automotive sector, including 5 million tons of direct sales and over 2 million tons of indirect sales.
Speaker 4: For all these reasons Cleveland Cliffs deserves to be paid for what we do.
Speaker 4: From the automotive company, buyers stand point. Replacing cliffs with another supplier might look intriguing, particularly when one or two steel companies are so eager to buy market share by selling steel cheaper than cliffs does.
Speaker 4: This script is well known. I still mu offers cheap still and promise that at this time around their performance will be better.
Speaker 4: However, that's almost always a recipe for disaster.
Speaker 4: It may save some dollars per ton paper and make the buyer look like a spreadsheet hero in front of his or her bosses.
Speaker 4: but for a limited period of time.
Speaker 4: And then, when still does not arrive on time at the assembly line or does not match specification, reality sinks in and it's always ugly.
Speaker 4: Well, in late 2021, we made some progress in reconciling the GAP in value.
Speaker 4: However, the outside view, particularly for investors, was that we only achieved the price increases because of the strong underlying pricing in the overall market.
Speaker 4: That was not the case.
Speaker 4: But it was not until this last renegotiating cycle toward 2023 that the new Cleveland Cliffs approach to the business became fully apparent. So in an environment where commodity flat roll is still pricing decreased 65%
Speaker 4: in a little over one year time period, we were able to achieve decent increases on our automotive contracts without sacrificing CEO's volume.
Speaker 4: We are actually expecting higher sales volume to the automotive sector in 2023 than in 2022.
Speaker 4: With that, for our direct automotive business, our largest end market will typical volumes of 5 million tons per year.
Speaker 4: We expect our full year 2023 selling price of carbon flat-rolled steel to increase to $1,415 Bernette-Ton.
Speaker 4: For a $115 per net on increased year over year.
Speaker 4: We consider that a significant but still more the price increase.
Speaker 4: Basically in line with fast inflation.
Speaker 4: Also, the vast majority of our customers recognize the value we provide.
Speaker 4: the solid advantage they enjoy from our unique one-stop shop and customer service capabilities, and how only our blast furnace BOF-based steel can meet the most stringent quality standards.
Speaker 4: for all of their flat-rolled needs. differently from every other steel company in the United States.
Speaker 4: Cleveland Cliffs is fully committed to the blast furnaces B.O.F. technological routes.
Speaker 4: Our significant presence as a supplier of highly specified automotive grade materials particularly exposed parts.
Speaker 4: Dictates the use of blast furnaces and VO apps.
Speaker 4: And we are not alone. Every country with a major presence of automotive manufacturing such as Japan, South Korea, Germany, France, or even China. Currently the largest automotive producer in the world. Now is the time of manufacture of ministre Yourals. Now the industry system of innovation and oil can access and the industry system of innovation and oil can access.
Speaker 4: Realize on Blast Penises and VOS.
Speaker 4: This country's actually have two important massive amounts of foreign war pellets and centrifuge from others.
Speaker 4: In all these countries, generic a lot of scrap.
Speaker 4: But they still do not transition to ES.
Speaker 4: And certainly do not rely on EIFs for highly sophisticated carbon flat-rolled steel products such as in automotive.
Speaker 4: There is a simple, in order to supply steel to their own domestic automotive clients.
Speaker 4: They need their blast bonuses and the OAPs.
Speaker 4: That's also our case here in the United States.
Speaker 4: And that's why Cleveland Cliffs does not need you and does not plan to invest in new EAS.
Speaker 4: Beyond the five EAFs we already operate.
Speaker 4: There's a lot more to that, but I believe we've got the picture.
Speaker 4: In our view of the current economic landscape, automotive is the most exciting steel-consuming sector for 2023.
Speaker 4: The current age of cars on the road, the consumer backlog, the low unemployment rate, and they still low inventory levels at the dealer lots, continue to point to gross and automotive sales in production over the coming years.
Speaker 4: particularly now when they have finally improved the performance of their supply chains.
Speaker 4: Our January auto-stil shipment rate was its best in nearly a year. And we expect this momentum to continue throughout 2023.
Speaker 4: Going forward, we remain committed to continuing to obtain fair prices for the still-wissel to our clients in the automotive sector.
Speaker 4: This improvement in the automotive market has also helped to support pricing for our non-automotive businesses.
Speaker 4: As the increased demand in auto has reduced our overall availability to the broader market.
Speaker 4: Back in November , we started to note an inflection in both service center buying behavior and a scrap market, which finally began to point in a positive direction.
Speaker 4: We capitalized on this and announced our first of what is now 5 price increases, all of which have taken hold and moved pricing higher.
Speaker 4: While imports of flat old steel in general have not been a major issue for us due to tariffs and duties we have in place, the one area where dumped and subsidized imports have become a problem is our team plate business, which represents about 300,000 tons.
Speaker 4: of sales per year for Cleveland Cliffs. Since 2019, we have seen a dramatic surge in unfairly-trade imports of tiny, firm social stimulus from a two-year exp Orthodox corporations.
Speaker 4: which significantly undermines the fair prices we would otherwise achieve in our contract negotiation with our team played clients.
Speaker 4: We have recently filed trade cases against eight countries who have distorted the market price here in the United States with the bad trade practices.
Speaker 4: We cannot allow this critical piece of our food supply chain to become fully dependent on imports.
Speaker 4: We have filed the street case alongside our union partners.
Speaker 4: the street case alongside our union partners, the United Stew Workers.
Speaker 4: We are grateful to have the USW taking on this fight with us and we will do everything in our power.
Speaker 4: to make sure US trade laws are respected and the situation is properly fixed.
Speaker 4: The outlook for our other specialty products, however, is very good. We expect that in 2023 our electrical steel business will post its highest profitability since 2009.
Speaker 4: Back when it was AK Steel's main profit center.
Speaker 4: This 14-year high is driven primarily by grain-oriented electrical steel, golds, products. As ongoing efforts to modernize the electro grid have leds with strong demand.
Speaker 4: With the investments we have put into our Butler PA and Zen's Vioh Hyal facilities. Over the past year...
Speaker 4: We now have even more capacity to serve our clients.
Speaker 4: We were also able to achieve unprecedented price increases on these products for 2023.
Speaker 4: giving the multi-year backlogs for electrical steels and the additional demand created by the Infrastructure Investments and Jobs Act
Speaker 4: Our elect yours to assets should be solid contributors to our profitability in 2023 and beyond. Finally, on the environmental side, 2022 was another year of progress toward achieving our carbon emission reduction goals.
Speaker 4: We are firmly believers that we will deliver on our aggressive 2030 targets with a footprint that is primarily Black Sponsored based.
Speaker 4: We are pleased with the progress we have made in our study of full scale carbon capture at Burns Harbor. Our largest steel plant.
Speaker 4: As we look at it now, based on the incentives the U.S. government has offered per unit of carbon sequestered, this project should generate a meaningful IRR.
Speaker 4: There is also the ability to substantially increase the use of hydrogen in our operations, replacing fossil fuel-based energy that we use throughout the entire footprint, particularly in our direct reduction plant and in our black furnaces.
Speaker 4: We already use hydrogen in some processes like in annealing.
Speaker 4: But its broader use will depend mainly on the economic availability of hydrogen itself.
Speaker 4: To facilitate this, we have joined with the industry and academic partners informing the Great Lakes Clean Hydrogen Coalition, or DLCH.
Speaker 4: A coordinated hydrogen hub effort to transition the Midwest into a leading low-carbon fuel production center.
Speaker 4: Cleveland Cliffs has successfully implemented the use of HBI in blast furnaces.
Speaker 4: Now, we look forward to becoming the first steel company in the world to utilize Hydrogen as a clean reductant to iron oxides in a full industry scale.
Speaker 5: Thank you.
Speaker 4: To wrap up, we at Cleveland Cliff.
Speaker 4: have a lot to be proud of for what we have accomplished in the last two years and even more to be excited about looking ahead.
Speaker 4: We have broken free from the harmful old paradigm that automotive steel should be priced like a commodity.
Speaker 4: Our balance sheet improvement over the past year is remarkable and it will only get better from here.
Speaker 4: Our costs are down and our backlog of capital needs from the time of their acquisitions has been taken care of.
Speaker 4: Braces are on the Upward Trend.
Speaker 4: with the fourth quarter of the draw of behind us.
Speaker 4: We look forward to the success that 2003 we will bring to Cleveland Cliffs.
Speaker 4: With that, I'll turn it over to the operators for questions.
Speaker 2: Thank you. We will now be conducting a question and answer session.
Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Speaker 2: You may press star 2 if you would like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your hands that before pressing the start keys.
Speaker 2: One moment please, Oli Pol for questions.
Speaker 2: Our first question comes from Emily Chang with Golden Sachs. Please proceed with your question.
Speaker 2: Good morning, Lorenzo and Selso and thanks. Morning, Emily. Morning, Lorenzo. My first question is around shipment expectations for the full year. So I think in the press release you've put out a 16 million ton expectation for 2023. What do you need to see from a demand perspective to hit that number? So perhaps you can...
Speaker 4: And in Q1 we're already ahead of the 4 million tons per quarter space. So we are very confident that this number is not only achieved but we are confident that it can beat the 16 million tons. The main reason we're a production constraint last year is simple. We were fixing equipment. We're producing less.
Speaker 4: and that has a delay tarot's impact in our Guasperton. Going forward, you said how can we get the 16 million tons? Well, the very first thing is automotive.
Speaker 4: Like I said in my preparing remarks, we are 7 million tons a year.
Speaker 4: provider of automotive steel. Five million tons through direct sales and at least two million tons through others. I mean service centers, processors, things like that. So we believe that this number will be achieved based on a higher
Speaker 4: even higher expectation from the automotive sector in building cars. So this number is probably a little bit on the conservative side.
Speaker 4: For the rest of the number, we only need to perform to the levels that we performed last year or if it's likely last because Alta would have been likely better. So long story short, I don't think that the 16 million tons is any stretch. We are in good shape to get there.
Speaker 2: Great, thank you, Lorenzo. My second question, maybe more so for Selso, but how do you think about balancing the de-leveraging component of your strategy and also the capital return space? Is there a point in time where the dividend may become a bigger part of the capital allocation discussion, or we're still just focusing on the de-leveraging and some opportunities?
Speaker 3: And that's what we're going to continue doing going forward. You know, although we feel like the balance sheet is in great shape, there's still, you know, some more debt reduction that we can do, particularly on the ABL. There's no prepayment penalty to deploy cash towards that. So, you know, just look at the kind of the balance of debt pay down versus buybacks that we've done in the prior quarters and you can kind of model that out for the next.
Speaker 4: that we're paying prior to the time that we cut the dividend by a round-court with time and never reinstituted because it was a new company after buying a K-buyer, so long top-of-the-t.
Speaker 4: being prior to the time that we cut the dividend by a round-court of time and never re-instituted because it was a new company after buying a K-buy or so long and tall by FCT. But if you compare the dollar amount...
Speaker 4: It's not by any stretch at a disadvantage against the amount of money that you would have paid if you have kept the dividend.
Speaker 4: based on the numbers of the past. So I would say, I'll give you a long explanation to tell you something.
Speaker 4: If the investors tend to value dividends more than the share by back, we can easily replace one with the other and it will be a neutral cash flow impact on us.
Speaker 4: I just believe that the share buybacks are more tax efficient than the dividends. But this is something that we are discussing internally and there is a strong possibility that we can just interrupt one and go to the other. It's a decision that we haven't made yet. I'm thinking. Keep in mind our strategies for the consumer pocket
Speaker 4: But we will be making the decision soon and to be at the very least would be neutral to our cash flow.
Speaker 6: Great, thanks. Thanks for the thanks, Elsa. Thank you. I appreciate it.
Speaker 6: Our next question comes from Christian Gressher with BNP Paraba. Please proceed with your question. Yes, hi, good morning. Thank you for taking my questions. The first one, I think in the past quarters you provided some full-year ASP guidance.
Speaker 6: based on the forward curve. Is it something you're comfortable sharing today, given the good level of visibility you have, notably on your contract? Thank you.
Speaker 4: Good morning, Tristan. Look, we believe that we gave at this time more granular information.
Speaker 4: on the ASP that will probably help you better than what you're doing before.
Speaker 4: ASP that will probably help you better than what you're doing before. Remember this...
Speaker 4: For future curve is just a forward looking assumption that might or might not not materialize what we're doing with automotive prices is real because these are these are contracts that are signed and by the way, Tristan These are negotiations that are not easy to get through
Speaker 4: Because of every single automobot of manufacturers that were negotiating, I guess. We're throwing on us that the competitors, they never say the names, but the competitors, or one competitor, or two competitors, were offering lower prices, in some cases much lower prices.
Speaker 4: So that was the uphill battle that we had to fight in order to get what we got. And we are proud of what we did. And again, these are real numbers. These are not assumptions towards futures that can change on a dime. These are numbers that will be firm.
Speaker 4: I believe that we gave enough information for you to model better than what we were doing before. I hope you agree with that.
Speaker 6: Yeah, I think that's that's totally fair and appreciate the color on the contract structure and the improvement. If I maybe a follow up on that maybe we've seen the product mix quite evolve quite a bit in Q4 and I think you previously flagged that maybe looking into Q1 and for your 2023, how would you expect the product mix to evolve? Yeah.
Speaker 6: especially on growing volumes, notably on the HSC side, on the coded side. Finally, maybe you could give us a sense of how much more volumes in illness and electrical can you achieve all you already at school capacity? Thank you.
Speaker 4: As far as the overall mix, you should expect more on the high value added side in general and less in the low value added side. Why is that? 1. The more this guy's...
Speaker 4: build cars, the more we're going to be concentrating on the higher side. You saw the mix that we informed, 70% quoted, 15% hot road, 15% cold road, that's the mix that we sell out of more of these days. So the more cars
Speaker 4: they built and the more our participation continues to increase in automotive, we're going to have more galvanized, more galvanized, more electric galvanized and percentage wise less hot rolled, less cold rolled.
Speaker 4: That's one. Second, you will heard about the electrical steels. We made an investment in our...
Speaker 4: Zane's view of a higher facility that increased the our ability to produce more nori-entered electrical steels, more no more it's called nose, no no orientated electrical no grain oriented electrical steels that goes to the to the motors of the electric vehicles and with that we're freeing up butler to concentrate only on goals.
Speaker 4: on gray-oriented electrical systems that goes to the grid that goes to transform us. So we're expecting meaningful increasing in throughput because we're basically separating Zen's view for nodes and butter for goals. So that's very high value added. The contracts are negotiated extremely well by the team.
Speaker 4: towards 2023 and that again it's more in the high a bit of a ton type of business and last but not least if we there's one more before the last one that went up on me. Stan Les you did well as well. Stan Les is
Speaker 4: And there's a big component of stainless for automotive. So I mentioned the bright and yield in the trim material that we sell that sell our highest margin. These are $5,000 per ton type of material. $5,000 per ton plus material. So it's really, really high value added material.
Speaker 4: Well, it goes good too and it's out on wood if it's it's the set is done as well But the last item that's kind of easy is team plate because team plate it's a typical case of dump We are starting to really Gather information about a priest
Speaker 4: absurd type of collusion against the suppliers, particularly against Cleveland Cliffs, and we are exposing what I believe is a serious issue that might start in the ITC and end up in a court of law.
Speaker 4: with the personal liability for a few individuals, and I'm going to go to the neck on that one, because what they do in terms of making us starve is totally absurd. It's not enormous for us in a big scheme of things. We're talking 300,000 tons, but it's very strategically critical for the country.
Speaker 4: We cannot, particularly in the state of Cold War that we are in right now, to outsource our ability to produce candid foods. And that's the main reason we are fighting this fight. But at the end of the day, we expect higher prices at the other end.
Speaker 4: in a few people that are acting like dogs to be personally responsible for their actions. So we're working on very seriously with our lawyers on that.
Speaker 6: Okay. Thank you very much. Appreciate the call.
Speaker 4: Thanks for your time.
Speaker 2: Our next question comes from Lucas Pipes with B. Riley. Please proceed with your question.
Speaker 7: Thank you very much operator and good morning everyone.
Speaker 7: Good morning everyone. Why Lucas?
Speaker 7: Lorenzo and Celso, thank you for the color on Q1 pricing. And I have to admit, I didn't catch all the details, but could you walk us through kind of the pluses and minuses on the pricing front in Q1 versus Q4? And ideally looking out to Q2, if you could shed some color on the price increase there.
Speaker 4: legs from sub 700 index prices in November and December and that will go against the fixed price contract that are higher. So, 2023.
Speaker 4: Every sale price we even be impacted by
Speaker 4: this type of thing. Also we have to remember that the renegotiations of contracts is for 2023. So we will talk about things that will happen through the year. So we are only in all because of our cost cut initiatives that we also explained.
Speaker 4: we are expecting cost-cutting impacts to be higher than the lower Q1 average sales price. And that's what is going to increase margin. So it's not just a matter of average sales price, but also
Speaker 4: the cost cutting initiatives that will enlarge our margins. So Q1 will be better, we expect Q1 to be better than Q4ABD, and then Q2ABD to be higher than Q1ABD and so on and so forth. So that's the story.
Speaker 7: I hope I answered. Yeah, I know that that was very helpful color. So for Q2 pricing, we would essentially see the full benefit of the higher fixed prices alongside the higher spot prices coming through with the lag. That's correct.
Speaker 7: And then on the call, thank you, thank you Lorenzo. And on the cost side, we would also see continued improvement in Q2. And that is my second question. What would be the key drivers? They're, I estimated about $40 or so of additional cost savings.
Speaker 7: in Q2 versus Q1, is that the right ballpark? And I assume it's working through higher cost inventories and such, but if you could add on continued cost savings in Q2, I would appreciate your perspective. Thank you, Lorenzo.
Speaker 3: Yeah, Celsus, do you want to take it this way? Yeah, sure. Lucas, as you know, a lot of the cost increases in 22 were driven by these repair maintenance initiatives and special projects like the re-line of the Cleveland furnace, et cetera. As you know, the
Speaker 3: But as we work through those and we see some relief from inflationary pressures as well and as we increase our volume output, Q4 cost decreased to the level that we got to the $80 a ton in line with our Q3 guidance.
Speaker 3: And going forward, you know, we expect another $50 per ton reduction in Q1. And then beyond that, you can probably plug in another $60 per ton from Q1 to Q2.
Speaker 3: And then, you know, call it another $40 per ton or so from Q2 to Q3.
Speaker 3: Is that kind of get you where you need to be Lucas?
Speaker 7: That is super helpful, so I'd say that's better than I expect. So I really appreciate the color and detail for the cadence of the year and wish you and the team a continued best of luck.
Speaker 4: Take a look, and I insist with that this cost cutting initiatives are also a function of the volume.
Speaker 4: because they are talking quespertons, so higher volume. Anything included in the numbers that sounds new to you.
Speaker 4: And these volumes are all being priced at the higher prices, both in fixed contracts with Automora and hopefully we'll continue the strength that we initiated in November and so far so good for the other business where prices are going up and that's a good thing for us. So, it's pretty.
Speaker 4: meaningful enlargement of a margin that we are expecting throughout the year.
Speaker 7: Thank you very much, Lorenzo.
Speaker 8: Thanks Lucas.
Speaker 1: If.
Speaker 2: Our next question comes from Loss in the Windr, Bank of America Securities.
Speaker 9: Hi, thank you operator. Good morning, Lorenzo and Selso. Nice to hear from you both. I wanted to ask about good morning.
Speaker 9: Thank you, Warren. Thank you. I wanted to ask about the fixed price volume. So just looking at your volume guidance of 16 million tons, would you be able to provide a little bit more color on what percentage of those would fall under the fixed price contracting? I think so historically you said sort of like 40 to 45 percent, which would imply 6.4 to...
Speaker 9: 7.2 million short tons. So I just wanted to confirm if that still made sense and whether or not that Included any of your assumptions around service center
Speaker 4: in the 16. Five are direct auto and we have two of several others and it includes some on service centers include some on electrical, some on stain, left, some on teammates pretty much everything but you know, team play altogether is...
Speaker 4: between 250,300 dollars. So it's not really a big scheme of things is not enough. But anyway, I would assume that 45% is a good number with 7 million dollars.
Speaker 9: Okay, fantastic. And maybe you could also comment on any quarterly variability in that ratio.
Speaker 4: Yeah, not that I expect anything meaningful. It will be all dictated by the cadence of the automotive industry to build cars. They are building more cars in January .
Speaker 4: then they did in the previous quarter each one of the months of the previous court. January was our best shipment volume for the quarter so that's a data point that we have on hand right now.
Speaker 4: And we expect that these things will continue at least at the very same level that we saw in January . And maybe better, it thinks we start to shape up as we are seeing as we saw this morning. Inflation going down, employment is still okay. The CPI not crazy, one way or another.
Speaker 4: So the doomsday scenario that some were anticipating is not really materialized. It's doing good. We are doing good. Our other book is showing that's why we are able to announce and enforce the
Speaker 4: The previous price increase and the one we announced yesterday so far so good the last 24 hours were good in book Is then everything so very good shape
Speaker 9: Okay, that's fantastic. Thank you for the comments and keep up the good work.
Speaker 4: Appreciate lesson. Thanks a lot.
Speaker 2: Our next question comes from Phil Gibbs with Keybank Capital Markets. Please proceed with your question.
Speaker 10: Take good morning. Why do you feel?
Speaker 10: Lorenzo and Kelso, the pension expense or credit this year, what is that relative to last year? And then also, what are your interest expense expectations? Because they know rates have been changed.
Speaker 4: yeah I was also to reply to this one so go ahead
Speaker 3: Yes, sure.
Speaker 3: Hey, good morning. So, you know, we have a big balance on the, drawn on the ABL. So that's a floating rate instrument. So interest expense has been going up because of that. On a full year basis, you can, including the ABL plus all the bonds that we have, you can call it two, two 60 to 270 of interest expense for the year.
Speaker 3: And then as it relates to pension and op-ed, what was your question exactly on that?
Speaker 10: I think you had a decent credit last year, but most of that was from below the line. How is that full?
Speaker 10: full year expense or credit changed given everything that you've done to your plan and interest rates.
Speaker 3: Yeah, but it should be about a hundred million of cash expense and plus a hundred, I'll call it a hundred and forty million of credits in 2023.
Speaker 3: Okay. A little less than 2022.
Speaker 1: Appreciate it.
Speaker 11: Our next question comes from Andreas Bokenhalki, UBS. Please proceed with your question. Thank you, operator. Good morning, everybody. Just a quick question from me. Obviously, there's been a little talk about some capacity being restarted among some of your peers.
Speaker 11: which I think was a little bit surprising given that, you know, industry utilization on average is just about 70%. Can you give us a little bit of clarity where your utilization is sitting versus a sector at the moment in terms of production? And secondly, obviously seeing the headlines about further price hikes on HRC.
Speaker 11: Are you fully getting 850 now? I know it differs between producers, but are you fully getting 850 HRC now? Giving you comfort to obviously push it towards 900. Those are my two questions. Thank you very much.
Speaker 4: Our utilization, we are running all of our assets and we are not idling anything. So that's what I can tell you. The number I don't have it, I don't follow, that's not relevance to what we do.
Speaker 4: We deliver automotive on time. We take care of our clients. We run our assets for maximum profitability. And these are the guidelines. We don't have to run...
Speaker 4: 24-7 to mitigate the question the fight on the last tone. We have a different approach to business.
Speaker 4: So we are not in the commodity business I hope.
Speaker 4: This message came across loading clear.
Speaker 4: Because that's what we are, that's what we do, and that's why we invest money in take care of the equipment
Speaker 4: instead of just running to to exhaust you.
Speaker 4: So that's what I saw from part of the assets that I acquired two years ago. No more. The assets are in good shape and we are producing for a maximum quality, maximum profitability. And that's what we're going to deliver in 2023.
Speaker 11: What was the second question under SI? We saw with the headlines on pricing going to 850, you guys, I think you raised another
Speaker 11: 50 to 900 just wanted to get a sense of whether you're fully getting the 850 now giving you good comfort that you can push to 900
Speaker 4: Well, when we start the first price increase, hot vendola 640.
Speaker 4: So now we are announcing 900, so what do you think?
Speaker 4: What was your take? Is it sticking or not?
Speaker 11: Yeah, I guess it just comes back to the utilization point. I guess with 70% utilization for the industry, I can appreciate you're not thinking about in terms of utilization, but just the strength of the market to push it onto 900. I guess that's kind of where I'm coming from. But I guess you have to come for 900.
Speaker 4: Well, we are at 850 and we believe 900 is archival. That's our take.
Speaker 11: That's loud and clear thank you Lorenzo, appreciate it.
Speaker 2: All right. Our next question comes from Carl Bundin with Goldman Sachs. Please proceed with your question.
Speaker 7: Good morning. Thanks so much for the time. You're outlined here in terms of free cash flow, a plan to deploy that towards share by Vax and then also debt reduction. Everything about 23 and beyond. Is there also potential for M&A or should we think about the footprint as pretty much what you want it to be right now?
Speaker 4: I like the footprint called. I like the footprint. M&A, we never talk about this company. We never talk about M&A as a theoretical exercise.
Speaker 4: So as a theoretical size, I like my footprint.
Speaker 4: As a theoretical, the size where I like my footprint. That's what I can tell right now.
Speaker 7: That's helpful. And then on the debt profile, you've made a lot of progress in paying down debt both the bonds and also the ABL. As you think about the optimal cap structure, is there an interest in also extending that beyond just paying down, or should we think about the focus being primarily towards just debt pay down for now?
Speaker 4: We will continue to pay down that. It is still our main use of cash. This being said with all the conversations about that and the pension of public businesses and things like that, think about two years ago we were 4.0 something billion dollars in
Speaker 4: For full UN video, visit our website.
Speaker 4: sub $1,800,000,000 and something, million dollars. So we take care of these things. We don't talk much about it, we just do it.
Speaker 4: And sometimes the underlying numbers, the ones that trigger trades minute by minute, play by play based, they're not that great. There's not a lot of EPS. Cash flow is higher than EBITDA.
Speaker 4: This is a company that we are running for shareholders, for bondholders, for employees, for people that are vested long term. And we will continue to do that.
Speaker 4: Two years is a long time for us. We proved that when we acquired AK and then our solar meter, our USA and then FBT. So two years ago we were making $2 billion revenues. So now we're making $23 billion in revenues. Two years. That's not a crypto company. It's real.
Speaker 4: It's a Cleveland Cliff's 175 years old company, but we got to have to pick a step back and look the real picture
Speaker 4: looked like how things are really are in the marketplace. The most important thing that we did in 2022 was not even fixing the assets.
Speaker 4: The most important thing was fixing the relationship between a major, a major supplier to the automotive industry and the automotive industry itself.
Speaker 4: If you look back.
Speaker 4: to the root quads of the bunk crepesies often.
Speaker 4: Bethlehem, and LTV, and Armeco, and England, the England didn't go bankrupt, was acquired by metal. So it's not a good example. But the vast majority of these names of the past, you go back to this...
Speaker 4: value destruction that the automotive industry promoted between its two companies. And as of 2022, 2023, we're still facing that. We go to negotiate with a client that the biggest thing that they had last year was...
Speaker 4: microchips, supply chain, and they only think they want to talk about this price. So I was really ready to not renew a contract entirely with a common manufacturer, but at the end of the day they all renewed. They all appreciated. They all understood.
Speaker 4: I'm being very polite. So things will continue to be good, but that's the biggest accomplishment.
Speaker 4: And I got very few questions about that. So that's why I am emphasizing what I believe is the real game changer. It's like you know, an iron war company becoming a steel company is a real game changer. Now I supply about the motive, not begging for orders.
Speaker 4: and offering lower prices to get it, it's not a big game changer. So stay tuned. 2023 is just starting, it's February . So we have 10 more months to go. OK, Koff? Yeah, that's helpful. Thanks, Congrats on the continued debt reduction. Thank you.
Speaker 4: Alright, thanks Carl.
Speaker 4: We have reached the end of our questionnaire answer session. I would now like to turn the floor back over to Mr. Gondzalviz for a close comment. All right, thanks very much. Appreciate it. Thank you everyone for the attention to the scroll and for the questions and for the support. I really appreciate your hard work.
Speaker 4: and trying to model a pre-complex company that's Cleveland Cliffs. We are extremely committed. We never think that Selson I is spoke about today and we look forward to continue the dialogue. Thanks a lot and have a great day.
Speaker 2: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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