Q1 2023 Cleveland-Cliffs Inc. Earnings Call

Inception, 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 active 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 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 with the SEC, which are available on the company's website.

Today's conference call is also being is off.

So 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 yesterday.

At this time I would like to introduce us So solvents executive Vice President and Chief Financial Officer.

Thank you Daryl and good morning, everyone.

Our Q1 results Mark the rebound in profitability from the trough in Q4, as we effectively doubled our adjusted EBITDA from the previous quarter.

We outperformed on our three most important metrics selling price unit costs and steel volumes.

We guided to a Q1 implied selling price of around 11 $20 per ton and realized around $11 30.

We indicated that unit costs would decline by $50 per ton and they declined by 60.

We said volumes would rise to around 4 million tons, and we delivered $4 1 million.

Most importantly, we set the stage for another highly profitable year in 2023, which we expect to further materialize, which with a much higher Q2, EBITDA and strong free cash flow generation in the last three quarters of the year.

Q1 free cash flow was lower largely because we invested in working capital due to strong demand.

As pricing and volumes went up we saw higher receivables and higher inventory tons.

In Q2, we expect this trend to continue but EBITDA will be so much higher and capex will be so much lower that the massive amount of free cash flow coming in Q2 should far outpace any further build in working capital.

Adjusted EBITDA in Q1 was $243 million, a 98% increase from the previous quarter.

Driven almost entirely by reduced unit costs, a function of normalized repair and maintenance spend lower input costs and higher steel production.

Our Q1 shipment volume of $4 1 million net tons was roughly 250000 tons higher than the previous quarter, making.

Making Q1 of 2023, our highest steel shipment quarter since Q3 of 2021.

Automotive demand was robust service center buying behavior has improved and.

And we did not have any significant maintenance outages like we did for much of last year.

Q1, selling price of $11 $28 per net ton came in ahead of expectations due to higher tonnage and higher value added mix in automotive.

A little more than half of our sales are index linked with lags generally varying from one to three months.

Due to these lags the recent rise in flat rolled index pricing was barely were reflected in our Q1 results.

This improvement is now in full force, which will benefit our results meaningfully here in Q2 and beyond.

Okay.

We have been successful in implementing several spot price increases over the past few months. We have also achieved continued increases in our fixed price contracts for the April 1st renewal cycle.

Taken together these improved prices will propel our realizations in Q2.

In addition, due to the same factors that drove Q1 costs lower our unit costs should continue their downward trend going forward.

We also expect that our strong volume performance will carryover into Q2 as the order book remains full and we run it are configured capacity levels.

As pricing and volumes improved in Q1, particularly in the month of March we built around $230 million in receivables contributing to the lower free cash flow quarter over quarter.

As these receipts come in our cash flow performance will ramp up significantly in Q2, particularly as we have already received $110 million in tax refunds here in April .

This comes after a tax refund receipt of $25 million received during Q1.

Furthermore, we expect our Q1 capex of $188 million to represent the peak capex quarter for this year.

Due to some carryover maintenance projects from 2022.

So Q2, Q3, and Q4 capex should each be lower than Q1.

In fact, we have lowered our total expected full year capex range by $25 million to $675 million to $725 million, reflecting primarily sustaining projects.

Touching now on the capital structure two weeks ago, we completed a seven year unsecured notes offering for $750 million pricing and only 325 basis points above the comparable treasury.

This was our tightest spread on any unsecured high yield bond ever we took advantage of the inverted yield curve to issue. These notes, which are priced off of lower longer term rates and used the proceeds to pay down our ABL, which is priced off of currently much higher short term rates.

We have been comfortable using our ABL as an effective source of liquidity for some time given it was nearly free money, but with the rapid rise in the fed fund rates. This is no longer the case. So terming some of this ABL balance out with longer term bonds was a no brainer.

In fact, the coupon on these new notes is effectively the same as the all in interest rate on the ABL.

The additional liquidity provided as a result also gives us more flexibility for whatever market conditions or opportunities may come up.

This being said this swap of shorter term debt with longer term notes does not change our capital allocation priorities. We intend to continue using the robust free cash flow, we expect to generate this year toward continued debt repayment and opportunistic share buybacks.

We still have over $1 billion in pre payable debt on the ABL and another $1 5 billion in callable bonds.

For now the main priority for debt reduction will be to continue driving down the ABL balance when that has been paid off in full we will then target redeeming our 2026 secured notes.

As we've shown in the past with aggressive bond buybacks, even our non callable long dated unsecured bonds are effectively pre payable since we can also opportunistically buy them back and meaningful amounts in the open market.

We plan to continue this capital allocation strategy until our net debt gets down to around $3 billion and assuming market conditions remain as they are now we should achieve that at some point this year.

With that I will turn it over to Lorenzo for his remarks.

Thank you Michelle and good morning, everyone.

During the first quarter order release rates from our automotive clients were the strongest and most consistent we have seen since becoming a steel company three years ago.

Also service center buying behavior in Q1 came back to more normal levels.

These two factors combined with reduced imports of flat rolled steel forces the buyers to increase their order levels with domestic producers. In addition, the excess scrap and metallics inventories that were built by other steel companies in response to the war in Youku.

We have lowered our total expected full year capex range by $25 million to $675 million to $725 million, reflecting primarily sustaining projects.

Wayne, we're ultimately drawn down, forcing scrap prices back to what we believe are higher but is still acceptable and sustainable levels.

Yeah.

Touching now on the capital structure two weeks ago, we completed a seven year unsecured notes offering for $750 million pricing and only 325 basis points above the comparable treasury.

We used all of these factors in our favor to implement several spot price increases, which have ultimately driven index pricing higher.

This was our tightest spread on any unsecured high yield bond ever we took advantage of the inverted yield curve to issue. These notes, which are priced off of lower longer term rates and used the proceeds to pay down our ABL, which is priced off of currently much higher short term rates.

Our conviction that these countries, Brian scrap and metallics shortage will continue to tighten over the coming years is at the core of our strategy.

We have been comfortable using our ABL as an effective source of liquidity for some time given it was nearly free money, but with the rapid rise in the fed fund rates. This is no longer the case. So terming some of this ABL balance out with longer term bonds was a no brainer.

Last year, the strange scrap movement in the second half of the year has been proven to be an outlier and if Bryan scrap market is back in a shortage position.

There is less than 20 million tons of annual Brian scrap and metallics supply in North America currently and unless you are a producer of only rebar and nothing else you'd need prime scrap and metallics.

In fact, the coupon on these new notes is effectively the same as the all in interest rate on the ABL.

The additional liquidity provided as a result also gives us more flexibility for whatever market conditions or opportunities may come up.

Our in house production of 2 million tons of HBA midyear at Cleveland Cliffs is an integral part of our own internal supply chain.

This being said this swap of shorter term debt with longer term notes does not change our capital allocation priorities. We intend to continue using the robust free cash flow, we expect to generate this year toward continued debt repayment and opportunistic share buybacks.

Use our <unk>, primarily to feed our own blast furnaces to reduce coke rate and C. O two emissions and that results in very limited availability to sell <unk> to third parties.

We still have over $1 billion in pre payable debt on the ABL and another $1 5 billion in callable bonds.

For now the main priority for debt reduction will be to continue driving down the ABL balance when that has been paid off in full we will then target redeeming our 2026 secured notes.

We anticipate that with the new electric arc furnace coming online demand for prime scrap and metallics will be at 30 million tons by 2026.

As we've shown in the past with aggressive bond buybacks, even our non callable long dated unsecured bonds are effectively pre payables. Since we can also opportunistically buy them back and meaningful amounts in the open market.

This will require significant levels of imported metallics.

The largest sources of these imports up until last year, where Russia and Ukraine.

We plan to continue this capital allocation strategy until our net debt gets down to around $3 billion.

More than a year after the invasion of Ukraine that import Avenue remains heavily disrupted.

And assuming market conditions remain as they are now we should achieve that at some point this year.

Said another way.

Last one is rerouting Russian supply throughout the country sports running shipment, which is by the way illegal they cannot get all the feedstock they need.

With that I will turn it over to Lorenzo for his remarks.

Thank you Michelle and good morning, everyone.

During the past quarter order release rates from our Alto motive clients were the strongest and most consistent we have seen since becoming a steel company three years ago.

Because Brian scrap is a byproduct of manufacturing and we as a country have been moving manufacturing offshore.

Also service center buying behavior in Q1 came back to more normal levels.

Iron scrap supply has been shrinking in this country for over 50 years.

These two factors combined with reduced imports of flat rolled steel forces the buyers to increase their order levels with domestic producers.

Bringing more manufacturing back to the United States over the coming years should help alleviate the situation, but that will take time.

In addition, the excess scrap and metallics inventories that were built by other steel companies in response to the war in Ukraine, where ultimately drawn down foreseeing scrap prices back to what we believe are higher but is still acceptable and sustainable levels.

The alternative to address this graph shortage would be additional metallics production, but that requires iron ore.

As the largest producer of iron ore pellets in North America. This plays right into our favor.

For the majority of the last three decades flat rolled steel production with Eas took advantage of cheap and plentiful prime scrap.

We used all of these factors in our favor to implement several spot price increases, which have ultimately driven index pricing higher.

This historical situation is changing fast.

Greenfield flat rolled production from <unk>.

Our conviction that this country's Brian scrap and metallics shortage will continue to tighten over the coming years is at the core of our strategy.

So plays into our favor in the automotive market.

Some eas startups have been demonstrating for a few quarters now the metallurgical challenging automotive is too big for them.

Last year, the strange scrap movement in the second half of the year has been proven to be an outlier in the prime scrap market is back in a shortage position.

This fact, along with our customer service and our R&D capabilities.

There is less than 20 million tons of annual prime scrap and metallics supply in North America currently and unless you are a producer of only rebar and nothing else you need prime scrap and metallics.

The three main reasons.

Cleveland cliffs remains the supplier of choice to the automotive industry in the United States.

That also helped us achieve annual price increases from all and each one of our major automotive clients.

Our in house production of 2 million tons of <unk> per year at Cleveland Cliffs is an integral part of our all internal supply chain.

Some of this price increase will only show in our Q2 results as they are effective April one.

We use our <unk> primarily to feed our own blast furnaces to reduce coke rate and C. O two emissions and that results in very limited availability to sell <unk> to third parties.

Our shipments into the first quarter through our direct automotive customers were the highest they have ever been in our three years as a steel company and at higher prices.

We anticipate that with the new electric arc furnace coming online demand for prime scrap and metallics will be at 30 million tons by 2026.

This was the biggest reason for our strong quarterly shipment number or $4 1 million tonnes and why we're running all of ours to making shops at full capacity.

This will require significant levels of imported metallics.

Our higher levels of steel production has led to the partial restart of some operations at our iron ore mining and Pelletizing swing facility at Northshore earlier this month.

The largest sources of these imports up until last year.

Russia and Ukraine.

More than a year after the invasion of Ukraine that import Avenue remains heavily disrupted.

As you May recall Northshore has been totally idle since the spring of last year.

Said another way on last one is rerouting Russian supply through other countries for trans shipment.

We will continue to treat that facility as our swing operation and at this time, we still do not expect to operate northshore aimed for any time this year.

<unk> is by the way illegal.

Cannot get all the feedstock they need.

Because Brian scrap is a byproduct of manufacturing and we as a country have been moving manufacturing offshore.

The remarkable improvement in automotive demand is a combination of the easing of their supply chain issues and the American consumers' growing appetite for new cars.

Brian scrap supply has been shrinking in this country for over 50 years.

Bringing more manufacturing back to the United States over the coming years should help alleviate the situation, but that will take time.

Also sales seasonally adjusted annual rates, usually called Saar.

The United States averaged about $15 2 million units during Q1.

The alternative to address this grabbed shortage would be additional metallics production, but that requires iron ore.

A massive uptick after averaging $13 7 million units.

As the largest producer of iron ore pellets in North America. This plays right into our favor.

During all of 2022.

As such our forecast for North America automotive builds in 2023 or 55 million light vehicles is the best in four years.

For the majority of the last three decades.

That rolls of steel production with Eas took advantage of cheap and plentiful prime scrap.

This historical situation is changing fast.

With one car equally roughly one ton of steel and with Cleveland cliffs, representing nearly half of the flat rolled market for automotive steel you can do the math on the additional volume this will bring.

Greenfield flat rolled production from apps also plays into our favor in the automotive market.

As some startups have been demonstrating for a few quarters now.

The auto sales and production increases we have been seeing are further confirmation of our view on how steel demand in the U S. We will shift in our favor.

The metallurgical challenge in automotive is too big for them.

This fact, along with our customer service and our R&D capabilities are the three main reasons why Cleveland cliffs remains the supplier of choice to the automotive industry in the United States.

For the last couple of years nonresidential construction has been the outperformer in the steel market with automotive lagging significantly behind as.

As you know Google and cliffs is not a big player in non res.

That also helped us achieve annual price increases from all and each one of our major automotive clients.

That said given the massive backlog that has been created as a result of supply chain issues over the past few years and with the federal reserve, reaching the end of their interest rate hiking marathon going forward all signs point to automotive been the outperformer.

Some of this price increase will only show in our Q2 results as they are effective April one.

Our shipments in the first quarter to our direct automotive customers were the highest they have ever been in our three years as a steel company and at higher prices.

Google and cliffs is ready to accommodate any improvements in demand from the automotive sector, whether that be from internal combustion engine vehicles or evs and our clients know that very well.

This was the biggest reason for our strong quarterly shipment number or $4 1 million tonnes and why we're running all of ours to making shops at full capacity.

Polyvalent cliffs, we are agnostic to whatever ways that demand materializes over the coming years.

Our higher levels of steel production.

Have led to the partial restart of some operations at our iron ore mining and Pelletizing swing facility at Northshore earlier this month.

We are the clear cut leader in supplying steel for both types electric or conventional vehicles.

That said earlier this months President <unk> administration put forth their lead this push to drive large scale.

As you May recall Northshore has been totally idle since the spring of last year.

<unk> adoption in the United States.

We will continue to treat that facility as our swing operation and at this time, we still do not expect to operate northshore aimed for any time this year.

The proposal includes a projection that two out of every three new car sold in the United States in 2023.

2032, I'm, sorry in 2032 will be electric.

Compared to about only 7% today in 2023.

The remarkable improvement in automotive demand is a combination of the easing of their supply chain issues and the American consumers' growing appetite for new cars.

This is a structural reset that we have dedicated our research and innovation center efforts toward since we acquired AK steel in March of 2020.

Also sales seasonally adjusted annual rates, usually called SAR AMD.

Put simply due to our size as a supplier of automotive steel in the United States and also due to our unique technical capabilities. This goes of the U S government cannot be Richard without Cleveland cliffs.

In the United States averaged about $15 2 million units during Q1, a massive uptick after averaging $13 7 million units.

During all of 2022.

We are an integral part of this transition from ice vehicles to Evs in the United States, regardless of whether it happens at a fast or at as low base. This includes our supply of exposed body parts <unk>.

As such our forecast for North America automotive builds in 2023 of $15 5 million light vehicles is the best in four years with one car equally roughly one ton of steel and with Cleveland cliffs, representing nearly half.

Structural cages battery support and oriented electrical steels.

Five of the flat rolled market for automotive steel you can do the math on the additional volume this will bring.

Four models regarding oriented electrical steels, we call most and responding to growing demand from our existing customer customers. We have already deployed $30 million as capex into our Zanesville, Ohio facility to increase our production capacity of nose.

The auto sales and production increases we have been seeing are further confirmation of our view on how steel demand in the U S. We will shift in our favor.

For the last couple of years nonresidential construction has been the outperformer in the steel market with automotive lagging significantly behind.

Another 70000 tons annualized.

We should start operating this new capacity in the third quarter of this year.

As you know Greenville, and cliffs is not a big player in non res.

Also as a reminder, Cleveland cliffs is the sole producer and a well established supplier of both goals grain oriented electrical steels and those in our country.

That said given the massive backlog that has been created as a result of supply chain issues over the past few years and with the federal reserve, reaching the end of their interest rate hiking marathon going forward, all signs point to automotive being the outperformer.

That's our technology or regionally from Army Corp debt.

<unk> in AK steel.

The market for these products is huge but any new entrants to this market. We will have to first learn the products and then perfect day manufacturing process.

Google and cliffs is ready to accommodate any improvements in demand from the automotive sector, whether that be from internal combustion engine vehicles or ev's and our clients know that very well.

Then the Rockies producer, we will have to qualify these products with each one of the clients Thats not our case, we are already in the house with all of these clients.

At Cleveland Cliffs, we are agnostic to whatever ways that demand materializes over the coming years.

As we are the clear cut leader in supplying steel for both types electric or conventional vehicles.

A couple more things before we open for Q&A.

Earlier. This month, we published our 2022 sustainability report we are pleased to report that as of 2022, our absolute scope, one and two greenhouse gas emissions were already below our aggressive target for 2030.

That said earlier this months president by the administration put forth their latest push to drive large scale EV adoption in the United States.

The proposal includes a projection that two out of every three new car sold in the United States in 2023.

25% reduction.

2032, I'm, sorry in 2032 will be electric.

And compares to our ambitions in 2017.

That was when we made our decision to build our state of the art direct reduction plant.

Compared to about only 7% today in 2023.

This early accomplishment of our target was made possible primarily by the use of massive amounts of <unk> in our blast furnaces helped by hot metal stretching through the increased utilization of scrap in our apps and natural gas injection in our blood.

This is a structural reset that we have dedicated our research and innovation center efforts toward since we acquired AK steel in March of 2020.

Put simply due to our size as a supplier of automotive steel in the United States and also due to our unique technical capabilities. This goes of the U S government cannot be Richard without Cleveland cliffs.

<unk> furnaces.

We also reported that our scope one and two emissions intensity from our blast furnace and POF operations. In 2022 was down to 160 metric tons of Cotwo per metric tonne of steel. This number puts Cleveland cliffs in the third person tayo.

We are an integral part of this transition from ice vehicles to Evs in the United States, regardless of whether it happens at a fast or at a slow pace.

Of integrated steelmaking emissions worldwide and compares extremely favorably to the global average of two.

This includes our supply of exposed body parts.

Structural cages battery support and oriented electrical steels.

32 tonnes of Cotwo per metric ton of steel.

Four models regarding oriented electrical steels, we call most and responding to growing demand from our existing customer customers. We have already deployed $13 million as capex into our Zanesville, Ohio facility to increase our production capacity of nose.

Because of the metallurgical requirements and quality needs of our automotive customer base, we remain committed to the blast furnace POF is still making route and we will continue to work to make it less carbon intensive.

In order to further reduce these already low initial numbers, we are pursuing potentially high IRR projects in emerging technologies, particularly carbon capture and storage and iron reduction by hydrogen.

Another 70000 tons annualized.

We should start operating this new capacity in the third quarter of this year.

Also as a reminder, Cleveland cliffs is the sole producer and a well established supplier of both goals grain oriented electrical steels and those in our country.

As things progress on these fronts will continue to keep you informed.

With that I will turn it over to Daryl for questions.

Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.

That's our technology or regionally from Army Corps.

<unk> in AK steel.

The market for these products is huge but any new entrants to this market. We will have to first learn the products and then perfect day manufacturing process.

Information cloud will indicate your line is in the question queue.

You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Then the Rockies producer, we will have to qualify these products with each one of the clients. That's not our case, we are already in the house with all of these clients.

Our first question comes from the line of Emily Chang with Goldman Sachs. Please proceed with your question.

Good morning, Lorenzo is also and thanks for taking my questions. This morning.

A couple of more things before we open for Q&A.

This is just around the electrical steel market I wanted to follow up here and understand a little bit more about what's happening could you perhaps talk to the size of the non grain oriented and grain oriented electrical steel market outlook.

Earlier. This month, we published our 2022 sustainability report we are pleased to report that as of 2022, our absolute scope, one and two greenhouse gas emissions were already below our aggressive target for 2030.

That's what electrical steel production capacity, Chris will have after the 70000 ton capacity investment later this year.

Sure. Good morning, Emily look first of all the non oriented electrical steels.

225% reduction.

And compares to our ambitions in 2017.

Our totally associated at this point with the pace of.

That was when we made our decision to build our state of the art direct reduction plant.

The adoption of electric vehicles, we have developed.

This early accomplishment of our target was made possible primarily by the use of massive amounts of <unk> in our blast furnaces helped by hot metal stretching through the increased utilization of scrap in our apps and natural gas injection in our blood.

Special project called the Morro Max and the modal Max is for these type of high end applications in oriented electrical steels. This investment that was not a massive investment we're talking $30 million, but which by the way has already been deployed to produce another 70000 tons of news will take.

<unk> furnaces.

We also reported that our scope one and two emissions intensity from our blast furnace and POF operations. In 2022 was down to 160 metric tons of Cotwo per metric tonne of steel. This number puts Cleveland cliffs in the third percentile.

Care of that and we will take care of that for the time being.

And freeing up capacity to produce more grain oriented electrical steels.

At our Butler, Pennsylvania plant.

Because today, we basically do both in Butler.

Our movie set.

70000, what is.

Significant when you will notice that our production capacity is around 240000 tonnes at Butler. So we are really growing our ability to supply more growth growth is related to the grid because it goes into.

Of integrated steelmaking emissions worldwide.

And compares extremely favorably to the global average of two point.

32 tonnes of Cotwo per metric ton of steel.

Because of the metallurgical requirements and quality needs of our automotive customer base, we remain committed to the blast furnace to <unk> App is still making route and we will continue to work to make it less carbon intensive.

No pun intended goes into the production of laminations and core for Transformers, and transformers or utilize the everywhere into the grid.

And we are at this point the sole suppliers does materials. So S. Monies are deployed there.

In order to further reduce these already low initial numbers, we are pursuing potentially high IRR projects in emerging technologies, particularly carbon capture and storage and iron reduction by hydrogen.

Money to be deployed.

Coming from legislation that will free up capital to be invested in the improvement of the grid and also the improvement of charging stations that we're going to have to.

It's the as things progress on these fronts will continue to keep you informed.

With that I will turn it over to Daryl for questions.

Continuing to grow the production of growth. So that's pretty much what we have at this point, but I think we are right sized for the pace of the growth of the market at this point.

Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.

Understood that's very helpful and a follow up.

Information will indicate your line is in the question queue.

If I may just around the cost outlook.

You May press star two to remove yourself from the queue.

I think something you mentioned analysis $60 ton decrease in <unk> in terms of the cost profile and I think previously you've also talked about further reductions in <unk> do you have any numbers as to help us frame, where those numbers could land and remind us what the moving pieces driving those costs down on a dollar per ton basis.

Disciplined using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first question comes from the line of Emily Chang with Goldman Sachs. Please proceed with your questions.

Thank you yes.

Good morning, Lorenzo also and thanks for taking my questions. This morning.

Yeah, sure Hey, Emlen.

We've already.

<unk> decreased cost by call it $140 a ton in just two quarters.

My question is just around the electrical steel market I wanted to follow up here and understand a little bit more about what's happening could you perhaps talk to the size of the non grain oriented and grain oriented electrical steel markets and growth outlook.

In the Q1 cost reduction of $60 a ton is $10 more than we guided down.

<unk> 50 for the quarter.

That's what electrical steel production capacity, Chris will have after the 70000 ton capacity investment later this year.

As the inventory continues to come out you can expect further.

Cost reduction here in Q2 now the magnitude won't be as great as it was here in Q1.

Sure. Good morning, Emily look first of all the non oriented electrical steels.

But we're still working hard to bring costs down.

Our totally associated at this point with the pace of.

Call it a 15% to $20 a tonne reduction here for for this coming quarter Q2.

The adoption of electric vehicles, we have developed.

Great that's very helpful. Thanks.

Special project called the Morro Max and Tomorrow Max is for this type of high end applications in oriented electrical steels. This investment that was not a massive investment we're talking $30 million, but which by the way has already been deployed to produce another 70000 tons of news will take.

Thank you.

Thank you. Our next question comes from the line of Lucas pipes with B Riley Securities. Please proceed with your questions. Thank you very much operator, good morning, everyone.

My first question was also is also on the electrical steel side and Lorenzo I wondered if you could maybe frame up.

Care of that and we will take care of that for the time being.

The project pipeline. After this year I assume kind of capital intensity would move up somewhat.

And freeing up capacity to produce more grain oriented electrical steels.

But maybe that's the wrong assumption, yes, I would really appreciate color on that.

At our Butler, Pennsylvania plant.

Because today, we basically do both in Butler.

The potential growth opportunities after this year and what the capital intensity, but it looked like for you or your competition. Thank you. Thank you very much.

Our movie set.

70000, what is significant when you will notice that our production capacity is around 240000 tonnes at Butler. So we are really growing our ability to supply more growth growth is related to the grid because it goes into.

Good morning, Lucas first of all I would like to position electrical steels.

Uh huh.

In a historical perspective that solar is very helpful to understand.

When I acquired AK steel back in March of 2020.

No pun intended goes into the production of laminations and core for Transformers, and Transformers are utilized to everywhere.

Butler Zanesville are both slated to be shut down.

Actually the first meeting that I participate representing AK steel happened in our steel caucus meeting in Washington D C.

Into the grid.

And we are at this point the sole suppliers of these materials.

U S <unk>.

Four days before we closed and.

Moneys are deployed.

There are money to be deployed.

I said in for the for Roger Newport dense CEO of AK steel.

Coming from.

This solution that will free up capital to be invested in the improvement of the grid and also the improvement of charging stations.

Very.

Come to allow me to to be there and speak I basically put everybody on notice that.

We're going to have to.

Continuing to grow the production of growth. So that's pretty much what we have at this point, but I think we are right sized for the pace of the growth of the market at this point.

Nothing would happen we would just go ahead.

The shutdown process to us.

To happen so long story short we're being.

As lettered by imported steel at that time, we were able to stop that.

Understood that's very helpful and a follow up if I may just around the cost outlook.

We're able to bring back production to the United States, we're able to shut down the back door.

I think something you mentioned there was a $60 ton decrease in <unk> in terms of the cost profile and I think previously you've also talked about further reductions in <unk> do you have any numbers as to help us frame, where those numbers could land and remind us what the moving pieces driving those costs down on a dollar per ton basis.

Production of elimination of course, coming mainly from Mexico, and Canada using steel.

Steel electrical steels from Korea, Taiwan, and Japan, So we.

Fixed the market in a way that we are no longer losing money at this very point Lucas.

Keith.

Yeah, sure Hey, Emlen.

Yes.

We've already decreased cost by call it $140 a ton in just two quarters in.

Electrical steels is.

Our most.

Profitable line of business.

In the Q1 cost reduction of $60 a ton is $10 more than we guided down.

So we are very happy with the fact that we're growing our own capacity with the pace of the demand we are not going to run ahead of the demand.

<unk> 50 for the quarter.

As the inventory continues to come out you can expect further.

We are aware that the competition will try to participate in this market be my guest it's not an easy market is complicated product. So we know that a lot of that tends to favor that this business will come back to us. So at the right time, we will deploy capital is not a priority right now we are happy with.

Cost reduction here in Q2 now the magnitude won't be as great as it was here in Q1.

But we're still working hard to bring costs down.

Call. It a 15 to $20 a tonne reduction here for for this coming quarter Q2.

Great that's very helpful. Thanks.

We have we are happy with the expansion that we deployed in Zanesville four knows that will free up more goes out of Butler. We're in good shape for now.

Thank you.

Thank you. Our next question comes from the line of Lucas pipes with B Riley Securities. Please proceed with your questions. Thank you very much operator, good morning, everyone.

Very helpful. Thank you Lorenzo.

My second question is it's also a little bit.

My first question was also is also on the electrical steel side and Lorenzo I wondered if you could maybe frame up the project pipeline. After this year I assume kind of capital intensity would move up somewhat.

More on the near term and I wondered if you could comment on the second quarter pricing outlook, you mentioned April batch on the fixed contracts with sprint reset a very successfully and then spot prices, obviously moved up very nicely year to date. So I wonder if you could comment on what the whole package would look like.

But maybe that's the wrong assumption and yes, I would really appreciate color on.

The potential growth opportunities after this year and what the capital intensity, but it looked like for you or your competition. Thanks. Thank you very much.

On the pricing side in Q2, Thank you very much for your perspective.

As far as global <unk> concern the outlook is great because as you know our contracts with the with automotive and other clients, but particularly in the automotive business Thats Big for us is fixed price.

Good morning Lucas.

First of all I would like to position electrical steels.

Sure.

And our historical perspective, Thats always very helpful to understand.

<unk> acquired AK steel back in March of 2020.

So when underlying.

Butler Zanesville are both slated to be shut down.

Hot rolled price of the spot market is a $1000, if I'm selling to and I'm, making this up just two two gigawatt.

Actually the first meeting that I participate representing AK steel happen in our steel caucus meeting in Washington D C.

So don't take the number to the bank, but if.

Underlying hot rolled price of 1000, and my context, 1200 that I'm selling for 1200.

Four days before we closed.

And.

I said and for the for Roger Newport dense CEO of AK steel.

If underlying market prices <unk> hundred.

My underlying my price for the automotive clients also 1200 long story short it doesn't matter, where the spot price will go up and up or down.

Very.

Come to allow me to to be there and speak I basically put everybody on notice that.

If not.

Nothing would happen we would just go ahead.

A lot down a lot up our price with automotive slice of the business.

The shutdown process to us.

Related to happen so long story short we're being.

In the quarter was 36% of the business will stay where it is so we are feeling very good about that because we are protected in a very very important part of the market social going to complement something on that yes, sure Hey, Lukas just to add some numbers to that as well.

As lettered by imported steel at that time, we were able to stop that.

We're able to bring back production to the United States, we're able to shut down the back door.

Reduction of elimination of course, coming mainly from Mexico, and Canada using.

Relative to Q1, we expect Q2 average selling price to increase more than $100 a ton call. It a $120 a ton compared to Q1 and thats largely driven by.

Steel electrical steels from Korea, Taiwan, and Japan, So we.

Fixed the market in a way that we are no longer losing money at this very point Lucas.

Higher HRC pricing higher slab pricing and then most importantly, those lags that we experienced in Q1 from the sub 700 index pricing environment in November December those all fall off in Q2. So that's why you see the big jump in sales price.

Electrical steels is.

Our most.

Profitable line of business. So we are very happy with the fact that we're growing our own capacity with the pace of the demand we are not going to run ahead of the demand.

Terrific. This is super helpful really appreciate your color.

We are aware that the competition will try to participate in this market be my guest it's not an easy market is complicated product. So we know that a lot of that tends to favor that this business will come back to us. So at the right time, we will deploy capital is not a priority right now we are happier.

Continued best of luck. Thank you. Thank you. Thanks.

Thanks Lucas.

Our next questions come from the line of Carlos de Alba with Morgan Stanley . Please proceed with your questions.

Yes. Thank you good morning.

On the <unk>.

Couple of questions one is on Capex.

We have we are happy with the expansion that we deployed in Zanesville four knows that will free up more goes our Butler we are in good shape for now.

How should we think about capex going forward given that.

It is.

Ronnie <unk> hundred.

Very helpful. Thank you Lorenzo.

<unk> million dollars depreciation, which a lot of time, we use as a reference for sustaining capex is closer to 901 hundred 50.

My second question is also a little bit.

More on the near term and I wondered if you could comment on the second quarter pricing outlook, you mentioned April batch on a fixed contract with sprint reset them very successfully and then spot prices, obviously moved up very nicely year to date. So I wonder if you could comment on what the whole package would look like.

So how do you see for.

How many years do you think you can.

Keep your Capex below these thresholds depreciation without jeopardizing the equipment, so that that will be very useful.

On the pricing side in Q2, Thank you very much for your perspective.

For the projection of cash flows.

Yes, just to give you color on what you have just said depreciation a good reference.

Lucas as far as global <unk> concern the outlook is great because as you know our contracts with the with automotive and other clients, but particularly in the automotive business Thats Big for us is fixed price.

Because it's a good average, but it is not good in the short term as a reference because remember when we acquired the assets do were mistreated, we had to deploy more capital than the depreciation.

So when underlying.

That's why we're still paying our accounting for the higher costs and lower production.

Hot rolled price of the spot market is a $1000, if I'm selling to and I'm, making this up just two two gigawatt.

In the time that we're doing just that so wherever.

So don't take the number to the bank, but if.

<unk>, what's happening this year and it was going to happen next year with what happened last year Youll, probably go back to your depreciation number goes but we are now in the backend of the stuff that we have already done monies that we have already spent and we're not going to spend again.

On the life Hot rolled price of 1000, my context, 1200 that I'm selling for 1200.

If underlying market prices <unk> hundred.

My underlying my price for the automotive clients also 12 months long story short it doesn't matter, where the spot price will go up and up or down.

I don't know if social wants to complement.

Yes, sure Hey, Carlos So if you think of 2022, we spent over 900 and capex, but that included a lot of maintenance repairs.

A lot down a lot up our price with automotive slice of the business.

That cycle is now behind us.

In the quarter was 36% of the business will stay where it is so we are feeling very good about that because we are protected in a very very important part of the market. So it will be on a complement something on that yes, sure Hey, Lukas just to add some numbers to that as well.

So the new sustaining level for 2023 and at least 2024 is that 700 level now when you get to 2025 and beyond and then you have some additional re lines and things like that it could increase again, but for the foreseeable future, where we can see here in 'twenty three 'twenty four.

Relative to Q1, we expect Q2 average selling price to increase more than $100 a ton call. It a $120 a ton compared to Q1 and thats largely driven by.

Thats 700 is a number that we're comfortable with.

Alright, and just since you mentioned so when is the natural line this world.

Hello.

Higher HRC pricing higher slab pricing and then most importantly, those lags that we experienced in Q1 from the sub 700 index pricing environment in November December those all fall off in Q2. So that's why you see the big jump in sales price.

In our records.

Yes, 2025 at Burns.

Okay.

And then my second question, if I may on prices.

The October the October renegotiation before the resetting for the auto contracts.

Terrific. This is super helpful really appreciate your color and.

How should we think about that is that going to be in line with what we saw in April or is that more subject to.

Continued best of luck. Thank you. Thank you.

Thanks Lucas.

Our next questions come from the line of Carlos de Alba with Morgan Stanley . Please proceed with your questions.

Supply and demand conditions of the auto sector.

Not necessarily the HRC spot spot market.

Yes. Thank you good morning.

Yes, <unk> sports car, which has been taken out of the picture.

On the.

Couple of questions one is on Capex.

Promoter.

Each one of our major clients the option to buy from people that sell based on that.

How should we think about capex going forward given that.

As Ronnie below 800.

No one took it.

Million dollars depreciation, which a lot of time, we use as a reference for sustaining capex is closer to 900 and 950.

So we know we are in supply and demand.

But truly relationship type of thing.

I know, it's a game changer, yes. It is a game changer never happen between.

How do you see for.

How many years do you think you can.

As two companies and car manufacturers ever it is happening now.

Keep your Capex below these thresholds on depreciation without jeopardizing the equipment, so that that will be very useful.

I believe that the automotive.

Company's relationship with the steel mills are at the core of why we more iron ore company, we're able to acquire two big suppliers of automotive steel that are actually.

For the protection of cash flows.

Yes, just to give you color on what we have just said depreciation a good reference.

Because it is a good average, but it is not good in the short term as a reference because remember when we acquired the assets do were mistreated, we had to deploy more capital than the depreciation.

Already consolidated from several other that went down throughout the history of this business in the United States.

That party is over now we will continue to support the automotive industry. We will continue to provide them the technical capabilities that they need we will continue to develop the products for the next generation cars as we normally do but we want to be rewarded on behalf.

That's why we're still paying our accounting for the higher costs and lower production during the time that we're doing just that.

So wherever deck, what's happening this year and it was going to happen next year with what happened last year Youll, probably go back to your depreciation number goes but we are now in the backend of stuff that we have already done monies that we have already spent and we're not going to spend again.

Our shareholders, we need to get paid they understood that through the last two cycles of negotiation. So when October comes we'll talk again, it's too early although my shoes off where I get to the river.

I don't know if social wants to complement.

Not there yet.

Yeah sure Hey, Carlos So if you think of 2022, we spent over 900 and capex, but that included a lot of maintenance repairs.

Alright, good luck.

Thank you very much thank you.

Thanks Carlos.

Thank you. Our next question is coming from the line of Curt Woodworth with Credit Suisse. Please proceed with your questions.

That cycle is now behind us.

So the new sustaining level for 2023 and at least 2024 is that 700 level now when you get to 2025 and beyond and then you have some additional re lines and things like that it could increase again, but for the foreseeable future, where we can see here in 'twenty three 'twenty four.

Yes, thanks, good morning, so how.

How are you.

And Youre very Kurt about.

So I guess with respect to the longer term capex projections.

Around the $700 million you also talked about potential investments in Ccs as well as <unk>.

That 700 is the number that we're comfortable with.

Iron reduction via hydrogen, which.

Alright and just.

You mentioned so when is the next relying just for us to have a few of them.

Some of the numbers being postulated on some of those things are fairly significant capital. So.

In our records.

Yes, 2025 at Burns.

I realize it may be preliminary but can you give us a little bit of insight into.

Okay.

How ccs or hydrogen could fit into your business model and what maybe some of the economics could be around that.

And then my second question, if I may on prices.

<unk>.

The October the October .

Yes first indications.

The negotiation for the auto resetting for the auto contracts.

Sure.

Particularly ccs could be a very high internal rate of return project.

How should we think about that is that going to be in line with what we saw in April .

Based on not only monies available to develop the project.

Is that a more subject to.

Supply and demand conditions of the auto sector.

With the submission of the government, but also.

Not necessarily the HRC spot spot market.

<unk> supports goals has been taken out of the picture tomo.

Tax credits of up to $85 per ton of carbon capture.

Automotive.

So this is pretty meaningful pretty significant.

Each one of our major clients the option to buy from people that sell based on that.

It's not a short term.

Deployment of capital.

No one took it.

Carlo Kurt So theres, nothing really urgent about executing right now, but these are the numbers that we're working with as far as hydrogen we are ready we are ready to use it why is that well we already built.

So we know we are in the supply and demand.

Yes.

But truly relationship type of thing.

I know, it's a game changer, yes. It is a game changer never happen between.

As two companies and car manufacturers ever it is happening now.

The direct reduction plant that can use hydrogen we just need a pipe with hydrogen to connect to the pipeline that we feed natural gas, we are starting reaching natural gas with 1% than 5% and 10%. We can go up to 60% hydrogen in that plant. So we already we just need to.

I believe that the automotive.

Company's relationship with the steel mills are at the core of why we more iron ore company, we're able to acquire two big suppliers of automotive steel that are actually.

100, yet we are working with several no one but several different groups to create hydrogen hubs that can bring.

Already consolidated from several other that went down throughout the history of this business in the United States.

Deep and plentiful hydrogen to Toledo and also Cleveland because.

That party is over now we will continue to support the automotive industry. We will continue to provide them the technical capabilities that they need we will continue to develop the products for the next generation cars as we normally do but we want to be rewarded on behalf.

We actually have the technology of injecting natural gas into blast furnace I think that.

And the amounts that we use here in the United States that is only one other country in the world that does its Russia.

Our shareholders, we need to get paid they understood that through the last two cycles of negotiation. So when October comes we'll talk again, it's too early although my shoes off where I get to the river.

So.

Other suppliers of.

Steel.

For the automotive industry throughout the entire World, Japan, Korea, Europe , Brazil, They don't have natural gas available cheap.

Not there yet.

Alright, good luck.

Plentiful so they don't have this technique.

Thank you very much. Thank you. Thanks.

And we do so like the Russians.

Thanks Carlos.

Thank you. Our next question is coming from the line of Curt Woodworth with Credit Suisse. Please proceed with your questions.

<unk>.

Civilized World, we are the only ones so as far as manufacturing we are already a lot greener than the Europeans a lot greener than the Japanese a lot greener than the Koreans because we inject natural gas as soon as we enrich natural gas with hydrogen we are going to be really green. So.

Yes. Thanks, good morning, Lorenzo how are you.

Good and you're very Kurt about.

So I guess with respect to the longer term capex projections.

Around the $700 million you also talked about potential investments in Ccs as well as iron reduction via hydrogen which.

And we were promoted.

We are producing massive amounts of automotive steel, we're now producing press release with brand names. We have supplied the massive tons that the car manufacturers produce we haven't seen a press release, because we received a massive numbers that we produce every quarter in our financial statements. That's why you don't see brand names a press release.

Some of the numbers being postulated on some of those things are fairly significant capital. So.

<unk>.

I realize it may be preliminary but can you give us a little bit of insight into.

How ccs or hydrogen could fit into your business model and what maybe some of the economics could be around that.

<unk>.

Okay.

Yes first indications.

That's helpful and then I guess.

<unk> are showing that.

Second question just on the metallic market you talked about I guess 30 million tons.

Particularly ccs could be a very high internal rate of return projects based on not only monies available to develop the project.

Prime metallic demand in three years.

From <unk> I think you said today.

And obviously you guys are in unique position, having captive or.

But submission of the government, but also.

I guess.

You did the large FTC deal.

Tax credits of up to $85 per ton of carbon capture.

What is kind of your strategy going forward to either further leverage your metallic position would you look to.

So this is pretty meaningful pretty significant.

It's not a short term.

Increase your HDI potential do you see scope for more consolidation in the scrap market.

Deployment of capital.

Carlo Kurt So theres, nothing really urgent about executing right now, but these are the numbers that we're working with as part of hydrogen we are ready we are ready to use it why is that well we already built the direct reduction plant that can use hydrogen we just need.

And kind of how do you see that fitting in and you talked about Burns Harbor up for a re line in 'twenty five.

Is that capital you would spend or would that free up iron ore to potentially.

Further leverage the metallics strategy, thanks, very much guys.

Kurt look.

I am very comfortable with our situation right now using our finite resources in Minnesota, and Michigan for our own use.

Our pipe with hydrogen to connect to the pipeline that we feed natural gas, we are starting reaching natural gas with 1% than 5% and 10%. We can go up to 60% hydrogen in that plant. So we already we just need the hydrogen we are working with several no one but several.

We like that.

So if we're trying to ask me if I'm going to build another <unk> plant. The answer is no where if a gap network. The answer is still no.

Different groups to create hydrogen hubs that can bring.

Are you considering building <unk> to supply the company.

Deep and plentiful hydrogen to Toledo and also Cleveland because.

No.

Net course Hess.

The part the barn, when I acquired AK steel I built that <unk> planned to do.

We actually have the technology of injecting natural gas into blast furnace I think that.

To support many mills that I thought they were really serious in producing flat rolled steel.

<unk>.

And the amounts that we use here in the United States. That's the only one other country in the world that does its Russia.

With the high specification, while they're actually they are in the business of producing rebar wide flange beams Blake. That's all good good stuff what does it compete against my Automotives. So I'll keep my metallics for ourselves. The SPT is the biggest buyer of prime scrap.

So the other suppliers of.

Steel.

For the automotive industry throughout the entire World, Japan, Korea, Europe , Brazil, They don't have natural gas available cheap.

The country will continue to do this closed loop, we're happy with what we have we will only continue to grow FPP for ourselves as well so it's all self centered.

Plentiful so they don't have this technique.

And we do so like the Russians.

<unk>.

In closing slide Cleveland cliffs, and everybody also be outside looking in.

Civilized World, we are the only ones so as far as manufacturing we are already a lot greener than the Europeans a lot greener than the Japanese a lot greener than the Koreans because we inject natural gas as soon as we enrich natural gas with hydrogen we're going to be really green. So.

Very clear thank you. Thank.

Thank you.

Thank you our next questions come from the line of Timna Tanners with Wolfe Research. Please proceed with your questions.

Hey, good morning, everyone I wanted.

And we were a promote.

I wanted to ask a little bit about the mix and my first question. So I know that Lorenzo mentioned that the big driver of improved volumes was the automotive market, but based off of the detail that you provided I couldn't see.

We are producing massive amounts of automotive steel runoff, reducing press release with brand names. We have supplied the massive tons that the car manufacturers produce we haven't seen a press release, because we are seeing the massive numbers that we produce every quarter in our financial statements. That's why you don't see brand names and press release.

And I can see a big move in coated actually saw the biggest move in and HRC. So I'm. Just wondering is there a cadence where maybe that ramps up more later in the year or is this kind of the mix that we should expect for the balance of the year.

<unk>.

Okay.

That's helpful and then I guess.

Yes Luca.

Second question just on the metallic market you talked about I guess 30 million tons.

We did.

Did gain hot rolled as well.

Like I said when you.

Prime metallic demand in three years.

Allocate more to automotive.

From <unk> I think you said today.

You basically fill up your Gulf of 19 lines producing exposed parts in high strength low alloy for a structure gauges for evs things like that you're done with your.

And obviously you guys are in a unique position having captive or.

I guess.

You did the large FTC deal.

What is kind of your strategy going forward.

Either further leverage your metallic position would you look to.

Utilization of <unk>.

High value added a galvanized and then you grow shipments youre going to grow shipping whereas easier.

Increase your HDI potential.

Do you see scope for more consolidation in the scrap market.

It's easier to sell hot rolled through your asset assessments deadline.

And kind of how do you see that fitting in and you talked about Burns Harbor up for a re line in 'twenty five.

Whereas the gross gain after filling up all of our capacity of galvanized.

Is that capital you would spend or would that free up iron ore to potentially.

With the high value added galvanized.

Okay and you are planning to continue to produce at these levels through the rest of the year just taking my question. I think you commented on its call that it was going to manage volumes and I think other companies have said, they're going to run full out. So just wanted your latest thinking there.

Further leverage dermatology strategy, thanks, very much guys.

Kurt look I'm very comfortable with our situation right now using our finite resources in Minnesota, and Michigan for our own use.

We are running full out to supply all of our automotive clients as our automotive plants continue to do more and more cars.

We like that.

So if we're trying to ask me if I'm going to build another <unk>. The answer is no where if you get Nash walk the answer is still no.

The recession has been.

And one more time and with the fed getting to the end of this.

Ill consider this building <unk> supplier carpets no.

Like a call in my prepared remarks, right hiking marathon.

We're going to see that the cars, we will continue to be sold.

That horse has.

The part the barn, when I acquired AK steel I built that <unk> planned to do to support many mills that I thought they were really serious in producing flat rolled steel.

And we are the ones that will benefit the most from that.

With our.

Other capacity allocated to the rest of the market. We are also developing close loop programs with our major clients in appliances and in other markets. So we are continuing to deliver more to these folks. So we are in good shape with that all debt.

The high specification, while they're actually they are in the business of producing rebar wide flange beams Blake. That's so good good stuff what does it compete against my automotive so I'll keep my metallics for ourselves.

My perspective for the balance of the year is very positive because <unk> along with the the growth in demand thats coming from automotive.

<unk> is the biggest buyer of prime scrap.

In the country will continue to do this closed loop, we are happy with what we have we will only continue to grow FPP for ourselves as well. So it's all self centered it's all in closing side Cleveland cliffs and everybody also be outside looking in.

Got it thanks, and then if I could the last question is just on the guidance you gave last quarter was for net periodic benefit credits of $140 million and you started out pretty high run rate. So just wondering if you have any updated guidance or if we should still be using that value and thanks again.

Very clear thank you. Thank.

Thank you.

Thank you our next questions come from the line of Timna Tanners with Wolfe Research. Please proceed with your questions.

I'm sorry can you repeat the question and with that I think I missed Oh, yeah. No problem. Yeah. So on that just a kind of accounting question I guess on the net periodic benefit credits I have in my notes 140 million guided for 2023 on the last call, but the first.

Hey, good morning, everyone I wanted.

I wanted to ask a little bit about the mix and my first question. So I know that Lorenzo mentioned that the big driver of improved volumes was the automotive market, but based off of the detail that you provided I couldn't see.

Quarter was already 50 million. So just trying to make sure that that's still the right value for modeling purposes.

And I can see a big move and coded actually saw the biggest moving and HRC. So I'm. Just wondering is there a cadence where maybe that ramps up more later in the year or is this kind of the mix that we should expect for the balance of the year.

Got you Hey, Timna. It's also I think youre missing service cost and interest cost.

Which are on Cogs.

That's too around.

Yes Luca.

Call It $140 million after you consider that piece, it's still 140.

We did.

Did gain hot rolled as well.

Like I said when you.

Okay alright, thank you.

No problem.

Allocate more to automotive.

Thank you. Our next question is coming from the line of Tristan <unk> with BNP Paribas. Please proceed with your questions.

Basically fill up your Gulf of 19 lines producing exposed parts in high strength low alloy for a structure gauges for evs things like that you're done with your.

Sure.

Yes, hi, Thank you for taking my question just have one left.

Capital allocation.

Utilization of <unk>.

I think in your prepared remarks, you flagged at $3 billion net debt target that you would expect to reach at some point this year, if I understood correctly.

High value added a galvanized and then you grow shipments we are going to grow shipping whereas easier.

It's easier to sell hot rolled so we are assessing assessments deadline.

So what's the strategy after that I think you talked about.

Whereas the gross gain after filling up all of our capacity of galvanized.

The strong electrical steel market, you'll find with your capacity you're fine with the meta links.

With the high value added galvanized.

Supply there as well you flagged some de carbonization needs.

Okay, and Youre planning to continue to produce at these levels through the rest of the year just to my question. I think you commented on its call that it was going to manage volumes and I think other companies have said, they're going to run full out. So just wanted your latest thinking there.

Are there more investment coming or will free cash flow generation will be more tilted towards shareholder returns after that after we reached.

That point and also is the net debt to EBITDA.

We are running full out to supply all of our automotive clients as our automotive plants continue to build more and more cars.

Reference point.

Below a one time is it still valid.

The recession has been.

Keith.

We didn't flag anything that you said that reflect less correct today. The records, we talked about projects that are multi year and youre conflating everything for the cash flow that we're going to have this year and our target of getting to net debt net debt down to 3 billion. This year. So the only thing that we said that we are.

And one more time and with the fed getting to the end of this.

Like a call in my prepared remarks, right hiking marathon.

We're going to see that cars, we will continue to be sold.

And we are the ones that will benefit the most from that.

With our.

You do take notice police Tristan, we're going to get to net debt.

Other capacity allocated to the rest of the market. We are also developing closed loop programs with our major clients in the appliance and in other markets. So we are continuing to deliver more to these folks. So we're in good shape with that all that.

At 3 billion later this year still this year.

What we said.

The carbon capture project is future.

The hydrogen project is future because we still don't have hydrogen.

My perspective for the balance of the year is very positive because <unk> along with the growth in demand thats coming from automotive.

Your line of Indiana Harbor is in 2025, we are in 2023 so.

One more time, we flagged that we're going to get to net debt $3 billion. This year.

Got it thanks for the answer and then if I could the last question is just on the guidance you gave last quarter was for net periodic benefit credits of $140 million and you started out at a pretty high run rate. So just wondering if you have any updated guidance or if we should still be using that value and thanks again.

Before Santa Claus came to your home, we're going to be with $3 billion net debt.

What else can I do for your interesting.

Sorry, My question wasn't clear then.

I'm sorry can you repeat the question on water I think I missed Oh, yeah, no problem. Yeah. So on that just a kind of accounting question I guess on the net periodic benefit credits.

After you get to that milestone whats your thinking what's the strategy.

Your question was clear your understanding was wrong. So that's why I corrected your assessment, but after we get to 3 billion, we will see.

My notes are 140 million guided for 2023 on the last call that the first quarter was already 50 million. So just trying to make sure that that's still the right value for modeling purposes.

We haven't said anything about it I'm not going to tell you at this point, but usually companies at that point tend to increase return to the shareholders, but returned to the shareholders. It could happen earlier, whereas my stock prices on sale in the stock exchange.

Got you Hey, Timna itself, so, yes, I think youre missing service cost and interest cost.

Which are on Cogs.

That's too around.

Call It $140 million after you consider that piece, it's still 140.

As soon as the window opens I might be buying stock.

Okay alright, thank you.

Self SCO by a lot of stock.

No problem.

Thank you. Our next question is coming from the line of Tristan <unk> with BNP Paribas. Please proceed with your questions.

Soon as the window opens.

Because it's on sale.

It's on sale because people don't understand long term, we believe that three months a quarter is long term it's not in.

Yes, hi, Thank you for taking my question.

One left.

In our business.

On capital allocation.

New York minute.

I think in your prepared remarks, you flagged at $3 billion net debt target that you expect to reach at some point this year, if I understood correctly.

Okay.

Alright, thank you.

Youre welcome.

Yes.

So what's the strategy after that I think you talked about.

Thank you. Our next question is coming from the line of Alex hacking with Citi. Please proceed with your questions.

The strong electrical steel market, you'll find with your capacity you find with the meta links.

Yes, good morning, and thanks for the call I just wanted to follow up on the cost guidance I think in the last quarter also.

Supply there as well you flagged some de carbonization needs.

You had guided to maybe $60 of cost decreases in <unk> and then another 40 in <unk>.

Are there more investment coming or will free cash flow generation will be more tilted towards shareholder returns after that after we reached.

Now, we're looking I think of 'twenty and <unk>.

At that point and also is the net debt to EBITDA.

I understand it's extremely difficult to forecast I guess, what what changed in.

Reference point you have.

Below a one time is it still valid.

In the forecast and should we still be expecting.

<unk>.

Decreases to flow into the third.

We didn't flag anything that you said that reflect so thats correct.

And potentially the fourth quarter as well thank you.

The record.

Yeah, sure Hey, Alex, let's let's drill down on that because it's important so since we gave that guide.

We've talked about projects that are multi year and youre completing everything for the cash flow that we're going to have this year and our target of getting to net debt net debt down to 3 billion. This year. So the only thing that we said that we do take notice police Tristan we are going to get to net debt.

Scrap prices for example have gone up around.

Around 100 Bucks.

So things change right and like I said.

We guided to $50 cost reduction in Q1, and we executed 60, so theres a little bit of pull forward there.

At 3 billion later this year you still this year, that's what we said.

And we as you said had guided to.

The carbon capture project is future.

Another 60 in Q2, and now I'm seeing call it 15 to 20.

The hydrogen project is future because we still don't have hydrogen.

And the bridge between that $60 <unk> is largely driven by that change in scrap.

The realign of Indiana Harbor is in 2025, we are in 2023 so.

But beyond Q2, we will see further cost reductions as well, so even though I'm seeing 15% to 20 here. In Q2 Q3 is also going to have further cost reductions call. It another 25.

One more time, we flagged that we are going to get to net debt $3 billion. This year.

Before Santa Claus came to your home, we're going to be with $3 billion net debt.

So it's still significant meaningful cost reduction is just the timing like you said, it's hard to nail down.

What else can I do for your interest in <unk>.

Okay. Thanks, I appreciate the color and I understand you know metallics is a moving target and hard to forecast.

Sorry, My question wasn't clear then.

After you get to that milestone.

And then I guess just on the shipment side, obviously extremely strong in the quarter to auto and also outside of auto.

You're thinking what's the strategy.

Your question was clear your.

Understanding what's wrong so.

Is there any is there any part of that you think is restocking or you think this reflects a true underlying demand and the weakness that we saw at the end of last year was was really just driven by destocking. Thank you.

That's why I corrected your assessment, but.

After we get to 3 billion, we will see.

We haven't said anything about it I'm not going to tell you at this point, but usually companies at that point tend to increase return to the shareholders, but returned to the shareholders. It could happen earlier.

In our case Alex.

All the fluctuations that we're seeing are coming from end user end users, particularly coming from automotive automotive is buying more.

Stock prices on sale in the stock exchange.

Once the window opens I might be buying stock I myself as CEO by a lot of stock as soon as the window opens.

<unk> is higher now than it has been in a long time.

Not back to where it should be but the consumer continues to buy cars. They continue to produce cars.

So because it's on sale it is.

As on sale because people don't understand long term they believe that three months a quarter is long term it's not.

The OEM level, they continue to push cars into the lots of the dealers and we continued to sell steel for them to build these cars. So this.

In our business is a new York minute.

Yes.

Okay tourism.

North of 4 million tons a quarter.

Alright, thank you.

Youre welcome.

Base that we are in right now is.

Yes.

Thank you. Our next question is coming from the line of Alex hacking with Citi. Please proceed with your questions.

Supported basically I would say exclusively by outdoor board of demand in our case all the rest is just.

Yes, good morning, and thanks for the call.

Just wanted to follow up on the cost guidance I think in the last quarter also.

Great.

Service centers are continuing to operate at low levels of inventory and if they see something different coming next week when the fed speak they probably will buy more.

You had guided to maybe $60 of cost decreases in <unk>, and then another 40% and <unk>.

And now we're looking I think of 'twenty and <unk>.

I am anticipating.

I understand it's extremely difficult to forecast I guess, what what changed.

Car manufacturers continue to buy strong and service centers will be left behind if they don't start to change their pace, it's not bad, but it's not great at this point.

And the forecast and should we still be expecting.

Cost decreases.

Decreases to flow into the third quarter and potentially the fourth quarter as well. Thank you.

Yeah, sure Hey, Alex, let's let's drill down on that because it's important so since we gave that guide.

Okay I appreciate the color as always thank you. Thank.

Thank you.

Thanks, Alex.

Scrap prices for example have gone up.

Thank you our next questions come from the line of Sean <unk> with Deutsche Bank. Please proceed with your questions.

Around 100 Bucks.

So things change and like I said.

We guided to 50 dollar cost reduction in Q1, and we executed 60, so theres a little bit of pull forward there.

Hi, good morning, Orange zones SASSA.

Just first question when you think about sort of green energy in some of the opportunities you are pursuing.

And we as you said had guided too.

Do you see any other tangential opportunities, whether it's within solar or wind or even a charging infrastructure.

Another 60 in Q2, and now I'm seeing call it 15 to 20.

And the bridge between that $60 15 is largely driven by that change in scrap.

That we could look forward to in the next few years.

Yes look we sell to.

Clients in this.

But beyond Q2, we will see further cost reductions as well, so even though I am saying 15 to 20 here. In Q2 Q3 is also going to have further cost reductions call. It another 25.

Some markets and we are seeing demand coming from them, we believe that that money is coming from infill.

Inflation reduction Act.

And the infrastructure Bill will support more and more investment.

So it's still significant meaningful cost reduction is just the timing like you said, it's hard to nail down.

Areas, but at this point.

Okay. Thanks, I appreciate the color and I understand you know metallics is a moving target and hard to forecast.

It is still very institute at the very beginning of the development of these sub markets. One thing that I believe will pick up steam very quickly is.

And then I guess just on the shipment side you know obviously extremely strong in the quarter to auto and also outside of auto.

The deployment of capital and charging stations because the states are starting to move faster on that and that will create more opportunities for us not only for.

Is there any is there any part of that you think is restocking or you think this reflects our true underlying demand is and the weakness that we saw at the end of last year, which was really just driven by destocking. Thank you.

Grain oriented electrical steels, obviously, but also for other types of steel because the charging stations consuming steel not only electrical steels Macau normal carbon steel that we produce and sell all.

In our case Alex.

All the fluctuations that we're seeing are coming from end user.

Users, particularly coming from automotive automotive is buying more.

These are mainly the.

The best points of consumption increase consumption that we see right now.

<unk> is higher now than it has been in a long time.

Thank you. That's that's definitely helpful. And then just understanding you've done a good job paying down a lot of debt and your top priorities remains debt reduction.

It's not back to where it should be but the consumer continues to buy cars. They continue to produce cars.

At the OEM level, they continue to push cars into the lots of the dealers and we continue to sell steel for them to build these cars. So.

That aside bananas.

Banana of M&A for a little while is there any.

Fortuity or appetite for M&A or are you still favoring organic improvement as you've laid out on the call. Thank you.

Yes.

North of 4 million tons a quarter pace.

Base that we are in right now is.

Neither one nor the other.

Supported basically I would say exclusively by outdoor motive demand in our case all the rest is just.

Because M&A is opportunity.

<unk>.

You don't see.

As more iron ore company buying a steelmaker and then by another steelmaker and going from $2 billion in revenues.

Great.

Service centers are continuing to operate at low levels of of inventory and if they see something different coming next week, when the fed who speak they probably will buy more.

In 2000 $19 billion to $23 billion in revenues in 2022, all the time.

You'll probably never saw it in your life and never will.

Im anticipating.

In the future so.

Car manufacturers continue to buy strong and service centers will be left behind if they don't start to change their pace, it's not bad, but it's not great at this point.

M&A as opportunities. So at this point I don't see annual opportunity on M&A and I did commit to the Greenfield gross anytime going to score anytime they lost.

Two years, so theres no.

Okay I appreciate the color as always thank you. Thank you.

Real greenfield opportunity for us for us, it's paying down debt.

Thanks, Alex.

Thank you and our next questions come from the line of Sean <unk> with Deutsche Bank. Please proceed with your questions.

And once we pay down debt, we're going to do something with the money are good for the shareholders. That's all.

Hi, good morning, Orange zones.

You can get a commitment for us at this point.

Yes.

Just first question when you think about sort of green energy in some of the opportunities you're pursuing.

Okay. That's very clear. Thank you very much thank you Sean.

Do you see any other tangential opportunities, whether it's within solar or wind or even charging infrastructure.

Thanks, Eric.

There are no further questions I would like to hand, the call back over to you.

We could look forward to in the next few years.

Alright, ladies and gentlemen, thanks for being with US for the last hour. We appreciate the interest in Cleveland cliffs.

Thank you, yes look we sell to.

Clients in this.

<unk> markets and we are seeing demand coming from them, we believe that that money is coming from inflation.

We'll continue to keep you posted and we will continue to deliver the results we are committed to deliver.

Thanks, again and have a great day.

Inflation reduction Act.

And the infrastructure Bill will support more and more investment.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

Areas, but at this point.

It is still very interesting at the very beginning of the development of these sub markets. One thing that I believe will pick up steam very quickly is.

The deployment of capital and charging stations because the states are starting to move faster on that and that will create more opportunities for us not only for.

Grain oriented electrical steels, obviously, but also for other types of steel because the charging stations consuming steel not only electrical steels Macau normal carbon steel that we produce and sell all.

These are mainly the.

The best points of consumption increase consumption that we see right now.

Thank you. That's that's definitely helpful. And then just understanding you've done a good job paying down a lot of debt and your top priorities remains debt reduction.

That aside the banana.

Banana of M&A for a little while is there any.

Fortuity or appetite for M&A or are you still favoring organic improvement as you've laid out on the call. Thank you.

Neither one nor the other.

Because M&A is opportunity.

You don't see.

As more iron ore company buying a steelmaker and then by another steelmaker and going from $2 billion in revenues.

In 2000 $19 billion to $23 billion in revenues in 2022, all the time.

You'll probably never saw it in your life and never will.

The future so.

M&A as opportunities. So at this point I don't see any opportunity on M&A and I did commit to the Greenfield gross anytime during this call or any time they lost.

Two years, so theres no.

Real grief huge opportunity for us for us, it's paying down debt.

And once we pay down debt, we're going to do something with the money are good for the shareholders. That's all.

You can't get a commitment for us at this point.

Okay. That's very clear. Thank you very much thank you Sean.

Thanks, Eric there are no further.

There are no further questions I will like to hand, the call back over to you.

Alright, ladies and gentlemen, thanks for being with US for the last hour. We appreciate the interest in Cleveland cliffs.

We'll continue to keep you posted and we will continue to deliver the results we are committed to deliver.

Thanks, again and have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.