Q2 2023 Cleveland-Cliffs Inc Earnings Call
At this time I would like to introduce Celso <unk> Executive Vice President and Chief Financial Officer.
Thank you Daryl and good morning, everyone.
Q2, adjusted EBITDA of $775 million was more than three times higher than Q1.
We had our best free cash flow quarter since 2021 at $756 million we.
We used most of that cash to pay down over $550 million of debt, bringing our net debt down to $3 9 billion, our lowest debt level. Since we were just a mining company in 2019.
Q2 of 2023 was our largest quarterly debt reduction in company history.
We also returned nearly $100 million to shareholders by buying back six 5 million shares at an average price of just over $14 per share.
Since the acquisition of F. P. T. In November of 2021, we have dedicated the vast majority of our free cash flow to debt repayment and share repurchases.
To summarize our balance sheet accomplishments over the past two years.
Net debt has gone from $5 3 billion to $3 $9 billion down by 26%.
Net pension and <unk> liabilities have gone from $3 8 billion to just $750 million down by 80%.
And our diluted share count has gone from 585 million to $514 million down by 12% to the benefit of our shareholders.
We have remained disciplined in our approach to capital allocation and we will continue to do so going forward.
Our current and future Capex needs are low and we expect to maintain a very strong free cash to remain a very strong free cash flow generator for the foreseeable future.
Q2 was a multi year low in capex for us.
Looking ahead very importantly, based on more recent evaluations by our operations team the blast furnace realign at Burns Harbor that we mentioned on the last call, which was originally planned for 2025 has now been pushed by one year and will now only be done in 2026.
With that we now expect annual Capex to remain around the $700 million level for 2023, 2024 and 2025.
Drilling down specifically on our results for this past quarter.
Our volumes and selling prices were both up sequentially from Q1 to Q2.
Shipments of $4 2 million tons effectively matched the high watermark that we set as a steel company two years ago.
This was highlighted by a much richer sales mix with another quarterly record shipment level to our automotive customers and more value added end user sales than originally expected.
This mix impact led to better price realizations than expected with our selling price averaging $1255 per net ton, representing a significant increase of nearly $130 per ton quarter over quarter.
During Q2, the offsetting impact of the richer mix came on the cost side as our unit costs were effectively flat compared to the prior quarter.
We ultimately sold a higher proportion of value added tonnes than originally expected.
This being said the cost reduction targets, we laid out loud in the that we laid out in the prior quarter remain on track as we anticipate a $40 per ton reduction in steel costs from the second to the third quarter.
You can already see this foreshadowed in our cash flow statement as replacing higher cost inventory with lower cost inventory drove a working capital benefit in Q2.
This cost reduction is a function of healthy production volumes normalized repair and maintenance costs as well as lower scrap energy and alloy costs.
The reduction in costs coming in Q3 will help to partially offset the impact of recently lower index pricing, which will roll through in the back half of the year.
As typical for the sector, we will likely see lower volumes lower automotive volumes in Q3 due to OEM outages for model year changeovers.
While we still aim to maintain in Q3, the same high levels of total shipments we achieved in Q2, the expected product mix should drive a favorable impact on unit costs.
We're excited that we have now worked through effective effectively all of our higher cost inventory leftover from our days of elevated repair and maintenance and reduced production volumes.
Looking forward, we not only see the near term costs coming down in Q3, and then Q4, but also expect to see further reductions into next year, mainly related to lower coal prices.
During the quarter following the well timed issuance of our unsecured bonds in April we were able to successfully upsized and extend the maturity of our ABL facility from 2025 to 2028 pushing out by three years, what was previously our nearest dated debt maturity.
With the assets of SPT now included as part of the collateral we right sized our ABL from $4 5 billion to $4 75 billion.
The ABL together with our bond offering and free cash flow allowed us to end the quarter with record liquidity of $3 $8 billion.
With that I will now turn the call over to Lorenzo.
Thank you and good morning, everyone.
The first thing to highlight about our second quarter results as our total shipments of $4 2 million tonnes.
It matches the record high we set in the second quarter of 2021.
At that time back in 2021, we were operating a total of eight blast furnaces and now in 2023, we operate only seven.
If you'll recall, we idled, our Indiana Harbor number four blast furnace.
Two 1 million ton per unit.
In 2022.
So with one less major blast furnace in our footprint.
We were able to accomplish the same levels of production and shipments.
This fact demonstrates the efficiency of our strategic use of H B I S feedstock in our blast furnaces to.
Together with the maximization of the scrap usage in our <unk> apps.
As a result, we're able to use a lot less coke for the same amount of pig iron produced.
Let's make it even more evident had.
It had Cleveland cliffs not acquired the choose to companies in 2020 the.
The same amount of steel would be produced today, but there's still choose generation would be a lot higher.
They use of large amounts of H B R. In blast furnaces introduced by Cleveland cliffs.
Allows for significantly less C O two generation.
In our case, 32% less than five years.
While maintaining the same level of production and the same product mix, which is heavy in flat rolled out automotive steels.
We do not know of any other company mini meal or integrated in the U S, Canada, Europe Asia or anywhere else in the world that has achieved similar magnitude of reduction in <unk> emissions in such a short period of time.
Jim.
One of our key competitive advantages. They have is having full control of all our main raw material iron ore pellets from our mines in Michigan and Minnesota.
You're speaking of Minnesota in Q2, we got a final resolution of the issue at Nash walk.
We have been fighting for Nash walk since I came to cliffs.
In 2014.
Nine years later, we now control the state leases.
This leaves us together with the private land, we acquired there six years ago add decades of high quality ore to our reserves at the hearing.
We have already started the work necessary to develop niche walk and our preliminary assessment confirms that this ore body will support the production of both blast furnace pellets and direct reduction grade pellets for the long term.
On that note, we find ourselves in 2023 reaping the benefits so far early decision to invest in direct reduction.
Back in 2017.
We broke ground in 2018, and the plant began producing production of <unk> in late 2020.
With natural gas prices, where they have been.
We have produced the H b.
At a cost of less than $200 per metric ton.
So our <unk> has not only been a carbon intensity reduction agent, but also our productivity and margin enhancing agent.
It's also worth reflecting on our success in building ramping up and operating our Toledo plant.
Neither one of the true direct reduction iron plants breathe.
He built into and I would just state by two other companies are good examples of success.
Their failure to execute caused a lot of skepticism regarding our ability to do it successfully to the point that one research analyst was call it a widow maker.
Moreover, when comparing Cleveland cliffs execution of the Toledo plant.
While the greenfield sheet and plate new products in our space and the struggles that they have had during construction and after startup.
It goes under appreciated that <unk> built and commissioned our HDI plant, we have been operating and eventually and add capacity for two and a half years case closed.
Our customers are starting to recognize the important role that <unk> has played in our carbon reduction goals with that we have recently introduced in our invoices to our clients what's called the cliffs H surcharge.
With a $40 per ton surcharge applies to each ton of steel made with cliffs H B I.
Well the ones that work in metric tons is $44 per metric ton.
We deserve to be paid for a characteristic of our steel that truly differentiates us, particularly when compared to other major suppliers of steel to the automotive industry in the United States in Europe in Japan, and South Korea and China.
Or anywhere else throughout the entire world.
We also believe that the $40 per net ton glyphs eight surcharge should be passed along by the car manufacturers to the final consumer.
And that would only increase the window sticker MSRP price of a car by less than zero point to 1%.
Regardless.
As one of the largest suppliers of steel to the automotive industry in the world Cleveland cliffs wants to continue to invest in green initiatives and therefore, we need to be paid for that.
That's not unreasonable and should actually be expected.
Universally accepted.
We at Cleveland cliffs are happy to be the first ones on this back.
Okay.
The next step in our evolution will be the use of hydrogen throughout our footprint, including at our <unk> facility and our blast furnaces, which we have already proven our hydrogen ready.
Three months ago on May eight at Middletown works, we became the first company in the Western Hemisphere to successfully complete a full scale trial injecting hydrogen into all two years off of blast furnace for an extended period of time.
Using the existing pipeline and transportation infrastructure in place hydrogen gas was injected into all two years of the blast furnaces and used as a substitute for fossil fuel reduction.
This ultimately replace the release of Seo tool with the release of each tool, which water vapor.
With no impact to product quality or operating efficiency.
We'll be next Trialing the technology, it's all our largest blast furnace, Indiana Harbor Seth.
We believe hydrogen will be the true game changer for the carbonization of steel.
It's simple as simple chemistry after all and.
And we have already proven its effectiveness the main hurdle right now is economics.
As of to date equivalent units of hydrogen gas.
<unk> 10 times more expensive than natural gas.
That's why we are an active player on the initiatives to build hydrogen hubs in the Midwest is specifically near our Burns Harbor, Indiana Harbor is too complex and northwest, Indiana, and also near our Toledo, Ohio direct reduction plant.
As hydrogen becomes more and more economical we will be able to implement it throughout our entire footprint.
The steel industry in the U S represents just 1% of our Cabo.
Our country Skyborne emissions footprint.
Care to transportation and power generation.
Together account for over 50%.
With the role we play in automotive we are actively engaged in providing solutions.
For much more carbon intensive sectors.
On that regard I'm pleased to report that the 70000 tons.
Nor oriented electrical steels expansion at our Zanesville plant has been completed and we have already started producing our modal Max electrical steels for using EV motors.
Every electric vehicle on the road needs about 150 pounds of these mature Andrew.
And we are now in a great position to serve the growing demand for these steels.
Outside of automotive overall demand remains healthy.
In recent months, we have seen a massive influx in August related to solar projects, which are heavy users of our galvanized steel.
As a relatively new market for steel this is by far the largest growth area for us in terms of demand.
Now that it appears that inflation is under control and the soft landing scenario is a real possibility caution on the part of service center buyers should begin to ease.
Service Center inventories remain way too low and with this new sources of demand along with the economy, new demand related to federal spending initiatives, you're still buyers are starting to come off the sidelines.
Okay.
When a very specific note for those who have been following the recent <unk> 95 bridge collapse in Philadelphia.
I'm proud to report that Cleveland cliffs bleeds division's ability to respond quickly to the crisis led us.
Led to us being awarded the contract to supply the steel plate needed to repair the breach we received the pure on a Friday melted still on that Sunday rolled on Monday and began shipping on Tuesday.
Four day turnaround from both our Burns Harbor and Coatesville plants.
Head of the fabricators already accelerated schedule.
This was a huge effort and a great accomplishment achieved by our Cleveland cliffs team and I would like to personally congratulate all the men and women involved in getting this drop done so quickly and so professionally.
We look forward to the speedy reopening of this important piece of our infrastructure with that I will turn it over to the operator for questions Daryl.
Thank you, we'll now be conducting a question and answer session. If you would.
I'd like to ask a question. Please press star one on your telephone keypad.
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Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
One moment, please while we poll for your questions.
Our first questions come from the line of Timna Tanners with Wolfe Research. Please proceed with your question.
Yeah, Hey, good morning, everyone I wanted to ask for a little bit more color on the commentary related to coal price declines if you could give any more specifics and also on the next correction you talk about helping cost.
But any color on the expected implications for prices into the third quarter would be great. Thank you.
Okay.
First of all more coal to coal prices I get.
<unk> given right now are in the middle of a negotiation the only thing that I would like to say is that we expect price to decrease year over year.
By a significant percentage that's all I can tell you right now because it's not done yet it's too early maybe next quarter, we can be more numerical but good things are coming from this negotiation which at.
And this year I am handling myself.
That's number one the second one you mentioned mixed correction don't know what disease can you clarify.
Oh, yeah, absolutely. So when you talked about the benefits from the mix changes into the third quarter from a particularly strong mix in the second quarter, you talked about how that would help reduce costs, but it also tends to imply and I don't want to jump to conclusions, but generally if you have a mix shift like that you would also see.
An impact on your average realized selling price. So I was just wondering if you could also provide kind of the industry.
Color as well.
Understood.
Here's the thing in Q2.
Being the by far the largest supplier of automotive.
Skews to the Oems.
And service centers altogether.
We saw a bigger demand for automotive steels.
Then we were anticipating.
Several reasons for that.
Their supply chain issues have been resolved.
By and large.
D R.
Beauty card more aggressively ahead of union negotiations.
Was it better be safe than sorry, even though I don't expect any.
Disruption strike or anything like that but they are behaving.
If they need to stay ahead of the game, which is my opinion good management practice, when we're entering as union negotiation, even if the negotiations frankly, so we're being the largest by a lot where the biggest beneficiary of this type of thing and that explains why.
Our average sales price went up because automotive is high value added and compares with the rest of the what others do that's more skewed towards the <unk>.
Commodity commercial grade.
Stuff that every everyone can produce no matter, if it's a mini bureau and integrate.
So that explains the price side on the other hand, because this mix is have you on.
Gulf Gulf of yield.
Highly specified galvanized things like that.
There is cost involved in produced these higher margin prices.
So.
All in all it was great for US we we had a slightly higher cost than were anticipated. There was basically in line with the course of Q1 and our price went up by.
More than $200 for the more than $100 to 100 and something they don't have the number in front of me right now, but it was significant $127 per ton.
Something like that but don't take this number to the bank check that later.
We'll find out but I don't have those numbers in front of me, but higher price by $127 per tonne just confirms our position in the automotive industry because a lot of lots of of companies love to talk about gaining market share in automotive we are the ones that the storage goes up price go up every.
<unk> goes up with us and others keep repeating the same story about gaining market share I don't know where this market share all the market share gains they are buying but anyway, that's a separate story.
I explained the price thinking the core thing unless I left something outside please feel free to.
Oscar.
Missing something Tim Yeah, sorry, Lorenzo I was just trying to understand how we got to the second quarter, which I think you explained very well, but also the implications of that are backing off of the extra auto tonnage that you talked about okay got you.
Yeah exactly yeah, yeah. So what we are anticipating here's the basically.
Confirming the reality of July even though this year.
Summer shutdowns were very mild and compares with previous years.
You did some shut down.
At the very least a week in some case, two weeks, which again much less than what they normally do.
Talk about the automotive Oems.
So that.
That makes four when you compare Q2 with Q3.
Less tonnage for automotive so everything theyre explain about your jaw youre, taking a reverse into Q3. So we are going to have lower cost because you are going to be producing less of the <unk> debt.
Carried us well in Q2 on the other had this.
This lower <unk>.
The lower average prices will be offset by lower costs. So.
These things go together.
We'll be producing less galvanized less Gulf of new less.
Aluminite.
Kind of offset.
On the cost side.
The revenue.
Revenues impact that we're going to have four not producing the same amount still be a big number but we had a.
Time in July that were still doing the play the game with them shut down for their summer vacations.
Okay. Thank you.
Thank you.
Thank you. Our next question is coming from the line of Curt Woodworth with Credit Suisse. Please proceed with your questions.
Yeah. Thanks, Good morning, Lorenzo and sell so I hope you're doing well.
Sort of a follow up to <unk> question, So with respect to costs being down 40 or are you, saying that the combination of the spot price.
Index shift and then the mix shift would be roughly equivalent to that so do you feel like your EBITDA per ton could be similar to <unk> or can you give any more color on specifically.
What you see average selling prices during this quarter.
Oh.
Yeah sure Hey, Kurt It's also yeah, you know like we said let.
Let me touch on cost and then I'll and then I'll go over our average selling price expectations, but.
As Lorenzo mentioned with less automotive in Q coming here in Q3.
You know, there's going to be higher volume of kind of less value add.
Driven by service center demand.
And the impact of that lower cost is going to be running through through inventory.
And what what's driving the lower cost is lower repairs and maintenance and in this higher production volume lower scrap lower energy and alloy costs. So.
So that's what's baked into that $40 reduction per ton quarter over quarter for Q3 over Q2.
And then as it relates to average selling price.
You know youre going to have a similar kind of impact driven by mix.
And we've sort of given enough in terms of of our average selling price mix and how.
The lags with index pricing work, but just to reflect.
Just to kind of remind everybody how that works.
We have a 45% of our portfolio is fixed under full year prices and that is reset reset throughout the year and I think we've provided full year ASP.
Guidance of $14 15 for fixed price contracts and then beyond that we give the percent of volumes that are impacted by index pricing, which is 55%.
And the breakdown of that is 20% of that is on a CRE month lag <unk>.
10% is slabs on a two month lag, 10% as CRE you on a quarter lag and then the remaining 15% is spot. So I think with all of that you can kind of get to what the implied ASP for Q3 should be.
But if you need any more color or just.
Let us know and we can try to help a little bit further, but I think we've given enough breadcrumbs there.
Okay.
And then in terms of the cost progression going down another 10.
And for Q.
Is that just kind of a similar trend of working off some of the high cost inventory and then it seemed like what you're saying with respect to cost guide for next year.
For the most part the only real change in the model would be with respect to coal. So said another way do you feel like you'll be at pretty much targeted MRO cost structure going into next year.
Yeah, that's right. So the goal here is that we're trying to get our costs down to that $1000 per ton range by the end of this year right in the 40 to 40 for Q3 and 10 for Q4 is sort of just directional but the goal is to get to that 50 by the end of 50 altogether by the end of the year to get us back to 1000.
And then going into next year.
You know assuming that we get these benefits.
Benefits on lower <unk>.
Coal costs for next year, which we're very confident we will that will be a big step function down again into Q1 Q2 of 2024 that will be the big driver there.
Yes, Kurt Laura answer here, just one more thing.
Like you to keep in mind.
We continue to use.
Enormous amount of each be INR blast furnaces, which I've showed the today I gave a cost figure.
In my prepared remarks.
So that needs to be taken into consideration.
Also natural gas prices are back to a level that we feel like.
They are a healthy cost structure, so don't forget that and last but not least.
Because we use so much scrap inaugural apps everything that the mini mills do in terms of pushing scrap prices down for their benefit they are benefiting me too.
So that's the beauty about owning a scrap company I was always in the past upset with the fact that they had an easy way to accommodate lower prices. They would just work hard to push scrap price down. Okay. Now they do the work Cleveland cliffs benefits, because I use close to 30% <unk>.
<unk>.
So I thank them for that every time, they do what they do I benefit my costs go down.
No.
And then maybe just quickly Lorenzo on capital return given the.
Our realigned pushout it at Burns gives you a little bit more runway on the on the Capex side do you do you feel like.
Theres appetite at the board level to initiate a dividend and I guess, how do you see kind of capital return evolving.
Given you're going to be closer to net debt target of $3 billion by year end. Thank you.
Yeah look it's a possibility.
The board or is this board has been with me almost every place for nine years. So they have been through everything.
That you have.
<unk> been through as well, we would have been around for a long time and we're one of the.
Ones that have been falling and for the nine years. So we see the difference.
But this board has been.
Extremely supportive of everything.
It's not like we don't want to return capital to the shareholders. We actually we are if you look.
And then last two years' skirt, our share count was reduced by 12%.
Two years ago, our share count was 585 million shares now is 540 million shares or buying back a lot of stock.
So we're returning a lot of money to the shareholders.
A dividend will come at the right time, and the right time is getting closer every quarter.
I don't want to commit with anything, but we are making all the right moves in the right direction with the <unk>.
Very high speed, so we're going to get there soon.
Yes, just to add to that too I think the way to think about it Kurt if you look at the recent quarters, we've allocated sort of like 80% of free cash flow towards debt repayment and 20% towards share repurchases as we get closer and closer to that $3 billion of net debt target.
This kind of breakdown of 80 20 can shift more toward.
Capital returns to shareholders and less toward debt reduction it doesn't mean that we're going to stop paying down debt once we get to the three it's just the allocation.
It will change a little bit and it will be more skewed toward.
Towards capital returns.
I think Curt on this issue of the dividend.
We have been allocating money to buyback that's clear.
Why we are relocating money to buybacks because every now and then our stock price goes on sale.
Go ahead and buy.
There is one way for us to expedite the dividends.
Stock price is to follow the results.
As soon as the stock price start to reflecting the reality of what Cleveland cliffs has been there.
Delivering quarter after quarter year after year, we will be more.
Sighted.
About the dividend and I promise you as soon as I'm excited my board would be excited but we need to see the the.
The stock price to be consistently higher for me to consider that the best way to return money to the shareholders is through a dividend and not through a buyback because the buyback is a sure way to return it.
Capital to the shareholders.
And our stock desk artificially continues to be.
Inflicted volatility that we don't deserve.
Yes agreed.
Alright, thank you thanks.
Thanks Kurt.
Yeah.
Okay. Thank.
Thank you. Our next question is come from the line of Lucas pipes with B Riley Securities. Please proceed with your question.
Thank you very much operator, good morning, everyone.
Yeah.
Lorenzo really good to hear about the push out it.
After realigning Burns Harbor and I wondered if you could update us on the realigned schedule kind of across the fleet and then.
You mentioned hydrogen hubs in your prepared remarks, and now I am hearing more and more about dose and I wonder what role exactly cliffs could play in the development of dose I think you mentioned, Indiana, Ohio would appreciate you want to get your comments on that as well. Thank you okay cool. Thanks.
Thanks, Lucas for the questions look a bunch over a bunch.
A bunch of blast furnace <unk> is the next in line to be realigned.
<unk>.
We continue to monitor the furniture continued to operate the furnace and every time.
We released some information is based on updated operational information.
So on to last quarter, our worst case scenario would be a rely on into 2025.
Fort Bliss blast furnace <unk>.
Through this quarter, we have our conviction that the furnaces in great shape increased enough for us to be 100% sure that the post a postponement to 2026 is perfect. So that's why now the timing of 2026 after that we'll see.
Our biggest blast furnace, Indiana Harbor.
Number seven finishing.
<unk> finished in 2021, so it's very recent.
We just finished Cleveland.
Last year, so actually the next one in line with immediate Tao Bermuda Dow is that going to happen.
Before 2027.
It's not going to happen, but there is don't take the 2027 number to the bank because we will continue to monitor we'll continue to improve operations at mid or down at this point.
2027 might be come 2028, alright, so that's what we have at this very point.
Regarding <unk> regarding hydrogen hydrogen there.
Chicken and egg thing with hydrogen.
Industries.
Are all one step back hydrogen is the solution. If you really want to knock down see Youtube.
Cause a Gaba, we'll be in touch with oxygen and will produce future.
The Cub so the best way to remove the Cabo should replace with something else that doesn't have cargo. That's hydrogen. So when you combine <unk> with the old you you generate a chore that's great that's water vapor so that's not true.
But.
The problem is.
Companies that operate with gas as Don built plants to produce hydrogen massive amounts of hydrogen in scale to reduce the cost because there's no demand and then there is no demand because the.
The gas companies don't Buke the big plants. So we are we at Cleveland cliffs, we are breaking this chicken and egg conundrum bye.
<unk>.
Bye.
We're meeting with our stakes to the hubs so in Toledo, the hubs that's being proposed there.
The leading company as leap day, our main supplier of gases throughout the footprint.
Is 100 tonnes per day, our offtake. There is 50 tons per day, we are taking half of their capacity and leaving the other half for other industries to us which are the industry that are more several other possibilities outflow motive theyre serious Oems right now.
Now consider a hydrogen bomb.
Howard.
<unk> to propel cars.
Alternative to battery electric vehicles, and I believe that this is a great solution not to replace but to add to the to the battery electric vehicles.
Route.
So in Toledo, we are promoting that same thing in India in northwest, Indiana in northwest, Indiana hub is the BP constellation hub. So we met yesterday here at Cleveland cliffs with the management of BP. So we landed our support not only to the hub, but any.
I think BP is doing on their own to produce.
Produce more hydrogen.
Northwest, Indiana.
The hub itself is an enormous 10 times bigger than the hub in Toledo is a 1000 tons per day, but because we have Indiana Harbor inborn job over there my offtake, they're my commitment is 200 tonnes per day.
No.
That would make.
Or for us to be the enabler of having the automotive industry building stuff in northwest, Indiana to produce hydrogen cars, if the Oems really pursue this route.
So that's a state of things Im so confident that our trial at Indiana Harbor number seven will be done with a pipeline that will be a permanent just waiting for hydrogen to come in a normal basis, and then we're going to be able to.
Use it.
We use HDI today at that point instead of <unk>, we'll be talking about cliffs' <unk>, because <unk> is only H b.
Only $40 per ton with Richard Shaw, <unk> hydrogen and there'll be a little more expensive for the class.
Alright. So this is very helpful very helpful very excited.
Thanks Lucas.
As a follow up I wanted to ask about the amount of coal that you expect to purchase from third parties in 2024, just a rough range.
Then I can apply my own price price assumptions on that so that would be helpful and then.
Separately.
U S steel demand in 2022 I think we're still down about 7% per capita versus pre COVID-19 levels.
I'm wondering what your view is more broadly.
Steel market in the U S.
For the second half of this year, but also as we look into 2024. Thank you.
Okay. So our typical purchase offer.
<unk>.
Seven to 8 million tons, including what goes through suncook, plus our own production pre system.
What was the other question Lucas I'm sorry.
Does your demand outlook, especially in <unk>.
Viewed that per capita steel demand in the U S is actually still being down versus pre COVID-19 levels. Yes, I don't have any fears of per capita right now I was very good at that when I was in Brazil, because breakup.
A factor.
Here in the United States, our number two market Adam.
Our focus on that but I'll tell you about demand in our markets that met their method for us.
This will be the first year.
Since COVID-19 that automotive, who will get close not at close to a normal level.
And because automotive is so big for US. This is a game changer for us.
Not only makes us.
To produce more steel to supply Delta and what it means is that's doing better but it also makes us to produce less due to to to go out.
And compete with more commodity type players that bring prices down with no problem.
We will also start to see we're actually seeing right now the impact of the infrastructure Bill the inflation reduction Act. The Cheaps Act is coming soon.
We are going to see that in the coming quarters. So we are in good shape in terms of demand in this country, what's happening right now in terms of the resurgence of manufacturing here in the United States is completely under appreciated.
We spent the last 25 years.
Convinced ourselves that we could.
Produce everything in China in India in Vietnam in Indonesia, and places like that I guess, what we can't we have to produce here.
And I'm glad that this concept is starting to percolate. The next day, we need to start convincing our younger younger people that this is reality that working is not staying home behind a computer.
Joining zoom calls, but there is there is life a manufacturer there is life in engineering, we need to produce things in this country advisor when a lag behind.
And that's I think that parents grandparents and need to start to educate our people because.
Theres the wheel theres the money.
Willingness to invest here, but we need the people we have been blessed to have been very successful in hiring new people and retaining.
Younger people, we have an entire group of people inside our company.
Being trained almost completely trained to replace the ones that are retiring this year and next year, but thats not the overall picture in the country. So that's also part of the equation.
We need people to support this effort.
Redoing, what their last generation destroyed, bringing manufacturing back to America be able to bring strength back to this country.
The rent that I really appreciate your comment to you and your team continued best of luck. Thank you. Thanks, Lucas Lucas I appreciate it.
Thank you our next questions come from the line of Carlos de Alba with Morgan Stanley . Please proceed with your questions.
Thank you very much good morning.
It's also.
It's a question that I've been.
Getting a lot recently and the discussions.
Is that.
There is this perception or a discussion on that please may have lost some share and you sort of address that a little bit.
So earlier in your comments, but I wonder if you can give us a little bit more detail.
On what has happened with your shipments you share on auto.
Auto sector.
Given that you are.
You push for higher prices.
So I wanted to hear from you.
How do you see that.
You've set a perception.
Market share loss in the automotive.
<unk>.
Look look at our volumes.
They are up year.
Year over year, we just reported a quarter that has been record volumes.
So people say a lot of things.
But you know what reality is in the numbers.
We continue to gain market share without buying market share the only differentiation between us and everybody else.
Motive is that last year in the last cycle price renewals, we were able to increase prices.
$115 per Boe the net.
And everybody else in their quest to gain market share gave away the fob.
It gave the reduced prices.
Thank them for that because all in all the Oems are good.
We increased price they reduced pricing probably stayed even because we supply a half so everybody together supplying the other half and give you then a price discount good for GM. Good for forward good for Toyota at the workforce to Atlanta's good forgive you.
You've got the picture.
So that's fine with me I produce the steels that they need we deliver on time.
We are the ones that when push comes to show up they come to us to deliver new models.
And we stopped the bleeding without aluminum we stopped the bleeding with mini mills.
We can produce exposed parts is b S. Minimills cannot produce exposed parts, except for exceptions of the acceptance of the exceptions are the.
And that is on us.
And by the way of usage.
And we are charging them 40 bucks per tonne and they are paying because they don't pay they don't get this deal.
I Hope you understand my point, Carlos Yes, I did and I, presumably it's fair to assume that these dynamics will continue into second half of the year right.
You bet.
You bet.
They will continue and <unk> is now cliffs. They chew is when you get some hydrogen to enrich our natural gas.
Because you know we inject a lot of natural gas.
In our blast furnace in our natural gas is a mix of 96% CH four with 4% of others like <unk> <unk> stent.
All hydrocarbons.
But.
When we enriched the hydrogen we are doing a good thing to reduce future emissions. So when I have enough hydrogen to enrich natural gas will go from Brexit to play virtue and one day hopefully still within this decade, we're going to have enough hydrogen to replace natural gas and then.
It's a stage with go glyphs H Max.
Because we'll be really injecting hydrogen.
And at that point, our coke rate to be to the minimum theoretical just to keep their friends in vertical position with the board.
Because the coke inside the furnace is a reduction but it's also mechanical support for the board.
While the iron ore pellets.
So we're going to be to the theoretical minimum what at that point, but that would be 2029 2030, I am talking about 2023 2020 for 2025, 2023, 2030 40 scripts each type.
By late 2020 for early 2025, I hope that I will have enough hydrogen to go to please read through and at that point, others, who will be talking about I'm gaining market share no. They are not gaining anything there by at the edges, there buying market share.
When I say buy it because they dropped prices.
They entice the new purchasing manage that though is just moving into the sport that the other window was fired and then these new gradually or go believes that.
She will reinvent the wheel then they got the reality in reality sinks.
<unk> is a beast.
If they need the steel that they say they need they have.
To do at Cleveland Cliffs, we are not in their bids of gouging anyone we just want to get paid for what we do we have been paid for what we do we appreciate the support of our partners in the automotive industry and this will continue into the latter part of 2023 2024.
I hope I got it.
Your answer Carlos.
I did for sure.
And then coming back to capital allocation.
Several companies in the mining and steel sector have been signing capital allocation frameworks, where they they sort.
Sort of allocate a fix percentage of the free cash flow generation in whatever form or shape, you want to measure it to return money to shareholders.
Do you think that this is a possibility in cliffs and if not why don't you believe why don't you believe on that.
Yeah, Hey, Carlos itself, though.
No.
Contract that I actually like and it's something that we're considering.
At the right time right.
As I stated earlier.
We have allocated 80% of our free cash flow toward debt repayment and the rest towards share repurchases once we get down to that and that's what we're going to continue doing until we get to that $3 billion of net debt.
Now once we're there once we're at the $3 billion of net debt all other contracts are on the table, including what you're what you're mentioning are making it more of like a formulaic.
Capital returned to shareholders will still be a very strong free cash flow generator and the majority of the cash generated will go to the shareholders as opposed to.
Paying down debt at that time, not to say that we'll start paying down debt entirely but it'll just be a higher weighting towards <unk>.
Either buybacks or dividends at that time.
Alright.
Well, thank you very much tougher on RSV.
Thanks, Carl So just to add one more thing because I already talked about <unk> like to make abundantly clear.
In Q2, we paid a lot of debt repay down a lot of that we could have paid even more $94 million more.
If we had not purchased any stock.
But we did purchase stock because it was on sale.
No.
These things go together.
So altogether, we are not going to use every last penny to pay down debt just because we said that would be we'd be paying down debt, we want to pay down debt, we will pay down debt, but if the market gives us the gift of shares for free I buy back stock.
And that will create.
Postponements on accomplish whatever date to start a dividend. So there is only one solution.
For this thing.
Is our stock price goes up reflects the real value of the company reflect the real value of what I am.
And then we can start a dividend.
We are keeping ourselves.
I'm a shareholder I think like a shareholder by the way that's I think that very few Ceos, particularly in our space can brag about I have never sold a single share that are acquired in the open market or that was given to me as compensation.
So I think like a shareholder I like dividends.
65 years old man.
One day, that's far away in the future I will retire and I'm going to do.
League of dividends from Cleveland cliffs.
So.
I need the stock price to go to the right place before.
I really commit with a dividend date.
Think about that please.
Thank you. Our next question comes from the line of Bill Peterson with Jpmorgan. Please proceed with your questions.
Yes, hi, good morning, Lorenzo so so thanks for letting me ask a question I wanted to continue on with discussion of others.
<unk> H so it sounds like you've already begun shipping just want to make sure but also.
Looking ahead, I guess, how broad is copper.
How far does that demand from automakers in other words is it.
Across the board automakers.
And then you alluded to the mix on this but how should we think about the mix of clip H as a portion of your auto steel demand over the next few years.
Cliffs <unk> is what we produce good morning, bill by the way.
<unk> is what we produce in our.
Our integrated footprint.
Everyone have a blast furnace and we produce due to the automotive industry we have.
Producing cliffs H.
Cliffs H.
Is a differentiating factor for companies like the ones that have plants here in the United States in plants in Europe plants here in the United States and <unk> in Japan.
Blips here in United States and plants in Brazil.
There are several that are <unk>.
<unk> followed this description.
Well these companies.
In Europe cannot yet.
The steel for their Automd.
Although motive needs.
That has lower still true.
Missions associated to.
Because they use sinter.
And a portion of pellets, we use only pellets.
And because we use H b.
They don't.
That's clear.
That's the concept.
Our steel that we.
Sales to the automotive industry is all please reach so we are negotiated with all of our clients. We already have clients signed up to pay the $40 per ton.
And we appreciate the early support from these folks but over time everybody rupee.
Because it's everything that we produce in our integrated footprint and then who may say, all but your emissions through the integrated route.
Our higher than the emissions of Dominion museums.
To build a car with rebar is not going to work.
Yes, but trying to build a car with wide flange beams is not going to work.
Yes try to build a car all with steel flat rolled steel produced in flat rolled mini mills.
Does not work.
I challenge that.
If that would be the way to do it.
They would be doing in Japan, they will be doing in Korea. They will be doing in a lot of places that have a lot of scrap.
So.
Theres no way.
That's a consequence youll get a bill.
Yep Yep understood alright, thanks, Thanks for that maybe sticking with the carbon team so.
Wanted to see if you had any thoughts on the ongoing negotiations between the U S and the EU on a carbon tax structure, which is looking like a standard that may not be met by the October deadline I guess, what is your thoughts on a feasible solution or do you see any upside risks the prices of the section 232 tariffs are reinforced against the U.
I just want to get your thoughts on that yes.
Section 232 already.
Played the role that they have to to play.
We believe that the.
The the the market.
We will continue to support.
Fair trade, it's time for us to stop believing that what they the.
<unk> come here for is to help the market no just diluting dear.
There.
Fixed costs by using our demand. So I think this these items regarding regarding section 232 have been.
Yes.
It had been addressed over time.
Don't know if theres any specifics that you really would like me to talk about.
Really it's related to the carbon tax structure, we can take it offline.
No.
Income structure, we we support because we are so much better here in the United States Dominion views I just gave.
The reality check on exports, but that doesn't mean I'm using the United States made enormous advancements in producing automotive steels for other uses.
No exposed parts and then they have a decent participation in automotive.
No.
Not in some areas that are really exclusive to our our skus, but.
We are so much better in terms of everything.
The Europeans into Japanese and the Koreans that's just fair.
To have a carbon tax adjustment and then we have a resemblance of a level playing field when compared to steel produced in the United States will still produce somewhere else and that includes Canada by the way.
Again, it is part of the rest of the world not part of.
Not part of the United States and because we're talking about Canada I have to talk about Mexico. The transshipment capped off the world. This was our setting ourselves up to be dumped from <unk>, we're not going to stand still with Mexico acting the way they are.
Yep.
Appreciate the insights and look forward to us on the progress. Thank you.
Thank you our next questions come from the line of Lawson Winder with Bank of America. Please proceed with your questions.
Great. Thank you operator, and good morning, Lorenzo and sell so thank you for fitting me in.
You mentioned that you've worked through effectively all of the higher cost inventory leftover from the days of elevated repairs and maintenance.
Lower production volumes and I wanted to ask what that means for potential further working capital reduction in the second half just in terms of rough magnitude.
Thank you.
Yeah, Hey, Austin, it's also.
So in Q2 as it relates to working capital we had a nice release as you can see mostly driven by inventory.
We moved a lot of that higher cost auto motive inventory out of the system.
And replace higher cost with lower steel cost.
We expect an even further released her in Q3, mostly driven by <unk>.
And further inventory.
So it should be a positive impact in Q3, working capital release, and then sort of neutral in Q4, if that helps.
Yes that helps and if maybe I could ask one more.
With what time, we have remaining or at what time you have available.
You've talked about strong auto demand you talked about an expectation for strong demand from low inventories in the supply chain.
What about some of the other.
And markets.
Thanks, very much yeah.
Look.
I believe I addressed at least generally during my prepared remarks, but things related to the infrastructure Bill would oh.
Okay.
<unk> reduction act are already starting to percolate I'm very impressed with two things one is solar solar is amazing right now.
Demand real demand, we are starting to make things internally.
To accommodate more and more demand coming from.
The biggest impact is in our galvanized and the other one is electrical steels.
We continue to increase our capacity to produce more electrical steels.
And there are initiatives from competitors to produce more electrical steels. These are welcome. Thanks.
Thanks.
It moves because the demand is enormous here in the United States keep in mind.
Less than.
Three years ago when I.
Acquired AK steel they had already decided to shut down their plant that produce electrical steels and we kept that plant on because.
We saw this coming and there was a very important decision and now we're investing to increase our capacity and we still have demand to accommodate this.
Increased capacity at Cleveland cliffs, and the competition and we still have more to come.
Yeah.
Demand is very promising automotive, we will have a normal year close to normal year, not real normal, but close to normal for the first time since COVID-19, well theres a lot going on and so forth.
Okay loss okay.
That's fantastic. Thank you both keep up the good work.
Great. Thanks, Ross I appreciate it.
Yes.
Thank you we have reached the end of the question and answer session I would like to hand, the call back over to management for any closing comments.
Thank you everybody for being here with me today, and there's more to come in three months it will be more than happy to talk you again, you guys have a great day and gross thinks a lot I appreciate vinyl.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.