Q1 2024 Cleveland-Cliffs Inc Earnings Call
Rob: Good evening, ladies and gentlemen. My name is Rob, and I am your conference facilitator.
Good morning, Ladies and gentlemen, my name is Rob and I Am Your conference facilitator today.
Rob: I'd like to welcome everyone to Cleveland Cliffs first quarter 2024 earnings conference call.
Rob: I'd like to welcome everyone. All lines have been placed on mute to prevent any, After the speaker's remarks, there will be a question and answer session. Let me remind you that certain comments made on today's call, All of these include predictive statements that are intended to be made as forward... The Safe Harbor Protections of the Private Securities, Although the company believes that its forward-looking statements are based on reasonable, etc. etc. 10-K and 10-Q, and Newsroom, filings with the SEC, which are available on the company's website. Today's conference call is also available. Broadcast on clevelandcliffs.com, and at the conclusion of the call, it will be archived on the website and available to refresh.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Speaker Change: After the Speakers' remarks, there will be a question and answer session.
Speaker Change: The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward looking within the safe Harbor protections of the private Securities Litigation Reform Act of 1995.
Speaker Change: 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.
Speaker Change: 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 available and being broadcast at Cleveland cliffs Dotcom.
Speaker Change: At the conclusion of the call it will be archived on the website and available for replay.
Unnamed Speaker: The company will also discuss... Excluding certain special items, and time.
Speaker Change: Company will also discuss results excluding certain special items.
Celso L. Goncalves: Celso Goncalves, Executive Vice President and Chief Financial Officer, Good morning, everyone. As I did on the last conference call, I'm going to start today by providing an update on capital allocation and M&A. On our last call in February, I indicated that we would be much more aggressive with returning capital to shareholders and made it very clear that share buybacks are now the number one capital allocation priority for Cleveland-Cliffs. Consistent with what we said we would do, we bought back more than 30 million CLF shares during Q1 by utilizing the remaining $608 million from our prior $1 billion share buyback program announced in 2020.
Speaker Change: Reconciliation for regulation G purposes can be found in the earnings release, which was published yesterday.
Speaker Change: At this time I would like to introduce so silicon solve as executive Vice President and Chief Financial Officer.
Silicon Solve: Good morning, everyone.
Silicon Solve: As I did on the last conference call I'm going to start today by providing an update on capital allocation and M&A.
On our last call in February I indicated that we would be much more aggressive with returning capital to shareholders and made it very clear that share buybacks are now the number one capital allocation priority for Cleveland cliffs.
Silicon Solve: Consistent with what we said we would do we bought back more than 30 million C. L. F shares during Q1 by utilizing the remaining $608 million from our prior $1 billion share buyback program announced in 2022.
Celso L. Goncalves: In the last couple of years, we have reduced our diluted share count by over 100 million shares, or 17%, realizing an average purchase price of $18.79 per share on OpenMarketCap, significantly below where we are trading. Going forward, given our strong free cash flow outlook and healthy liquidity, we are introducing a new $1.5 billion share repurchase program that we plan to deploy immediately and aggressively during the open window. This new buyback program is also supported by the fact that we are no longer compelled to preserve as much dry powder for M&A, given the limited number of possible outcomes for USDA.
Silicon Solve: And the last couple of years, we have reduced our diluted share count by over 100 million shares or 17%. Realizing an average purchase price of $18 79 per share on open market repurchases significantly below where we're trading today.
Silicon Solve: Going forward, given our strong free cash flow outlook and healthy liquidity, we are introducing a new $1 $5 billion share repurchase program that we plan to deploy immediately and aggressively during open windows.
Silicon Solve: This new buyback program is also supported by the fact that we are no longer compelled to preserve as much dry powder for M&A given the limited number of possible outcomes for U S steel.
Celso L. Goncalves: It's now clear that their Strategic Alternatives review process was only robust and competitive because the company and its financial advisors at Barclays and Goldman Sachs invited foreign buyers, creative consortiums, and investors and companies with no support from the USW. As we explained to U.S. Steel, to their advisors, and to the entire market early in the process last year, there is no way to close the sale of U.S. Steel without agreement and full support from the U.S.W.
Silicon Solve: It's now clear that their strategic alternatives review process was only robust and competitive because of the company and their financial advisors at Barclays and Goldman Sachs invited foreign buyers creative consortiums and companies with no support from the USW.
Silicon Solve: As we explained to U S steel to their advisors and to the entire market early in the process last year. There is no way to close the sale of U S steel without agreement and full support from the USW.
Celso L. Goncalves: We discussed publicly in August that the USW has de facto veto power in the outcome of this process, but U.S. Steel denied it. Back then, Cliffs was right, and U.S. Steel was wrong. Today, we continue to be right, and they continue to be wrong. There's no denying reality anymore.
Silicon Solve: We discussed publicly in August that the USW has defective veto power in the outcome of this process, but U S steel denied.
Back then cliffs was right and U S steel was wrong.
Silicon Solve: Today, we continue to be right and they continue to be wrong.
Silicon Solve: There's no denying reality anymore. The USW has said from the very beginning that they would not endorse any other buyer only Cleveland cliffs.
Celso L. Goncalves: The USW has said from the very beginning that they would not endorse any other buyer, only Cleveland-Cliffs. Union leaders do not go back on their word. And now, after President Biden has clearly expressed his position unequivocally against foreign ownership of U.S. Steel, the list of real buyers for the company is even more evidently a party of one. Cliffs is the only union-friendly American solution for U.S. Steel. The Nippon deal is dead, and other buyers stand no chance to close a deal involving U.S. Steel Union. In terms of value, the inflated bids resulting from the blind auction process that included unrealistic buyers don't represent a meaningful proxy for reevaluation.
Silicon Solve: Union leaders do not go back on their word.
Silicon Solve: And now after President Biden has clearly expressed his position unequivocally against foreign ownership of U S. Steel the list of real buyers for the company is even more evidently a party of one.
Silicon Solve: Cliffs is the only union friendly American solution for U S steel.
Silicon Solve: The Nippon deal is dead and other buyer stand no chance to close the deal involving U S steel Union assets.
Silicon Solve: In terms of value the inflated bids, resulting from the blind auction process that included unrealistic buyers don't represent a meaningful proxy for real valuation.
Celso L. Goncalves: And neither do the stand-alone price targets coming from research firms pandering to the ARB. The company is only worth what a real buyer or investor is willing to pay for it, and everything else is just an opinion. The last time that real steel industry investors owned U.S. steel, the stock was valued at $22.72.
Silicon Solve: And neither do the Standalone price targets coming from research firms pandering to the arbs.
Silicon Solve: Our company is only worth what a real buyer of investor is willing to pay for it and everything else is just an opinion.
Silicon Solve: Okay.
Silicon Solve: The last time that real steel industry investors owned U S steel the stock was valued at $22.72.
Celso L. Goncalves: The valuation reset lower is far from over. We will have to reassess everything, including value, once we have the chance to re-engage in M&A due diligence, as everything we saw last year is now stale. Obviously, there's no assurance that U.S. Steel will even want to sell to Cliffs. The company can always stick around as a stand-alone entity, and the ARBs holding the stocks can always sell their shares back to the real investors in the 20s.
Silicon Solve: The valuation reset lower is far from over.
Silicon Solve: We will have to reassess everything including value once we have the chance to re engage in M&A due diligence as everything we saw last year is now scale.
Silicon Solve: Obviously, there is no assurance that you are still even want to sell to cliffs. The company can always stick around as a standalone entity and the arms holding the stock can always sell their shares back to the real investors in the twenties.
Celso L. Goncalves: In the meantime, Cliffs will continue to buy back our own CLF stock hand over fist like we did in Q1. Buying our own stock and returning dollars to our Cliffs shareholders, who are real investors, is a much better use of capital than any M&A opportunities at the current valuation. From a leverage standpoint, we are implementing a more shareholder-friendly leverage target of two-and-a-half times net debt to last 12 months' adjusted EBIT, allowing ourselves even more flexibility for aggressive shareholder returns.
Silicon Solve: In the meantime, cliffs will continue to buyback our own CLS stock handover fast like we did in Q1.
Silicon Solve: Buying our own stock and returning dollars to our eclipse shareholders, who are real investors is a much better use of capital than any M&A opportunities at current valuations.
Silicon Solve: From a leverage standpoint, we are implementing a more shareholder friendly leverage target of two and a half times net debt to last 12 months' adjusted EBITDA.
Silicon Solve: Allowing ourselves even more flexibility for aggressive shareholder returns.
Celso L. Goncalves: We have made a lot of progress on the balance sheet over the past few years. As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged. If the agencies are just going to keep our ratings where they are now, we might as well give ourselves the flexibility to buy back more stock.
Silicon Solve: We have made a lot of progress on the balance sheet over the past few years.
Silicon Solve: As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged.
Silicon Solve: If the agencies are just going to keep our ratings, where they are now we might as well give ourselves the flexibility to buyback more stock.
Celso L. Goncalves: At two and a half times net debt to EBITDA, there's also no risk of a ratings downgrade from where we currently are. We have flexibility up to three or three-and-a-half times before risking any downgrade. By self-imposing the 2.5 times threshold on ourselves, we are just allowing for more flexibility while remaining comfortably within the spectrum of our existing ratings category. This new leverage target just gives us the ability to continue to execute open-market share buybacks, and even if we deploy the entire $1.5 billion program throughout this year, our net leverage would still be comfortably well below $2.5 billion. This new leverage target also applies in the context of M&A. Any acquisition situation would also be limited to pro forma net leverage at the same self-imposed two-and-a-half times target level.
Silicon Solve: At two five times net debt to EBITDA. There is also no risk of a ratings downgrade from where we currently are.
Silicon Solve: We have flexibility up to three or three five times before risking any downgrade.
Silicon Solve: By self imposing the two five times threshold on ourselves, we are just allowing for more flexibility while remaining.
Silicon Solve: Comfortably within the spectrum of our existing ratings category.
Silicon Solve: This new leverage target just gives us the ability to continue to execute open market share buybacks and even if we deploy the entire $1 $5 billion program throughout this year, our net leverage would still be comfortably well below two and a half times.
Silicon Solve: This new leverage target also applies in the context of M&A.
Silicon Solve: Any acquisition situation would also be limited to pro forma net leverage at the same self imposed two five times target level.
Celso L. Goncalves: Obviously, any M&A that we do will come with meaningful EBITDA contribution, significant synergy realization, and increased scale that will be viewed by the rating agencies and bond investors as a credit positive. For the avoidance of doubt, we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today. And even if the U.S. steel situation were to resurface at some point in the future, we would need to refresh our due diligence at that point and reset valuation expectations from current levels.
Silicon Solve: Obviously any M&A that we do will come with meaningful EBITDA contribution significant synergy realization and interest increased scale that will be viewed by the rating agencies and bond investors is a credit positive.
Silicon Solve: For the avoidance of doubt we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today and.
Silicon Solve: And even if the U S steel situation where to resurface at some point in the future we would need to refresh our due diligence at that point and reset valuation expectations from current levels.
Celso L. Goncalves: Our balance sheet continues to be in great shape, with near-record liquidity and no secured bonds in our capital structure for the first time since 2017. During the quarter, we launched the redemption of our final tranche of secured debt, which was also our nearest dated bond material.
Silicon Solve: Our balance sheet continues to be in great shape with near record liquidity and no secured bonds in our capital structure for the first time since 2017.
Silicon Solve: During the quarter, we launched the redemption of our final tranche of secured debt that was also our nearest dated bond maturity.
Celso L. Goncalves: With no debt maturities until 2027, we now have a three-year maturity runway that gives us even further comfort with our new target level. This is the best shape our capital structure has been in since Lorenzo took over the company ten years ago. As a result of higher automotive sales during the quarter, our Q1 adjusted EBITDA of $414 million marked a rebound in profitability from the latest trough in Q4. With production and sales of cars, trucks, and SUVs remaining healthy in the U.S. throughout Q1, our average sales pricing came in much better than expected due to a greater participation of cars in our Q1 steel sales numbers.
Silicon Solve: With no debt maturities until 2027, we now have a three year maturity runway that gives us even further comfort with our new target level.
Silicon Solve: This is the best shape, our capital structure has been in since Lorenzo took over the company 10 years ago.
Silicon Solve: Yes.
Silicon Solve: As a result of higher automotive sales during the quarter, our Q1, adjusted EBITDA of $414 million Mark the rebound in profitability from the latest trough in Q4.
Silicon Solve: With production and sales of cars trucks, and Suvs remaining healthy in the U S. Throughout Q1, our average sales pricing came in much better than expected due to a greater participation of automotive in our Q1 steel sales mix.
Celso L. Goncalves: Conversely, in January and February, service centers went on a typical buyer strike, which led to reduced sales to the distribution sector. The net result of this dynamic of more sales to the automotive industry and fewer tons delivered to service centers led to a reduced sales output of $3.9 million. Now that distributors and service centers have come off the sidelines and steel pricing is on an upward trend, we expect to again exceed the four million ton shipment level in the second quarter. Unit costs were, of course, impacted by the heavy automotive mix in Q1, as well as the overall lower production volumes.
Silicon Solve: Conversely in January and February service centers, one on a typical buyer strike, which led to reduced sales to the distribution sector.
Silicon Solve: The net result of this dynamic of more sales to automotive and fewer tons delivered to service centers led to a reduced sales output of $3 9 million net tons.
Silicon Solve: Now that the distributors and service centers have come off the sidelines and steel pricing is on an upward trend, we expect to again exceed the 4 million tonne shipment level in the second quarter.
Silicon Solve: Unit costs were of course impacted by the heavy automotive mix in Q1 as well as the overall lower production volumes, though we maintain our previous guidance of an approximately $30 per net ton reduction in unit costs in 2024 compared to 2023.
Silicon Solve: That will begin here in Q2, with an expected $20 per ton drop in cost quarter over quarter.
Celso L. Goncalves: Though we maintain our previous guidance of an approximately $30 per net ton reduction in unit costs in 2024 compared to 2021, that will begin here in Q2, with an expected $20 per ton drop in costs quarter over quarter. The lower production volume in Q1 and the heavier automotive mix impact on unit costs have been offset by lower natural gas prices. As is typical in the first quarter, working capital represented a use of cash, which we expect to recover in the second quarter.
The lower production volume in Q1, and heavier automotive mix impact on unit costs have been offset by lower natural gas prices.
Silicon Solve: As is typical in the first quarter working capital represented a use of cash, which we expect to recover in the second quarter.
Silicon Solve: Also during Q1 as widely publicized by the U S. Government. We were selected for award negotiations related to two decarbonization projects for a total of $575 million worth of Doe grants.
Silicon Solve: These projects should not impact our capital spend expectations for this year and in the case of the Middletown Diarra MF project, the new investment will significantly mitigate future future expenditures related to the Middletown blast furnace and other infrastructure.
Lorenzo: Also, during Q1, as widely publicized by the U.S. government, we were selected for award negotiations related to two decarbonization projects for a total of $575 million worth of DOE grants. However, these projects should not impact our capital spend expectations for this year. And in the case of the Middletown DRI EMF project, the new investment will significantly mitigate future expenditures related to the Middletown Blast Furnace and other initiatives. Our investment expectation related to the two projects is that our net capital expenditures will hover around $1 billion from 2025 through 2028, with the ultimate outcome of $550 million in annual costs, starting in 2022, with virtually no impact to production. With that, I will turn it over to Lorenzo for his... Thank you, Celso, and good morning, everyone.
Silicon Solve: Our investment expectation related to the two projects is that our net capital expenditures will hover around $1 billion.
Silicon Solve: From 2025 through 2028 with the ultimate outcome of $550 million in annual cost savings starting in 2029 with virtually no impact to production.
Silicon Solve: With that I'll turn it over to Lorenzo for his remarks.
Lorenzo: Thank you <unk> and good morning, everyone.
Cleveland Cliffs has a very simple yet somehow unique way of conducting business in corporate America.
Lorenzo: We respect our workforce.
Lorenzo: There is nothing special or particularly complex beyond that.
Lorenzo: Our employees drive our performance and our profitability.
Lorenzo: Our workforce is the reason.
Lorenzo: Why we're here.
Lorenzo: And they are treated accordingly.
Lorenzo: Of course this has always been the case during the last 10 years I have been running cliffs, but the events of the past year have obviously shed a brighter light on this.
Lorenzo: Our relationship with all workers and particularly with the Union represented workers.
Lorenzo: Cleveland-Cliffs has a very simple, yet somehow unique way of conducting business in corporate America. We respect our workforce. There is nothing special or particularly complex beyond that. Our employees drive our performance and our profitability. Our workforce is the reason why we're here, and they are treated accordingly. Of course, this has always been the case during the last 10 years I have been running Cliffs.
Lorenzo: He is a function of the long view, we have taken with respect to our labor force and not something that can be out shined buy empty promises from outsiders written on worst less pieces of paper.
Lorenzo: Nippon steel the unsuccessful attempts to acquire of U S. Steel has failed to understand this.
Lorenzo: But the events of the past year have obviously shed a brighter light on this; our relationship with all workers and, particularly, with union-represented workers, is a function of the long view we have taken with respect to our labor force and not something that can be outshined by empty promises from outsiders written on worthless pieces of paper. Nippon Steel, the unsuccessful attempt to acquire U.S. steel, has failed to understand it.
Lorenzo: It's still baffles meat to this day that the dual less individuals representing Nippon steel is embarassing event felt that they could do this with Delta Union support you.
Lorenzo: You just cannot do it with our USW represented workforce.
Lorenzo: It still baffles me to this day that the clueless individuals representing Nippon Steel in this embarrassing event felt that they could do this without union support. You just cannot do it with a USW-represented workforce. This historic M&A fiasco was a direct consequence of the goals the US Steel CEO and his fellow board members had in mind, to do good for the stockholders only, ignoring everyone else, and second, to break the back of the USW. Therefore, for them, it was necessary not to sell to Cleveland-Cliffs.
Lorenzo: This historic M&A Fiasco was a direct consequence of the growth.
Lorenzo: Were still CEO and his fellow board members had in mind.
Lorenzo: First.
Lorenzo: Good good good.
Lorenzo: For the stockholders only ignoring everyone else and second to break the back of the USW.
Lorenzo: Therefore for them.
What is necessary not to sell to Cleveland cliffs.
Lorenzo: To give a sense of the enormous prejudice against cliffs and against the USW. Despite all we have clearly demonstrated to them.
Lorenzo: To give a sense of the enormous prejudice against CLIFS and against the USW, despite everything we have clearly demonstrated to them. The U.S. Steel Directors and their advisors from Milbank, Wachtell, Goldman Sachs, and Barclays still chose a buyer that cannot close the deal. We are grateful that the U.S. government shares the same view we have always had about the importance of union jobs for a thriving middle class in America. The Biden administration has different ways to terminate the Nippon transaction.
Lorenzo: <unk> <unk> directors and their advisers strong millbank Wachtell Goldman Sachs and Barclays is few shows a buyer that cannot close the deal.
Lorenzo: We are grateful that the U S government share. The same view, we have always had about the importance of union jobs for a thriving middle class in America.
Lorenzo: The by the administration has different ways to terminate the Newport transaction.
Lorenzo: And we believe that will be done sooner rather than later. Before the President of the United States had expressed his clear position, we attempted to offer a solution to Nippon Steel where we would acquire the union-represented assets of U.S. Steel, and Nippon would keep the assets they wanted in the first place, the no-union Big River Steel facility. However, Nippon did not accept that.
Lorenzo: And we believe that will be done sooner rather than later.
Lorenzo: Yes.
Lorenzo: Before the president of the United States had expressed his clear position, we attempted to offer a solution to Nippon steel.
Lorenzo: We would acquire the union represented assets of where steel and Nippon would keep the assets. They wanted in the first place they know Union Big River steel facility.
Lorenzo: Nippon did not accept that.
Lorenzo: And now, after President Biden has spoken, this option is no longer available to them. Nippon is now saying they actually value the blast furnace because they can apply their great technology. Let me be clear, this talking point on technology is complete hogwash. There is nothing special about Japanese blast furnace technology.
Lorenzo: And now after President Biden has spoken this auction is no longer available to them.
Nepal is now, saying they actually value the blast furnaces, because they can apply the great tech knowledge level.
Lorenzo: Let me be clear this stock viewpoint on technology is complete hogwash.
Lorenzo: There is nothing special about Jetblue and use blast furnace technology.
Lorenzo: We are far ahead of them on everything blast furnace-related. The use of iron ore pellets and low synthesis. Direct Reduction, The charging of HBI in blast furnaces. The Injection of Natural Gas in Hydrogen.
Lorenzo: We are far ahead of them on everything blast furnace related.
Lorenzo: The use of iron ore pellets and low center.
Lorenzo: Direct reduction.
Lorenzo: The charging off <unk> and blast furnaces.
Lorenzo: The injection of natural gas and hydrogen.
Lorenzo: We already have all that in the United States at Cleveland-Cliffs, and they do not have any of that in Japan. Their so-called superior technology is not even remotely based on fact. But one thing that's good about Nippon Steel now being hell-bent on owning blast furnaces and BOFs in the United States is that people that used to say that blast furnaces and BOFs are bad now don't know what to say anymore. They are now on mute.
Lorenzo: We already have.
Lorenzo: All that in the United States at Cleveland Cliffs, and they do not have any of that in Japan.
Lorenzo: There are so called superior technology is not even remotely based on fact.
Lorenzo: But one thing that's good about Nippon steel now being Hell bent on oney blast furnaces and <unk> in the United States is that people that used to say that blast furnaces and <unk>, a bad don't know what to say anymore.
Lorenzo: Thanks, Nippon Steel, for validating my point. You have to pay the breakup fee of $565 million just to prove my point, and I appreciate that. Your money will be well spent. Another relevant point ignored by the U.S. Steel Board. Nippon still has been a perpetual violator of our trade laws, probably the worst actor in the international steel trade over the past several decades. Among all
Speaker Change: They are now on mute.
Speaker Change: Thanks, Dave steel for validating my point.
Speaker Change: You have to pay the breakup fee of $565 million just to prove my point and I. Appreciate that you are money well spent.
Speaker Change: Another relevant point ignored by U S Steel board.
Speaker Change: Nippon Steel has been a perpetual video later of our trade loss.
Speaker Change: Probably the worst actor in the international steel trade over the past several decades.
Speaker Change: Mongo.
Lorenzo: In my view, Nippon Steel is actually worse than the Chinese, and they also have significant interests in China, which they love to downplay. Unfortunately for them... Nippon still cannot hide their deep ties with the Chinese, and that has also been completely exposed. Nippon's existence in the U.S. is also bad for customers. By the way, in order to obtain a price increase back in Japan, Nippon Steel has recently sued the largest Japanese automotive manufacturer, Toyota. Cleveland-Cliffs has never done that here in the United States.
Speaker Change: In my view <unk> is actually <unk>.
Speaker Change: Worse than the Chinese.
Speaker Change: And they also have significant interest in China, which they love to don't play.
Speaker Change: Fortunately before them.
Speaker Change: Still cannot hide their deep ties with the Chinese and that has also been completely exposed.
Speaker Change: Nipples existence in the U S is also bad for customers.
Speaker Change: The way in order to obtain a price increase back in Japan.
Nippon Steel has recently should the largest Japanese automotive manufacturer.
Speaker Change: Era.
Speaker Change: Cleveland Cliffs has never done that here in United States and for the record.
Lorenzo: And for the record, Toyota here in the United States is our largest automotive client. When this thing ultimately ends, we are in a whole new world. If the feelings of U.S. Steel directors are hurt by what I have said or done, and they still don't want to sell the company to Cleveland-Cliffs, that's their prerogative.
Speaker Change: Toyota here in the United States is our largest automotive clients.
Speaker Change: When this thing ultimately answer.
Speaker Change: We are in a whole new world.
Speaker Change: If the fee lease of U S. Steel directors are hurt, but by what I have said are done and they still don't want to sell the company to Cleveland cliffs, that's there.
Speaker Change: <unk>.
Lorenzo: At the end of the day, they don't have to sell themselves to Cliffs, and there is no easy way to force them to do so. But their only other alternative, after they collect the breakup fee from Nippon, is to continue as a standalone company. If that's going to be the case, good luck running the assets that you hate with the workers you don't respect. From our side, Cliffs has several other opportunities with or without M&A. The most relevant example of that right now is our share repurchase. We are overdoing Q1.
Speaker Change: At the end of the day, they don't have to sell themselves to cliffs.
Speaker Change: And there is no easy way to force them to do so.
Speaker Change: But the only other alternative after date collected the breakup fee from Nippon is to continue as a standout.
Speaker Change: If that's going to be the case, good look running the assets that you hate with the workers you don't respect.
Speaker Change: For an hour side cliffs has several other opportunities with or without M&A.
Speaker Change: The most relevant example of that right now is our share repurchases.
Speaker Change: We were overdoing Q1.
Lorenzo: And with our new reauthorization, we are still buyers of our stock at today's price. We have also just displayed our ability to grow profits organically with the two projects we are initiating with the support of the U.S. government. The $1.3 billion investment at Middletown Works, replacing our blast furnaces. With a DRI facility and two electrically melting furnaces, it's a game changer for our company and for our industry. The $500 million co-investment we will receive makes this project the largest federally supported decarbonization initiative in U.S. history.
Speaker Change: And with our new reauthorization, we are steel buyers of our stock at today's price.
Speaker Change: We also just displayed our ability to grow profits organically with the two projects we are initiating with support of the U S government.
Speaker Change: The $1 $3 billion investment at Middletown works, replacing our blast furnaces.
Speaker Change: With the DRA facility ensure electric melting furnaces is a game changer for our company and for our industry.
Speaker Change: The $500 million co investment we will receive makes this project the largest federally supported decarbonization initiative in U S history.
Lorenzo: The government took note of our investment in direct reduction made seven years ago, as well as our 30% reduction in CO2 emissions over a six-year period and our technological advances in hydrogen utilization. In our recent published sustainability report, we reported another reduction in integrated emissions intensity to 1.54 metric tons of CO2 per metric ton of steel, down from 1.82 in 2020 and significantly below the current global average of 2.15. When the Middletown project is in full operation, Middletown Works will be the lowest cost steel producing facility in the United States, to illustrate the cost savings. Our current cost to produce pig iron in Middletown is about $470 per net ton, and our current cost to produce DRI is less than $200 per net ton.
Speaker Change: The government took note of our investment indirect reduction made seven years ago as well as our 30% reduction in future emissions over a six year period.
Speaker Change: And our technological advances on hydrogen utilization.
Speaker Change: In our recent published sustainability report, we reported another reduction in integrated emissions intensity to 154 metric tons of <unk> per metric ton of steel down from 182 in 2020 and significantly.
Speaker Change: Below the current global average of two point 15.
Speaker Change: When the Middletown project is in full operation Middletown works, we will be the lowest cost of steel produced producing facility in the United States.
Speaker Change: To illustrate the cost savings.
Speaker Change: Our current cost to produce pig iron in Middletown is about $470 per net ton and our current cost to produce <unk> is less than $200 per net ton.
Lorenzo: Hot DRI will be fed into a melting furnace, a very simple process to melt solid DRI into liquid, creating a pig iron equivalent that can be fed into our existing BOFs and processed further downstream, knowing that scrap will become scarce, expensive, and more contaminated over time. We will avoid any increase in our scrap intake, maintaining our ability to serve the highest quality, demanding end markets, like the automotive markets, by using pure iron. That's technology!
Speaker Change: Our cri will be fed into our melting furnace, a very simple process to melt solid DIY into liquid, creating a pig iron or equivalent that can be fed into our existing <unk> then process. It further downstream.
Speaker Change: Knowing that scrap.
Speaker Change: Game is scarce and expensive and more contaminated overtime.
Speaker Change: We will avoid an increase in our scrapping take maintaining our ability to serve the highest quality demanding and in markets like the automotive markets by using pure iron.
Speaker Change: Yes.
Speaker Change: That's technology.
Lorenzo: American technology, not Japanese hogwash PR. At Butler Works, we were awarded $75 million by the DOE to replace our natural gas fired slab reheat furnaces with electrified slab furnaces, that will reduce emissions, improve productivity, and enhance our production of gold-oriented electrical steel, critical to our country's electrical grid. The future of our production of GHOST was at risk under the initial draft of the DOE's new emissions standard, as proposed last year. If adopted as initially proposed, the new standard would have effectively replaced the use of ghost in all transformers used in the United States with made-in-Japan amorphous metal.
Speaker Change: America technology, not Japanese hogwash PR.
Speaker Change: At Butler works, where were awarded $75 million by the Doe to.
Speaker Change: To replace our natural gas fires as lab reheat furnaces with electrified is lab furnaces.
Speaker Change: That will reduce emissions improve productivity and enhance our production of gross grain oriented electrical steel critical to our country's electrical grid.
Speaker Change: The future of our production goes why is it at risk under the initial draft of the new.
Speaker Change: New emissions standards as proposed last year.
Speaker Change: If adopted as initially proposed the newest standard would have effectively replace the use of goes in all transformers used in the United States with made in Japan.
Speaker Change: <unk> metal.
Lorenzo: Fortunately, the DOE heard what Cliffs and our American client, the companies producing transformers in the United States, were telling them, and with great help from elected officials like Senator Sherrod Brown of Ohio, Senator Bob Casey of Pennsylvania, and Governor Josh Shapiro of Pennsylvania, as well as Representative Mike Kelly from Butler County in Pennsylvania, and Representative Chris DiLuzio of Pittsburgh, Pennsylvania, just to name a few, a more reasonable standard was adopted.
Speaker Change: Fortunately, the Doa heard what cliffs and our American clients the companies producing transformers in the United States, we're telling them.
And with Great help from our elected officials like Senators Sherrod Brown of Ohio set of above Casey.
Speaker Change: Savannah, and Governor of Josh Shapiro of Pennsylvania, as well as representative Mike Kelly from Butler County, Pennsylvania and representative.
Speaker Change: Chris did lose your Pittsburgh, Pennsylvania.
Speaker Change: Just to name a few.
Speaker Change: More reasonable standard was adopted.
Lorenzo: With that, our customers will continue to be in business, and they will continue to set goals to produce the transformers our country needs. By the way, there is pent-up demand for transformers in the United States, and that's a great opportunity to produce more transformers and to generate more jobs for American workers. We expect to see significant investment from our customers in this important piece of infrastructure, and we must produce more made-in-USA transformers.
Speaker Change: With that our customers will continue to be in business and they will continue to use goes to produce the transformers our country needs.
By the way there is pent up demand for Transformers in the United States and Thats, a great opportunity to produce more transformers and to generate more jobs for American workers.
Speaker Change: We expect to see significant investment from our customers in this important piece of infrastructure and we must produce more made in USA transformers.
Lorenzo: That's totally viable because Cliffs already has enough additional steel-producing capacity for goals to deploy in both Pennsylvania and Zanesville, Ohio. Our other major move this quarter was announcing the indefinite closure of our Wilton facility, which officially ceased production on April 11. Over the past three years, Wilton's average annual contribution to our EBITDA was a negative $100 million, due largely to unfairly trade imports of thin-plate products.
Speaker Change: Thats totally viable because cliffs already has enough additional steel producing capacity for growth to deploy in Butler, Pennsylvania, and Zanesville, Ohio.
Speaker Change: Yeah.
Speaker Change: Our other major moves this quarter was announcing the indefinite idle of all weird facility, which which are officially cease production on April 11.
Speaker Change: Over the past three years Veritas average annual contribution to our EBITDA was a negative $100 million.
Speaker Change: Due largely to unfairly traded imports of tin plate products in.
Lorenzo: In January, the Department of Commerce recommended anti-dumping and countervailing duties on some of these imports, which would have mitigated this issue. But in February, the International Trade Commission, in a totally surprising decision, reversed the Department of Commerce recommendation, allowing for low-priced imports to continue to flow into the United States. As a result, we had no choice but to exit the template market, leaving more than 900 Whereton employees without a job.
Speaker Change: In January the Department of Commerce recommended anti dumping and countervailing duties on some of these imports which would have mitigated this issue.
Speaker Change: But in February the International Trade Commission in a totally surprising decision reversed the department of Commerce recommendation, allowing for low priced imports to continue to flow into the United States.
Speaker Change: As a result, we had no choice, but to exit the tin plate market, leaving more than 900 employees without a job.
Lorenzo: Some of these employees elected to retire, and we were able to offer the impacted workers employment at other CLIFS facilities. As of today, we have been able to relocate over 100 employees to other CLIFS locations. Our gap loss in Q1 is primarily driven by the approximately $170 million in one-time charges taken at Wheaton, mainly employee support costs along with asset impairments and other expenses.
Speaker Change: Some of these employees elected to retire and we were able to offer the impacted workers employment at other cliffs facilities as of today, we have being able to relocate over 100 employees throughout the cliffs locations.
Speaker Change: Our GAAP loss in Q1 is primarily driven by the approximately $170 million in one time charges, taking it to Eaton, mainly employee support costs, along with asset impairments and other expenses.
Lorenzo: Clearly, this was an eventful quarter for us. Our automotive business carried the day for us once again, as the automotive sector in the US continues to improve, growing for the fourth consecutive year. Our customers need us for our best-in-class quality, delivery performance, customer service, and technical expertise. Buying steel for other suppliers is just a price-driven decision for each one of the individual car manufacturers.
Speaker Change: Clearly this was an eventful quarter for us.
Our automotive business carried the day for us once again as the automotive sector in the U S continues to improve growing for the fourth consecutive year.
Speaker Change: Our customers need us for our best in class quality deliver performance customer service and technical expertise buying.
Speaker Change: Buying steel for other suppliers is just a price driven decision for each one of the individual car manufacturers, but not all car manufacturers are willing to bet their pro forma or less competent suppliers just to save a few bucks per ton.
Lorenzo: But not all car manufacturers are willing to bet their performance on less competent suppliers just to save a few bucks per ton. Some are willing to do so, and these ones will be treated by Cleveland-Cliffs accordingly. Message delivered. On the flip side, service center business lagged on both volume and price during the past quarter, impacting our production volume.
Speaker Change: Some are willing to do so and these ones will be treated by Cleveland cliffs Accordingly.
Speaker Change: Message deliberate.
Speaker Change: On the flip side.
Speaker Change: Service Center business lagged on both volume and price during the past quarter impacting our.
Speaker Change: Production volume.
Lorenzo: Demand has since returned, and we have had success in implementing our recent price increase. This should support prices and shipments above the 4 million ton level in Q2. With that, I'll turn it over to Rob for Q&A. Thank you. We will now be conducting a question and answer session. If you'd like to ask a question today, press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to withdraw your question from the queue.
Speaker Change: Demand has since returned.
And we have had success in implementing our recent price increase.
Speaker Change: This should support prices and shipments above the 4 million ton level in Q2.
Speaker Change: With that I'll turn it over to Rob for Q&A.
Speaker Change: Yeah.
Rob: Thank you.
Rob: We are conducting a question and answer session.
Rob: I just like to ask a question today, you May press star one from your telephone keypad.
Rob: Confirmation tone will indicate your line is that the question queue.
Rob: We first start to feel like to withdraw your question from the queue.
Rob: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. And once again, this is Star 1. Our first question today is from the line of Lucas Pipes with B Raleigh Securities. Thank you very much, Rob. Good morning, everyone.
Rob: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Rob: Please pull for questions what's the other star one thank you.
Rob: Yes.
Rob: Yes.
Rob: Our first question today is from the line of Lucas pipes with B Riley Securities. Please proceed with your question.
Lucas Nathaniel Pipes: Thank you very much Rob good morning, everyone.
Lorenzo: Lorenzo, you said the option that Nippon essentially acquires the non-union assets and you acquire the union assets is dead, and I wondered, is there anything that could revive that option? Any thoughts on that? Thank you. Thanks for the question, Lucas, and good morning to you.
Lucas Nathaniel Pipes: Lorenzo you set the option that Nippon.
Lucas Nathaniel Pipes: Essentially acquired to nonunion assets and you acquire.
Lucas Nathaniel Pipes: The Union assets is dead.
Speaker Change: Ted and I Wonder is there anything that.
Speaker Change: Could revise that option.
Any thoughts on that thank you very much.
Ted: Thanks for the question Luca and good morning to you.
Lorenzo: By the way, I said that I offered this option, but I'm assuming that between Citibank, the bank representing Nippon Steel, and Ropes & Gray, the law firm representing Nippon Steel, they were able to at least deliver the message to Nippon Steel, because Nippon Steel never had the courtesy to reply to my offer to sit down and discuss it. So I'm just assuming that they did what they said they had done to deliver the proposal to Nippon Steel. That said, yeah, the proposal is gone. Because at this point, the President of the United States has already said what he's going to do. He's not a dictator.
Speaker Change: By the way I said that I offer this option, but I'm assuming that.
Speaker Change: Between Citi Bank, and the bank, representing Nippon steel and ropes <unk> Gray.
Speaker Change: <unk> firm, representing Nippon steel they were able to at least deliver that message to Nippon steel because Nippon steel never had the courtesy to reply to my offer to sit down and discuss so I'm just assuming that they said what they.
Speaker Change: They did what they said they had done to deliver the.
Speaker Change: The proposal to Nippon steel that said, yes, the proposers gone because at this point at this point the president of the United States already said what is going to do it.
Lorenzo: He needs to wait for the process to run, and then he will do what he has already promised publicly to the workers of the USW, to the president of the USW, Dave McCaul, and he has repeated in public situations.
Speaker Change: Is that a dictator he needs to wait for the process to run and then he'll he'll do what he already promised publicly.
Speaker Change: To the workers of the USW to the president of the U S. W. David Mccall.
Speaker Change: And he has repeated in public.
Speaker Change: Situations. So it's game over I cannot go against the award of the President of the United States. So therefore, my option is totally 100% of the table.
Lorenzo: So it's game over. I cannot go against the word of the President of the United States. So therefore, my option is totally 100% off the table. That's very clear. Thank you.
Speaker Change: That's very clear. Thank you. Thank you for that.
Celso L. Goncalves: And Celso, I think in the prepared remarks you mentioned cost reductions in Q2, could you remind me or us of those, and also what would be the impact on margins in the current steel environment in Q2 and also for the rest of the year? And as you think about free cash flow, any portion that would go towards deleveraging off the kind of higher Q1 levels or 100% towards the buyback? Thank you. Yeah, sure. Hey Lucas, good morning.
Speaker Change: <unk>.
Speaker Change: So I think in the prepared remarks, you mentioned.
Speaker Change: Cost reductions in Q2 could you could you remind me or us of dose and also what would be the impact on margins in the current steel environment in Q2 and also for the rest of the year.
Speaker Change: And as you think about free cash flow.
Speaker Change: Any portion that would go towards deleveraging.
Speaker Change: Sure.
Speaker Change: Kind of higher higher Q1 levels or 100% towards the buyback. Thank you very much.
Yeah, sure Hey, Lucas good morning.
Celso L. Goncalves: As it relates to costs, you know, we indicated that from 2023 to 2024, we're going to achieve a $30 per ton decrease, which equates to kind of a $500 million savings on an annualized basis. And that's going to come from primarily lower-cost coal because we negotiated our coal contracts very well.
Speaker Change: As it relates to costs, we indicated that from 2023 to 2024.
Speaker Change: Going to achieve a $30 per ton decrease which equates to kind of a $500 million savings on an annualized basis and thats going to come from.
Speaker Change: Primarily lower cost coal.
Speaker Change: Negotiated our coal contracts very well.
Celso L. Goncalves: Lower natural gas, lower alloy costs. So these are the three primary drivers that are going to help our costs. As it relates to Q2 specifically, costs are going to be down $20 a ton, and you'll start to see the full benefit from these lower coal contracts. Natural gas has also been lower than we expected, and the mix is going to be slightly less value-add here in Q2, which is going to help us. As it relates to your other question, I believe you asked in terms of free cash flow and deleveraging.
Speaker Change: Natural gas.
Speaker Change: <unk> alloy costs.
Speaker Change: So these are the three primary drivers that are going to help our costs.
Speaker Change: As it relates to Q2, specifically.
Speaker Change: Costs are going to be down $20 a ton.
Speaker Change: Youll start to see the full benefit from these lower core contracts natural gas has also been lower than we expected.
Speaker Change: And the mix is going to be slightly less value add here in Q2, which is going to help costs.
Speaker Change: As it relates to your other question.
Speaker Change: I believe you asked in terms of free cash flow and deleveraging I think we made it pretty clear that.
Celso L. Goncalves: I think we made it pretty clear that share buybacks would be the number one priority. I made that abundantly clear in the last call. But obviously, if we do see opportunities to buy back bonds in the open market, we'll look to do that as well. We didn't have that opportunity during Q1 because our bonds were essentially all trading above par, and we had already paid down the entire balance of the ABL.
Speaker Change: Share buybacks would be the number one priority I made that abundantly clear in the last call, but obviously, if we do see opportunities to.
Speaker Change: To buy back bonds in the open market, we will look to do that as well we didn't have that opportunity during Q1, because our bonds are essentially all trading above par and we had already paid down the entire balance of the ABL.
Celso L. Goncalves: We're giving ourselves this flexibility to use a little bit more leverage within our existing rating category to buy back more stock. But if there are opportunities to buy back bonds in the open market, we'll look to do that as well. Celso, thank you very much for all the color.
Speaker Change: We're giving ourselves the flexibility to a to use a little bit more leverage within our existing rating category.
Speaker Change: To buy back more stock, but if there are if there are opportunities to buy back bonds in the open market, we'll look to do that as well.
Speaker Change: Sounds good. Thank you very much for all the color Lourenco and team continued best of luck. Thank you.
Lorenzo: Lorenzo and the team, continue to do best of luck. Thank you. Thank you, Lucas. I appreciate it.
Speaker Change: Thank you Lucas I appreciate it.
Rob: Our next question is from the line of Bill Peterson with J.P. Morgan. Let's just hear what their question is. Good morning, Lorenzo and Celso and team.
Speaker Change: Our next question is from the line of Bill Peterson with Jpmorgan. Please proceed with your questions.
William Chapman Peterson: Yeah, Hi, good morning, Lorenzo and social and team thanks for taking the questions.
Lorenzo: Thanks for taking the time to answer the question. I wanted to follow up on that, and you said you answered a little bit on the prior question, but how should we think about the product mix, and then as that impacts the trajectory of pricing into the second quarter, and maybe related to that, if we think about the negotiations you've had with the auto contract negotiations, how do they play out, especially with the Japanese headquarter companies, given their fiscal year? Good morning, Bill.
William Chapman Peterson: Wanted to follow up on that and you said you.
William Chapman Peterson: You answered a little bit on the on the prior question, but how should we think about the product mix and then as that.
William Chapman Peterson: Impact the trajectory of pricing into the second quarter, and maybe maybe related to that if we think about the negotiations you've had with the auto contract negotiations how do they play out, especially with the Japan headquarter companies given their fiscal year timing.
Lorenzo: The auto negotiations for this period are the ones related to the clients that have an April 1st renewal time, and those are basically Asians, Japanese, and Korean transplants because their fiscal year is April 1st in their respective countries. And I'm glad to inform you that these negotiations were completely uneventful, and everything went totally smoothly, and we accomplished what we were asking for, and I'm sure that they are happy because the tonnages delivered to each one of these guys are growing, each one of them. So consolidating, for example, one of the agents above Stellantis as a bigger client for Cleveland-Cliffs. So this specific client is now much bigger than Stellantis. Stellantis, for us, became like another member of the pack.
Speaker Change: Good morning Bill.
Speaker Change: No.
Speaker Change: The auto negotiations for this period.
Speaker Change: Are the ones related to the clients that they have.
Speaker Change: April one.
Speaker Change: Renewal time.
Speaker Change: Those are basically the Asians Japanese Korean.
Speaker Change: Transplant because their.
Speaker Change: Their fiscal year is April one.
Speaker Change: In their respective countries.
Speaker Change: And I'm glad to inform that this negotiation, we're completely uneventful and everything went totally smooth.
Speaker Change: And do we accomplish what we're asking for and I am sure that they are happy because the tonnage is delivered to each one of these guys are growing.
Speaker Change: Each one of them.
Speaker Change: Consolidating.
Speaker Change: For example.
Speaker Change: One of the agents.
Speaker Change: It's still lantus.
Speaker Change: Bigger.
Speaker Change: Client for Cleveland cliffs.
Speaker Change: So these are specific client is now much bigger than still answered just an edge for us became like another part of the BEC is no longer a top priority for EMEA for Cleveland cliffs. They are now treated here as a second class citizens and we are going to continue to do that.
Lorenzo: It's no longer a top priority for me and for Cleveland-Cliffs. They are now treated here as second-class citizens, for the ones that are price-driven like Stellantis. So, April was great, was fantastic, and keep in mind, we continue to grow tonnage for the automotive industry. The only difference is that we are concentrating more on some of the clients and selling less for other clients. This will be reflected in the quality of the cars. It's a matter of time. When you are only looking for a low cost, at the end of the day, you end up building a car that sucks.
Speaker Change: For the ones that are price driven likes the Atlantis.
Speaker Change: So April was great was fantastic and keep in mind, we continue to grow tonnage four automotive. The only difference is that we are concentrating more on the some of the clients and selling less for other clients. This will be reflected on the <unk>.
Speaker Change: Quality of the cars, it's a matter of time.
Speaker Change: When you are only 84 low cost at the end of the day, we'll end up building a car that sucks and Thats, what I expect to happen and we're going to help differentiate the good ones from the bad was I would say that the April.
Lorenzo: And that's what I expect to happen. And we're going to help differentiate the good ones from the bad ones. I would say that the April crowd was, in its totality, part of the good ones block.
Speaker Change: The crowd was.
Speaker Change: In its totality part of the good one.
Speaker Change: Our block.
Lorenzo: Yeah, maybe Celso can maybe speak to the product mix and trajectory of pricing into the second quarter. Let me take a look at the product mix as well. The second quarter will be a lot more normal deal than the first quarter. Because, if you recall, in January and February, we had kind of a buyer's strike among service centers. They were all expecting the price to go down, and not buying, uncertainty, and waiting for the Fed, and waiting for this, waiting for that, and no buyers were buying. And that was a very complicated period for us at the beginning of the first quarter.
Speaker Change: Yes, maybe Samsung maybe speak to the product mix and trajectory of pricing.
Speaker Change: Quarter. Please.
Speaker Change: Let me take the product mix as well.
Speaker Change: Second quarter will be a lot more normal.
Speaker Change: Then the first quarter, because if you recall January and February we had kind of a buyers' strike.
Speaker Change: Amongst service centers. They are all ex expecting price to go down and not by uncertainty and.
Speaker Change: Waiting for the fed and waiting for this waiting for that <unk>.
Speaker Change: And there was a very complicated period for us at the beginning of the first quarter and Thats also why we had so much more concentration in other words like automotive was buying a lot more is because service centers whereby a lot less.
Lorenzo: And that's also why we had so much more concentration on automotive, like they were buying a lot more because service centers were buying a lot less. But then things resolved after we announced the first price increase. The first price increase went through very well. Then we announced the second price increase. Then a competitor announced a price that became kind of a reference in the marketplace just to bring a different perspective, their intentions.
Speaker Change: But then things are resolved after we announced the first price increase probably the first price increase went through very well then we announced the second price increase than our competitor announced a price that became kind of a reference in the marketplace just to bring a different perspective theyre in patients, but at the end of the day that.
Lorenzo: But at the end of the day, that is still playing out in the marketplace, and we are still working through the consequences of that event. But all in all, I see Q2 returning to a much more normal mix between service center and distribution and automotive. So automotive will continue to be good. Service center and distribution will become bigger. And that will bring the mix back to where it normally is.
Speaker Change: Is still playing out in the marketplace.
We're still working through the consequences of that event, but all in all I see Q2, returning to a more much more normal mix between service center in distribution and automotive so automotive will continue to be good service center and the distribution will become.
Bigger and that will bring the mix back to where the mix in normal years.
Celso L. Goncalves: Yeah, great. Thanks. Yeah, Bill, and just to answer your question on selling price, which I believe is what you were focused on, obviously this mix will have an impact on pricing, obviously, you know, in Q2. And I think we've given you enough in terms of breadcrumbs that you can kind of calculate what the impact might be. But just to kind of refresh everyone in terms of what the contract lags are related to our index link contracts, we're about 40% to 45% fixed with full year prices.
Speaker Change: Yes, great. Thanks.
Speaker Change: Yes, Bill and just to answer to your question on on selling price.
Speaker Change: Which I believe is what you were focused on obviously this mix.
The mix will have an impact on pricing obviously.
Speaker Change: Q2, and I think we've given enough in terms of.
Speaker Change: In terms of bread crumbs that you can kind of calculate.
Speaker Change: What the impact might be but just to kind of refresh.
Speaker Change: For everyone in terms of what the contract lags are.
Speaker Change: Related to our index linked contracts were about 40% to 45%.
Speaker Change: Fixed with full year price and then we have 20% which are on <unk>.
Celso L. Goncalves: And then we have 20% which are on CRU month lags. About 10% of the volumes are slab on a two-month lag, 10% are CRU quarter lags, and the rest, call it 10% to 15%, is true spot.
Speaker Change: Sir you month lags about 10% of the volumes our slab on a two month lag.
10%, our CRE quarter lags and the rest call it 10% to 15% is true spot. So when you think about Q2.
Celso L. Goncalves: So when you think about Q2, you know, the monthly lag is down from Q1, and the quarterly lag is up from Q1. But overall, you can kind of expect the Q2 average selling price to be down around $40. The second one is on CapEx, and I guess thinking about the company on a stand-alone basis with net CapEx-excluding awards and so forth, you talked about a billion-dollar normalization over the next four years after this year. Can you provide a little more granularity on 2025 in particular? to get better visibility, or maybe even the 26th.
Speaker Change: The monthly lag is down from Q1.
Speaker Change: Quarter lag is up from Q1.
Speaker Change: But overall you can kind of expect Q2 average selling price to be down around $40 a ton.
Speaker Change: That's super helpful. Thanks for that.
Speaker Change: That insights.
Speaker Change: One is on Capex and I guess thinking about the company on a standalone basis.
Speaker Change: Net net.
Speaker Change: Capex.
Speaker Change: Excluding awards and so forth you talked about I guess $1 billion normalize over the next four years. After this year can you provide a little more granularity on 2025 in particular.
Speaker Change: Assuming you have better visibility or maybe even the 26.
Celso L. Goncalves: A lot of questions we've been getting are how to think about your free cash flow generation ability beyond this. Yeah, I think it's a little too early to go into the granularity of 2025. I think the easiest way to think about it is just stick to the $700 million for this year, which we're very confident with. 2025 probably won't even get to $1 billion, and then you're only exceeding $1 billion when you get to 2026, but as we get closer, we'll be able to share more detail related to 2025 and 2026. Thanks, Celso.
Speaker Change: A lot of questions. We've been getting is how to think about your free cash flow generation ability beyond this year.
Yes, I think it's a little too early to go into the granularity of 2025, I think the easiest way to think about it is just stick to the $700 million for this year, which we're very confident with 2025, probably won't even get to $1 billion.
Speaker Change: And then youre only exiting exceeding $1 billion when you get to 2026, but as we get closer.
Speaker Change: We will be able to share more detail related to 'twenty five 'twenty six.
Speaker Change: Thanks Russell.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Phil Gibbs with Keybanc capital markets. Please proceed with your questions.
Celso L. Goncalves: Thank you. Our next question comes from the line of Phil Gibbs with KeyBank Capital. Hey, good morning. Morning, Pew!
Phil Gibbs: Hey, good morning.
Phil Gibbs: Morning, Joe.
Rob: I have a question just on the timing of the DOE. Transcribed by https://otter.ai, CapEx projects over 25 to 28 timeframes, do those DOEs get let as you spend the capital on the project, or is that? up front.
Phil Gibbs: Yes.
Phil Gibbs: A question just on the timing of the Doe.
Phil Gibbs: Grant you, you're obviously up to very very substantial capex projects over 25% to 28 timeframe do those.
Phil Gibbs: Grants get get let as you spend the capital on the project.
Phil Gibbs: That kind of a lump sum fund that you get upfront before you start spending.
Celso L. Goncalves: I'll let Celso take that. Yeah, no, Phil, you're right, they're paid out pro rata with the spend. Thank you, and maybe with the Middletown Project. Timing and Scope. Can you give us..., kind of the timeline for, or the pocket?
Speaker Change: I'll, let <unk> take that.
Speaker Change: Yes, so youre right Theyre paid out pro rata with the spend that's the easiest way to think about it.
Speaker Change: Thank you.
Speaker Change: And then maybe with the Middletown project, given that it's a substantial and timing and scope.
Speaker Change: Can you give us.
Speaker Change: Kind of the timeline of.
Speaker Change: Where are the pockets of phases as you all are looking at it.
Lorenzo: You all are looking at it. And what more do you need to complete in terms of, you know, due diligence or design? Relatively new technologies that are in the area. Yeah, no, look, it's a brand new facility there, but it's not, by any stretch, new technology.
Speaker Change: What more do you need the need to complete in terms of.
Speaker Change: Due diligence or design given this is relatively low.
Speaker Change: Relatively new technology at least.
Speaker Change: But I think people would just be interested in hearing that.
Speaker Change: Yes, no look.
Speaker Change: <unk> new.
Speaker Change: It's a new brand new facility, there, but it's not by any stretch new technology.
Lorenzo: Because it's the combination of a direct reduction plant that, instead of producing HBI, like our plant in Toledo, will be producing hot DRI. And that hot DRI will be fed on site to two EMFs. And what is an EMF?
Speaker Change: Because it's the combination of our direct reduction plan that instead of producing Dr Ray will be producing.
Speaker Change: I'm, sorry, instead of producing <unk> like our plant in Toledo will be producing hot Eri and Dr. Ray will be fed in on site two to MFS and Watson MF is just let Scott furnace to melt.
Lorenzo: It's just an electric arc furnace to melt iron ore to melt, in the case of this facility, iron metallic because it will be sponge iron, hot DRI, from the direct reduction plant. So it's a simple setup. There's nothing really complex, and these are two things that we do extremely well. We have electric arc furnaces, so we dominate this operation, and we absolutely have the best in class direct reduction plant, as far as I know, in the world.
Iron ore to melt in the case of.
Speaker Change: This facility.
Speaker Change: Facility iron ore metallic because it to be.
Speaker Change: Foreign gyrus hot derived from the direct reduction plan. So it's a simple setup there is nothing really.
Speaker Change: Complex and these are the two things that we do extremely well we have electric arc furnaces.
Speaker Change: Dominate this operation and.
Speaker Change: We absolutely have the best in class direct reduction plant as far as I know in the world. So we.
Lorenzo: So we are going to be hydrogen ready, and we are hydrogen ready in Toledo. We have been using hydrogen, so hopefully, by 2029, when this plant goes into operation, we will be able to start with hydrogen, or start just from the start-up with natural gas, and then immediately go to sink gas and, in the short term, be 100% hydrogen by the early 30s. So this is a game-changer in terms of the technology to produce steel, and particularly to produce automotive-grade steel.
Speaker Change: Going to be a hydrogen ready Andrea hydrogen ready to lead who have been using hydrogen. So hopefully by 2029. When this plant goes into operation, we are able to start with the hydro generators truck.
Speaker Change: For just for de stocked up with natural gas and then immediately go to sink gazan.
Speaker Change: In the short term b, 100% hydrogen by the early thirties.
Speaker Change: So this is real game changing in terms of the technology to produce steel and particularly to produce automotive grid steel, but it's a combination of a lot of things that one we have full knowledge and food.
Lorenzo: But it's a combination of a lot of things. One, we have full knowledge and full operational capability. And second, we are operationally proven in terms of how to use all this. So it's no big deal. Thanks, Lorenzo. And then, just lastly, on the mix. As I mentioned, Otto carried the day.
Speaker Change: Operational capability and second.
Speaker Change: Our.
Speaker Change: Operational.
Speaker Change: Prove it in terms of how to use all of these things so it's no big deal.
Speaker Change: Thanks, Lauren Zelman just lastly on the mix.
Speaker Change: You mentioned auto carried the day in Q1 the service centers.
Speaker Change: Took a step back.
Lauren Zelman: Are we expecting are you expecting rather auto to be relatively stable in Q2, and then service centers to be the driver of the increased volume or is automotive would be pruning as well.
Lorenzo: [inaudible] and then Service Centers to be the drivers. Phil, the automotive industry continues to do very well, particularly now that they are no longer all pursuing to be the next Tesla. They are not as hell-bent on going all into electric vehicles as they were even six months or 12 months ago. They are now talking turkey. The cars that are selling are the ICE and now the hybrids.
Lauren Zelman: Fuel automotive continues to do very well.
Lauren Zelman: Particularly now that they are no longer all pursuant to be the next Tesla.
Lauren Zelman: They are not as hell bent on ongoing all into electrical vehicles as they were even six months or.
Lauren Zelman: 12 months ago, they're now talking Turkey, the cars that are sailing.
Lauren Zelman: And now the hybrids. So the ones that are moving faster to hybrids are the ones that are winning the day.
Lorenzo: So the ones that are moving faster to hybrids are the ones that are winning the day. And because we are so big in supporting pretty much all of them, except one that only buys cheap stuff, we are going to really continue to support the ones that are growing. And we don't have a problem picking winners and losers among the car manufacturers. For example, yesterday, I announced that I'm no longer selling steel to Volkswagen in Mexico because there's no point in selling steel from the United States to Mexico just to have Volkswagen then sending back cars to the United States just to pay cheaper wages to workers in Mexico.
Lauren Zelman: And we are because we are so big and supporting pretty much all of them, except one that only buys cheap stuff.
Lauren Zelman: We are going to really continue to support.
Lauren Zelman: <unk>.
Lauren Zelman: And we don't have a problem picking winners and losers among the car manufacturers for example, yesterday I announced that I'm no longer selling still to Volkswagen New Mexico.
Lauren Zelman: There's no point in selling steel from the United States to Mexico, just to have Volkswagen than sending back cars to the United States just to pay cheaper wages to workers in Mexico, I'm not going to support that particularly now that the UAW was able to unionize the planting in Chattanooga, Tennessee.
Lorenzo: I'm not going to support that. Particularly now that the UAW was able to unionize the plant in Chattanooga, Tennessee, for Volkswagen, I would rather sell to Chattanooga. So we are going to start to be a lot more selective among our automotive clients. But make no mistake; the automotive industry is good business for us. But the only innovation that the Alliance for American Innovation can come up with is that we need to sell them at a lower price.
Lauren Zelman: Volkswagen I would rather sell to shut in <unk>, Tennessee, So we're going to start to be a lot more selective among our automotive clients, but make no mistake automotive is good business for us.
Lauren Zelman: But the only innovation that the alliance for American innovation, Ken Ken can come up with this we need to sell to lower price. So we're not going to do that and we are going to continue to play the Cleveland cliffs game, we don't need to grow our size in automotive through M&A, where Ed big enough, but we can be smaller.
Lorenzo: So we are not going to do that, and we are going to continue to play the Cleveland-Cliffs game. We don't need to grow our size in the automotive industry through M&A.
Lauren Zelman: But beef market and Thats, what were going to do and that will bear fruit for Cleveland cliffs going forward.
Lorenzo: We're big enough, but we can be smaller but be smarter. And that's what we're going to do. And that will bear fruit for Cleveland-Cliffs going forward. And lastly, Lorenzo... team on the grain-oriented electrosteel market. [inaudible] 6-12 Months in terms of volumes.
Speaker Change: And then lastly, Lorenzo.
Speaker Change: Team on on the grain oriented electrical steel market I think your comments over the next several years or are very bullish, particularly as it relates to the grid spending the timing of.
Speaker Change: Around when that is going to take place but.
Speaker Change: What's your outlook in the shorter term maybe the next.
Lorenzo: And then within that question, you also mentioned in your prepared remarks that you expected some reshoring perhaps. After this debate, we saw in the last 10 years of offshoring into Canada and Mexico on the transformer side, maybe shed some light on that aspect too. Appreciate it.
Speaker Change: The 12 months in terms of volumes and then within that question. You also mentioned in your prepared remarks that you expected.
Speaker Change: Some some re shoring perhaps.
Speaker Change: And as we saw in the last 10 years.
Speaker Change: Offshoring indicators in Mexico on the transformer side, maybe maybe shed some light on that aspect to appreciate it. Thanks.
Lorenzo: Look, this situation of reshoring only happens because for a while we allowed the thing to go away from us. But we have been working very hard since the Trump administration to stop this bleeding. If you recall, during the last couple years of the Trump administration, we worked very hard to put Section 232 on cores and laminations, and the main reason was the situation with Mexico that was allowing that to happen.
Speaker Change: Look this.
Speaker Change: The situation of the re shoring.
Speaker Change: Only only happens because for a while we allowed the think to go away from us.
Speaker Change: But.
Speaker Change: We have been working very hard since the Trump administration to stop the bleeding.
Speaker Change: <unk>.
Speaker Change: If you recall during the last couple of years of the Trump administration, we work very hard to put a section in Q3, two on quarters and eliminations.
Speaker Change: And the main reason was the.
Speaker Change: Sure.
Speaker Change: The situation with Mexico, there was allowing that to happen we are able to fix that without this sector in Q3, two which by the way was never signed by President Trump. Despite the great efforts from the USTR Ambassador Bob Lighthizer for some reason President Trump never signed there.
Lorenzo: We were able to fix that without Section 232, which, by the way, was never signed by President Trump, despite the great efforts from USTR Ambassador Bob Lighthizer. For some reason, President Trump never signed that thing. But this is water under the bridge. We fixed the thing with the clients, and the clients are not doing that in Mexico anymore, at least not on a major scale.
Speaker Change: But this is water under the bridge, we fix the thing with the clients and the clients are not.
Speaker Change: Doing that in Mexico anymore at least not to me.
Speaker Change: A major scale.
Lorenzo: On the other hand, we still have the importation of transformers into this country, and I was discussing that situation yesterday with Secretary Jennifer Granholm about the risk we are taking when we import transformers. Among other things, we don't even know what's inside the transformer when we import the entire transformer.
Speaker Change: The other hand, we still have the importation of transformers into this country and I was discussing that situation yesterday with secretary Jennifer Granholm.
Speaker Change: About the risk, we're taking when we import transformers.
Speaker Change: Among other things, we don't even know what's inside the transformative when we reported the entire transformers. So we need to stop that and Thats for National Security reasons. So we will continue to work with the by the administration and whoever has the president after.
Lorenzo: So we need to stop that, and that's for national security reasons. So, we'll continue to work with the Biden administration and whoever is the president of the... election. We will continue to work on that. We need to stop importing transformers. We can't allow that to happen.
Speaker Change: The election, we will continue to work on that we need to stop importing.
Speaker Change: Transformers, we can't allow that to happen, we need to build more transformers in the United States. The good thing is that our dialogue with this client that reduced transformers in the United States is fantastic.
Lorenzo: We need to build more transformers in the United States. The good thing is that our dialogue with these clients that produce transformers in the U.S. is fantastic. We are working on a solution for Wirton that will resolve a lot of the situation with the transformers and allow us to produce more goals. We have spare capacity. With minor investments, we can increase 50% to 70% of our throughput in Butler just to produce more goals, grain-oriented electrical steels for transformers. So we want to build a new factory in Wilton, West Virginia, using our workforce there to produce transformers. We can co-invest. We can just support them with steel.
Speaker Change: We are working on a solution for Wilton.
Speaker Change: That will resolve a lot of distribution with Transformers will allow us to produce more goes we have spare capacity with minor investments, we can increase 50% to 70% of our throughput.
Speaker Change: Butler just to produce more goes grain oriented electrical steels for Transformers. So we will we want to put it.
Speaker Change: Our new factory in <unk>.
Speaker Change: West, Virginia, using our workforce there to produce Transformers, we can co invest we can't just support with the with the steel we can do whatever it takes but we need to increase the.
Lorenzo: We can do whatever it takes, but we need to increase the throughput and the availability of transformers for the supply chain, made-in-USA transformers, and hopefully with union workers. That's what we are working on, and we believe we're going to be successful. Thank you so much.
Speaker Change: The throughput and the availability of Transformers four the supply chain made in USA Transformers, and hopefully with the Union workers. That's what we're working on and we believe we're going to be successful.
Speaker Change: Thank you so much.
Rob: Thank you. Our next questions are from the line of Alex Hacking with Citi. Pleased to see you with your questions. Yeah, morning, Lorenzo, and Celso.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Alex hacking with Citi. Please proceed with your question.
Alex: Yes, good morning, Lorenzo and sell so just.
Lorenzo: Just coming back to the DOE award. It sounds like the negotiations there are somewhat of a formality, and you're very confident that that money will be awarded. Is that assumption correct? Am I correct in that assumption? And then what would be the timing there, the expected timing of when those awards would be confirmed?
Alex: Just coming back to the <unk>.
Awards.
Alex: It sounds like the negotiations there are somewhat of a formality and you're very confident that that money will be awarded.
Alex: Is that assumption.
Alex: Am I correct in that assumption.
Alex: And then what would be the timing there do you expect the timing of when those awards would be confirmed thank you.
Lorenzo: Look, I don't believe, good morning Alex, I don't believe it's a formality because they are asking a lot of good questions and we're providing what we believe are a lot of good answers, and the time frame for the negotiation, or the discussion, or whatever you call it, is basically we're going to use the rest of this year to finalize this negotiation. But we are fairly confident that we're going to be successful But I don't think it's a formality.
Speaker Change: Look I don't have a good morning.
Speaker Change: Alex I don't believe it's a formality.
Speaker Change: They are asking a lot of good questions and we will provide you with what we believe a lot of the answers and the.
Speaker Change: Time frame for the <unk>.
Speaker Change: The negotiation or the discussions over to Howard.
Speaker Change: Whatever you call it.
Speaker Change: You are going to use the rest of this year to finalize.
This negotiation, but we are.
Speaker Change: Fairly confident that we're going to be success, but I don't think is a formality I believe that they are doing a good job that they're doing.
Lorenzo: I believe that they are doing a good job. They are doing the due diligence that they need to do. At the end of the day, they are going to be giving us $575 million, $500 million for Middletown, and $75 million for Butler. So it's a lot of money. And it's, at the end of the day, taxpayer money. And we take this very seriously. But it's not a formality.
Speaker Change: Due diligence that they need to do.
Speaker Change: End of the day, they are going to be.
Speaker Change: Giving us $575 million $500 million for immuno down $75 million for Butler, So it's a lot of money and.
Speaker Change: At the end of the day taxpayers' money and we take this very seriously, but it is not a formality.
Lorenzo: We are doing the work. And in the process, the most important part is that, in the process, we have the ability to educate the government on what we do. Instead of them only reading what is in the trade press or in reports from research analysts, they are learning from the ones that really know what they're talking about. Okay, thanks. Yeah, that includes you in the crowd that doesn't know what you're talking about, but you're right about that. But that's just me. You know me, Alex.
Speaker Change: We are doing the work and in the process that the most important parts of that in the process. We are having the ability to educate the government on what we do instead of having then only reading what is in the trade press or.
Speaker Change: Reports from.
Speaker Change: Research analysts they are learning from the ones that really know what they're talking about.
Speaker Change: Okay. Thanks.
Speaker Change: Yes that includes jewelry the drought that don't know what youre talking about youre right about that.
But thats just Nomura Alex so.
Lorenzo: But what, yeah, what's next? What's next? What's next? Let's say the money wasn't awarded. It sounds like... for whatever reason.
Yes, so what's next.
Speaker Change: Well I can ask about that.
Speaker Change: What's next let's say the money wasn't awarded it sounds like.
Speaker Change: For whatever reason.
Lorenzo: It sounds like the economics of the electric melt furnace would be compelling even without the award, but is that a project that you would still move ahead with in that circumstance, or can't you really? Alex, I'm very confident that I'll get the money, and we'll, of course, run the projections with and without. With the money coming from the DOE, it's a no-brainer. It's a very, very compelling case of return on investment. It's money well spent. It's a real game-changer.
Speaker Change: It sounds like the economics of the electric melt furnace would be compelling even without the award but is that a project that you would still move ahead with in that circumstance you can't really say.
Speaker Change: Until you reach that point.
Speaker Change: Alex I'm very confident that they will get their money and.
Speaker Change: Of course run the projections with and without but.
Speaker Change: With the mining come from the Doe.
Speaker Change: It's a no brainer.
Speaker Change: A very very compelling case.
Speaker Change: <unk> return on investment.
Speaker Change: It's money well spent.
Speaker Change: It's a real game changer, we are going to be reducing our cost to produce the same.
Lorenzo: We are going to be reducing our costs to produce the same ton of liquid steel by more than $250 per ton. That's super significant. So we want that project. And yes, the ROI without the grant is still OK. But the ROI with the grant is unbelievable, and I believe that so far, based on what Cleveland-Cliffs is doing, in terms of, among other things, working together with the government and working together with our workforce, we deserve to get the money.
Speaker Change: <unk> of liquid steel by more than $250 per ton that's super significant so we want that project yes.
Speaker Change: Roy we though the grant is still okay, but they are ROI with the grant is.
Speaker Change: Unbelievable and I believe that so far based on what Cleveland cliffs is doing in terms of among other things.
Speaker Change: Working together with the government and working together with our workforce, we deserve to get the money.
Lorenzo: Yeah, and I guess just finally, I mean, you mentioned that the $250 number earlier. I mean, is that really like the direct saving from shifting the technology? That would obviously provide a massive... Massive Uplift. Right? And you've been to Uppertown. Exactly right, and Apples.
Speaker Change: And I guess, just finally, I mean, you mentioned that the $250 number.
Speaker Change: Earlier, I mean is that is that really like the direct saving from shifting the technology because.
Speaker Change: Obviously provide a massive.
Massive uplift fright and EBITDA per ton.
Speaker Change: Exactly right.
Lorenzo: Exactly right. Because, you know, I'm a neurologist. I like technology. It would be so easy to shut down blast furnaces and BOFs and PTAFs and not be able to produce all kinds of steel, the steel that is produced today, and cause massive unemployment. Europe is doing that. The UK is doing that.
Speaker Change: Apples to apples comparison exactly right because.
Speaker Change: I remember our largest select tech knowledge.
Speaker Change: It would be so easy to shutdown blast furnaces in <unk> and not be able to produce all kinds of steel. The students that are produced today and producing massive unemployment Europe is doing that.
Speaker Change: The UK is doing that.
Lorenzo: When I had a conversation with the then Minister of the Economy of Slovakia, he said that 600 million pounds... were granted money for COSITE just to shut down the blast furnace and replace it with EAFs. And I said, do you know that two-thirds of your personnel will be let go? He said, yes, unfortunately, that's the consequence of decarbonizing. I said, Mr. Minister, you don't know what you're talking about, with all due respect.
Speaker Change: When I was just.
Speaker Change: I had a conversation within minutes of the economy, Slovakia. He has said that there was 600 million pounds.
Speaker Change: Grant money for <unk>.
Speaker Change: <unk> just to shut down their blast furnace and replace with you.
Speaker Change: Yes.
Speaker Change: During all of that two thirds of your.
Speaker Change: Your personnel, who will be Lego so yes. Unfortunately, that's the consequence of decarbonization.
Speaker Change: Mr. Minister you don't know what Youre talking about with all due respect so we've got to see the big picture, we better understand where cost is.
Lorenzo: So you've got to see the big picture. You've got to understand where the cost is. If you believe that costs are saved by cutting $20 per ton today and $30 per ton tomorrow, you end up with what we created here in the United States. And then you decimate an industry that was the envy of the world four years ago, and you create China. And then you realize that China is an enemy to be defeated.
Speaker Change: If you believe that cost savings saved by cutting 20 Bucks per ton today at 30 Bucks per ton Tomorrow, you end up with what we created here in the United States and then you decimate.
Speaker Change: Two industry there was the envy of the World 40 years ago, and you create China and then you realize that China is an enemy to be beaten.
Lorenzo: And yeah, so you've got to see the big picture. And it takes a lot of education, and a lot of technology, and a lot of engineering to do things the way we are doing here at Cleveland-Cliffs. We are very happy that we found a willing counterpart in several cabinet members of the Biden administration, and we are happy. Okay, thanks. Best of luck. Thank you. Same to you.
Speaker Change: Yeah, so versus the big picture.
Speaker Change: And it takes a lot of education and a lot of technology and a lot of engineering to do things that we are doing here at Cleveland cliffs, we are very happy that we found.
Speaker Change: Uh huh.
Speaker Change: A wheelie.
Speaker Change: Counterpart.
Speaker Change: Several cabinet members of the by the administration.
Speaker Change: <unk>.
Speaker Change: We are we are happy that.
Speaker Change: Okay. Thanks best of luck.
Speaker Change: Thank you same to you.
Rob: Thank you. Our next question is from the line of Tristan Gresser with BNP Parma. Please proceed with your question. Yes, hi, good morning, and thank you for taking my questions.
Speaker Change: Thank you. Our next question is from the line of Tristan Dresser with BNP Parva. Please proceed with your question.
Tristan Dresser: Yes, hi, good morning, and thank you for taking my questions.
Tristan Dresser: Just maybe a follow up on the de carbonization.
Tristan Gresser: This is just maybe a follow-up. Co-Organization Project. Can you please maybe split the gross capex elements of the project in Middletown and give us a sense of, you know, not on a net capex basis but on a gross basis, what the normalized capex would look like in 2024, 5, 6, 7, would it be closer to 1.2 billion? That's my first question. Yeah, let's also take that, Celso. Yeah, sure. Hey Tristan,
Tristan Dresser: Projects.
Tristan Dresser: Can you. Please maybe split the gross capex elements of the project in Middletown, and then give us a sense.
Not on the net capex basis, but on a gross basis.
Tristan Dresser: What the normalized Capex would look like.
Tristan Dresser: Thousand 24 567.
Speaker Change: Would it be closer to $1 2 billion. That's my first question.
Speaker Change: Let's also take that social please.
Speaker Change: Yes sure interesting.
Celso L. Goncalves: Like I said, there's no impact to CapEx from these DOE projects in 2024, just to be abundantly clear. Everything starts in 2025. And if you want to break that down, in 2025, the Cliffs portion of the Middletown spend is about $250 million. And the total CapEx..., related to everything, is about $985 million. So that's why I said in 25, we don't even crack the $1 billion mark. And then when you go to 26, Middletown steps up to about $400 million, and the total goes to about $1.5 billion.
Speaker Change: <unk> said there is no impact to Capex from these projects in 2024, just to be abundantly clear everything starts in 2025.
Speaker Change: Yeah.
Speaker Change: And if you want to break that down in 2025, the cliffs portion of the Middletown spend is about $250 million.
Speaker Change: And.
Speaker Change: The total capex related to everything is about $985 million. So thats why I said in 25, we don't even crack above the 1 billion Mark and then when you go to 'twenty six.
Speaker Change: Middletown steps up to about $400 million.
Speaker Change: And the total gross about 1.2.
Celso L. Goncalves: So that's the breakdown for the next one. All right, that's helpful. And that's a net, a net number, right, the 1.2. So removing the reline and, Correct. And then the second question: should we think of Middletown Project as the way forward for the rest of the footprint, given the carbon benefits you mentioned that can translate, selling premiums, but also the cost benefit? I think you mentioned in the past that there was an X3 line at Burns Harbor in 2026, so basically, does it make sense to gradually convert your BEF footprint to this kind of DRI melting unit setup, and if that's the case, Yeah, it's a very good question.
Speaker Change: That's the breakdown for the next couple of years.
Speaker Change: Alright Thats helpful.
Speaker Change: Helpful and that's a net.
Speaker Change: That number right. The one two so moving to the.
Speaker Change: Re line and grant.
Correct: Correct, yes.
Correct: Alright.
Speaker Change: And then the second question.
Speaker Change: Should we think it's Middletown project is the way forward for the rest of the footprint given the.
Speaker Change: Carbon benefits you mentioned that can translate into selling premiums, but also the cost benefit.
Speaker Change:
Speaker Change: I think you mentioned in the past that there was an extra line at Burns Harbor in 2026.
Speaker Change: It does it makes sense to gradually convert UBS footprint to discount at the Cri Multiunit setups and if thats the case with more funding be available should you decide to go this way.
Speaker Change: Yes, it's a very good question.
Speaker Change: But.
Lorenzo: But let's go piece by piece on where my cost savings are, the numbers that I just gave you. The biggest problem for us in Middletown is our very punitive contract that we have with Sunco. That contract is absolutely horrible, and Our Cost of Coke and Middletown is one of the reasons why we started studying this project in the first place. That situation is going to change. No matter what, we are not going to be keeping ourselves penalized by Suncook with that horrible contract that we have. So for Middletown, the numbers are the numbers I mentioned.
Let's go piece.
Speaker Change: Piece by piece.
Where my cost savings are the numbers that I just gave to you the biggest problem for us.
Speaker Change: Hello, Tom is our very punitive contracts that we have with suncorp.
Speaker Change: That contract is absolutely horrible.
Speaker Change: And our cost of Coke.
Speaker Change: And <unk> is one of the reasons why we started studying this project in the first place.
Speaker Change: So.
That situation is going to change.
Speaker Change: No matter, what we are not going to be.
Speaker Change: Keep keeping ourselves penalized by Suncorp with that horrible contract that we have so far Middletown. The numbers are the numbers I mentioned to you.
Lorenzo: And we are going to go in that direction, coming here, Ohio Water. I'm going to get the grant. But the project there is our response to the contract we have with Sunco. When you go to a company like, to a plant like, for example, Burns Harbor, the situation is not as clear as that. Because we have been improving a lot our ability to produce coke at a reasonable cost. Burns Harbor is because of that, among other things, but mainly because of that.
Speaker Change: And we are going to go in that direction.
Speaker Change: Hell or high water I'm going to get the grant but.
Speaker Change: The project there is.
Speaker Change: Our response to the contract we have with Suncor, where do we go to a company like <unk> to a plant like for example, Burns Harbor. This situation is not as clear as that because we have been improving a lot our ability to produce coke at a reasonable cost Burns harbor east because of that among other things but.
Lorenzo: It's our lowest cost production plant in the entire footprint, so I don't see us going to Burns Harbor so quickly. But of course, the new configuration that we are implementing in Middletown will be our first in the company, like we did with our plant, our direct reduction plant, in Toledo. And with that, we were able to now easily go to Middletown with a new direct reduction plan because we know we dominate the technology. So, it's a first for me.
Was that mainly it's our lowest cost production plant in the entire footprint. So I don't see us going to Burns Harbor, so quickly but of course the.
Speaker Change: The new configuration that we are implementing mid hotel will be our first.
Speaker Change: In a company like we did with our plant our direct reduction plant.
Speaker Change: In Toledo, and we with.
Speaker Change: With that we were able to to now easily go to meter down with our new direct reduction plant, because we know who dominate the technology. So it is the first I don't know.
Speaker Change: If.
Speaker Change: We are going to continue in that route but there is a possibility and we have our priorities in terms of who would be an accident, who would be next if thats the case.
Lorenzo: I don't know if... We're going to continue on that road, but there's a possibility, and we have our priorities in terms of who would be next and who would be next if that's possible. All right, that's very clear. Maybe one final question. Maybe if you could discuss it a little bit.
Speaker Change: Alright thats.
Speaker Change: That's very clear maybe one final question.
Speaker Change: Maybe if you can discuss it a little bit.
Speaker Change: The situation at Calvert.
Speaker Change: You have a slab supply agreement.
Facility, there is ramping up its upstream.
Speaker Change: With a second yeah. So.
Lorenzo: The situation at Calvert, you have a slab supply agreement with some other slab supplier. Do you have an option?
Speaker Change: I think the contract is up to renewal next year, but what are the solution is let's say.
Speaker Change: Well calibrate this volatility with upstream or.
Lorenzo: Is that already a topic of discussion or negotiation? Share some thoughts on that. Yeah, the negotiation has just started. And, uh, of course, I can't give you details of how the negotiation is going, but I will tell you what the outcome will be. We will end up with a much better contract for us, or no contract. Either one is good for Cleveland-Cliffs.
Speaker Change: Some other snap supply GTS.
Speaker Change: Is that your topic of.
Speaker Change: <unk> discussion or negotiation. So if you can share some thoughts on that that would be helpful.
Speaker Change: Yes, the negotiation has just started.
Speaker Change: Of course, I'm not going to two to give you I can't give you details of how the negotiations going but I will tell you what the outcome will be we will end up with a much better contract for us or no contract.
Speaker Change: One is good for Cleveland cliffs.
Lorenzo: No contract is good, and a better contract might be good. The contract we have was the last piece of the puzzle for us to close the deal and acquire ArcelorMittal USA, and that was... In December of 2020, we closed, so that negotiation happened in September 2020, so that was almost four years ago.
Speaker Change: No contract is good and a better contract might be good the contract to have was the last piece of the puzzle for us to close the deal and acquire Arcelormittal USA and that was.
Speaker Change: In December of 2020, we closed so that negotiation happen.
Speaker Change: September 2020, so that was almost four years ago, I knew exactly where I was walking us into <unk>.
Lorenzo: I knew exactly where I was walking us into, and now it's the time of expiration. And it's like any situation with a contract. We prepared Cleveland-Cliffs to be without that contract. We're going to be OK. And if that contract improves, we can still work with our friends at ArcelorMittal. Otherwise, we're going to continue to be friends, but they will have to find this lab somewhere else.
Now, it's the time of exploration.
Speaker Change: It's like an hour.
Speaker Change: Any situation with a contract we prepared to Cleveland cliffs to be without that contract we're going to be okay.
Speaker Change: And if that contract improves we still can work with our friends at Arcelormittal, otherwise, we wont be continue to be France, but.
Speaker Change: We'll have to find slipped somewhere else.
The deal.
Speaker Change: Alright, Thank you very much.
Thank you.
Speaker Change: Our next question is from the line of Lawson Winder with Bank of America. Please proceed with your question.
Lorenzo: All right, thank you very much. Thank you. Thanks very much, operator, and good morning, Celso and Marietta. Question. I would like to ask about the nose expansion. Has that started to ship to customers, and how is that working? The NOSE expansion is in operation, and mission accomplished. We always believed that we would have more use for non-oriented electrical fuels, particularly for motors of electric vehicles, so we created a modest increase in our capacity by investing.
Lawson Winder: Thanks, very much operator and good.
Lawson Winder: Good morning, Celso Omar Thank you for taking my question.
Lawson Winder: I would like to ask about the Nos expansion at Zanesville has that started to ship to customers and how is that ramping up.
Lawson Winder: The nose.
Lawson Winder: Expansions and as you.
Lawson Winder: Uh huh.
Lawson Winder: LASA.
Lawson Winder: In operation and.
Lawson Winder: Michelle accomplished we always believed that.
Lawson Winder: We will have more.
Lawson Winder: For our non oriented electrical steels, particularly for motors of electrical vehicles and we create.
Lawson Winder: Created a modest increase in our capacity by investing.
Lorenzo: Relatively small amount of money in CapEx. So we're good. The project was executed as planned.
Lawson Winder: Hum.
Lawson Winder: Relatively small amount of money.
Lawson Winder: And capex so what.
Lawson Winder: Good.
Lorenzo: We are selling oriented electrical steels. We continue to develop applications, mainly with our automotive clients, and we are fine with that. And we have no intention to expand beyond what we already have for now. Okay, thank you for that. And can I also ask about the...
Lawson Winder: Project was executed as planned we are selling oriented electrical steels, we're continuing to develop applications with mainly with our automotive clients and we're fine with that and we.
Lawson Winder: We have no intention to expand beyond what we already have for news.
Speaker Change: Okay. Thank you for that.
Speaker Change: And can I also ask about the.
Lorenzo: The base price that you said was $900 per short ton, so I mean the price reporters are still indicating prices in the lower $800s. Are you guys realizing prices in that $900 per short ton range, and what's your thinking on pricing over the next month or two? I never give public predictions on price.
Speaker Change: The base price.
Speaker Change: That you said it $900 per short ton. So I mean, the price reporters are still indicating prices and the lower 800 are you guys realizing pricing in that $900 per short ton range and what's your thinking on pricing over the next month or two.
Speaker Change: I never give public predictions on price.
Lorenzo: We will announce our price increase, and we are working to get that price increase. We are not an island. In the meantime, let me announce that our price increased, and everything was actually going in the right direction, or still selling for $900, for that matter. We are. So the answer to your question is yes. But other clients, I'm sorry, other competitors came with different price points, and we live in a world of price competition, particularly in a world where everybody reads every single line that comes out of the trade press.
Speaker Change: And also a price increase and we're working to get that price increase we are not in a ligand.
Speaker Change: In the meantime that we announced our.
Speaker Change: Our price increase and everything was actually growing.
Speaker Change: In the right direction still selling for $900 for that matter. We are so the answer to your question is yes, but other clients.
Speaker Change: For other clients other competitors came with different price points and we live in a world of rising competition, particularly in a world that everybody reads every single line that comes out of the trade press.
Lorenzo: And you know, you just said what they would like to hear. So the prices are $800 and low $800. Yeah, they will take that to the, like the Bible. But I'm telling you, we're selling for $900. But is that easy right now to get there? No. It was easier before things that happened during the latter part of the quarter.
Speaker Change: And you know you just said what they would like to hear so the prices are 800 in the low eight hundreds yes, they will take that to them.
Speaker Change: Like the Bible.
Speaker Change: Selling we're selling for 900, but is.
Speaker Change: Is that easy right now together now.
Speaker Change: It was easier before things that happened during the day.
Speaker Change: Part of the quarter, but you know as always is on <unk>.
Lorenzo: But you know, it's always changing. And at the end of the day, we will see what's going to happen. And we expect to sell more, particularly for services that are completely depleted in terms of inventory, because not buying seems to be the only diet that they can do when they want to lose weight on their inventory. I suggest Monjaro or Ozempic.
Speaker Change: All this changing environment and at the end of the day, we will see what's going to happen.
Speaker Change: We expect to sell more particularly for service centers are completely depleted in terms of inventory.
Speaker Change: Was not bias seems to be the only diet that they can do when they want to lose weight on their inventory I suggest mungia oral Olympic that we'd be a lot more effective.
Lorenzo: That would be a lot more effective. All right. Thank you. With that, I think we're done. Yes, that's correct.
Speaker Change: Alright.
Speaker Change: With that I think we are done.
Hi, Rob.
Rob: Yes, that's correct I would like to make some closing comments.
Rob: Would you like to make some closing comments? Done. Munjaro resembles.
Rob: Done.
Rob: <unk>.
Lorenzo: You lose weight with that and pair it with exercise. But as far as inventory is concerned, service centers are supposed to carry inventory. If you're a service center that doesn't carry inventory, you're setting yourself up for a disgrace. So be my guest. Good luck. Thank you, everybody. I'll talk to you soon. Bye now. Thank you to everyone who joined us today. This will conclude today's call. We will disconnect your lines at this time and thank you for your participation.
Rob: Yeah, you'll lose weight to adapt.
With exercise, but as far as inventory service centers as opposed to carry inventory for our service Center is don't carry inventory you've set yourself up for a disgrace.
Speaker Change: But the my guess good luck. Thank you everybody I will talk to you soon bye now.
Speaker Change: Thank you and everyone who joined US today. This will conclude today's call. You may disconnect. Your lines at this time and thank you for your participation.