Edited Transcript of CLF earnings conference call or presentation 11-May-20 2:00pm GMT

Debora Carley

CLEVELAND Jul 11, 2020 (Thomson StreetEvents) — Edited Transcript of Cleveland-Cliffs Inc earnings conference call or presentation Monday, May 11, 2020 at 2:00:00pm GMT * C. Lourenco Goncalves Cleveland-Cliffs Inc. – Chairman, President & CEO * Keith A. Koci Cleveland-Cliffs Inc. – Executive VP & CFO B. Riley FBR, Inc., […]

CLEVELAND Jul 11, 2020 (Thomson StreetEvents) — Edited Transcript of Cleveland-Cliffs Inc earnings conference call or presentation Monday, May 11, 2020 at 2:00:00pm GMT

* C. Lourenco Goncalves

Cleveland-Cliffs Inc. – Chairman, President & CEO

* Keith A. Koci

Cleveland-Cliffs Inc. – Executive VP & CFO

B. Riley FBR, Inc., Research Division – Senior VP & Equity Analyst

KeyBanc Capital Markets Inc., Research Division – Director & Equity Research Analyst

* Seth R. Rosenfeld

Good morning, ladies and gentlemen. My name is Julian, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs First Quarter 2020 Earnings Conference Call. (Operator Instructions)

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 of Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on forms 10-K and 10-Q and news releases filed with the SEC, which are available on the company’s website. Today’s conference call is also available and being broadcast at clevelandcliffs.com.

At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning.

At this time, I would like to introduce Lourenco Goncalves, Chairman, President and Chief Executive Officer.

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [2]

Thank you, Julian, and good morning, everyone. I hope everyone listening on today’s call is safe and healthy. Starting my remarks, I want to begin with a note of appreciation for our employees throughout the entire company. I couldn’t ask for more dedicated people to navigate through the crisis with me. You have been deemed essential by the states who we operate in and you have always been essential to the long-term health of our company. We appreciate how well you have adapted to this new situation and how aligned we are on the importance of workplace safety throughout our several operating locations. Because of you, at the other side of this pandemic, we’ll emerge stronger, safer, healthier and more productive. It is remarkable what we have accomplished during these challenging times we have been through.

As you may know, we have navigated through crisis before. While the situation right now is a bit different, it certainly has not taken us out of our comfort zone. Actually, this is our comfort zone because differently from when the tide is high, making all boats float, this is a time when management really matters.

As I will lay out on this call, we have acted promptly and appropriately, and we will continue to do so. More importantly, nothing we have seen or done over the past 2 months has changed our perception on the combined company, we envisioned prior to the acquisition of AK Steel by Cleveland-Cliffs. We have acquired a steel company with highly concentrated exposure to high-end markets and very little exposure to sales of commodity steel products particularly HRC.

Among these high-end markets, the most important for our company is the automotive sector, a market which all steel companies would like to become part of and we already are a major lead player, supplying virtually all auto manufacturers in the United States. Also, we are the sole producers of electrical steels in North America, and that’s a crucial national security item, a concept, we have been able to communicate in Washington, D.C. since we acquired AK Steel. As confirmed by the recently announced Section 232 investigation self-initiated by the Department of Commerce.

We are also self-sufficient in iron ore pellets, our most important feedstock. And very importantly, we do not depend on scrap, a feedstock that will be scare at the other side of this crisis. Shutting down manufacturing, particularly automotive manufacturers and continuing to operate the steel mills particularly electric arc furnaces steel mills created an unprecedented situation in our country. The scrap is being consumed, but it’s not being generated. When our HBI plant comes online soon, we’ll have another relevant product to sell and another way to capitalize on our strength.

Before anything else, I would like to call your attention to our first quarter results. Had AK Steel being under our control for the entire quarter, our reported adjusted EBITDA would have been $61 million. This includes the results from both legacy Cliffs and AK Steel in the period prior to the acquisition. Those that follow Cliffs know that Q1 has always been our lowest tonnage quarter due to the seasonality associated to the shutdown of the Great Lakes during the winter months. From now on, with AK Steel in the mix, the impact of seasonality on our results is substantially reduced.

During the first week post acquisition, the most significant development impacting our business occurred with virtually all of the automotive manufacturing plants we serve, announcing full shutdowns. As you may recognize, even before the acquisition of AK Steel by Cleveland-Cliffs, our largest end market has always been the automotive industry through AK Steel and through our other major pellet clients, ArcelorMittal. And because most of our exposure to automotive steel products is on adjusting time basis, we had to make immediate adjustments to a large portion of our production. These adjustments included idling production at Dearborn Works, stopping operations at all Precision Partner plants, significantly curtailing AK Tube production and implementing an extended outage at one of our electrical furnace plant, Mansfield Works.

All of these facilities are meaningful suppliers of the automotive sector. While we are still far from normal, we have been encouraged by the timing and pace of production restarts announced across the automotive industry. If the automotive manufacturers continue to restart production as planned, as they actually have already started to do, our operations will normalize throughout the balance of the second quarter, delivering products to our customers more reliably than before. In fact, one item for improvement we uncovered during the due diligence process at AK Steel was the status of its just-in-time inventory. While we do not believe AK Steel just-in-time inventory was worse than the competitors’ inventory positions, it was definitely not as good as we believe it should be. In a normal world, with no coronavirus and business as usual, we had planned to fix this issue throughout the entire year 2020. And by the end of the year, we would have our inventories in better shape.

One silver lining of this automotive shutdown was that it allowed us to accelerate our execution on this issue. And I can confidently say that we are now only 2 months after the acquisition in a comfortable position to deliver our steel with perfect reliability on adjusting time basis. As soon as the automotive plants are back in full force, they will be amazed that how much AK Steel has changed and how ready we are for their requirements.

The automotive production stoppages will ultimately trickle back to our raw material operations. As such, we first indefinitely idle the AK’s metallurgical coal mine in Pennsylvania. Later on, in April, we then temporarily idled Cliffs, Northshore and Tilden iron ore mines, which account for 2/3 of our annual pellet production.

Due to the timing of the crisis hitting at the end of the winter, our blast furnace clients were in serious need of pellets for inventory replenishment, even if their immediate intent was to keep their blast furnaces on idle. With that our sales through our 2 major third-party pellet customers, ArcelorMittal and Algoma have actually persisted at a healthy rate since the Great Lakes reopened at the end of March. Even better, our take-or-pay volumes for these merchant agreements give us a lot of certainty for future pellet sales. And our primary demand reduction comes from our own facilities, Dearborn and Toledo.

The idling of our mines facilities will actually allow us to reduce some pellet inventory and will contribute in large part to the approximately $100 million inflow from working capital release in the second quarter. A number we made public when we publicly released our extreme stress test case scenario last month. While most of our facility idles are temporary, one that will remain permanent is that Dearborn hot strip mill, we anticipate returning to production very soon most of Dearborn works. But when it resumes, Dearborn should be viewed as 2 separate facilities, a hot end to produce slabs, including blast furnace BOF shop and continuous casting, and a best-in-class finishing facility, including the modern PL/TCM pickling line tandem cold rolling mill and the galvanizing lines. The Dearborn finishing facility which we consider to be at par with our flagship Rockport Works, we’ll utilize as feedstock hot-rolled coils produced in our Middletown hot strip mill.

One thing we found in due diligence is that the Dearborn hot strip mill was the weak link of the plant. Given the strength and capabilities of the Middletown works hot strip mill, the Dearborn hot strip mill is not necessary and suboptimal to operate. With this reconfiguration, we can now optimize our powerful Middletown hot strip mill by adding Dearborn’s slabs to the in-house slab mill. We estimate this improvement will save us several million dollars in annual costs, even after, of course, considering the additional freight to move slabs and coils between the 2 plants.

Going forward, our wholly-owned subsidiary, AK Steel will have the following planned configuration: A single one fully integrated steel mill in Middletown, Ohio; 2 electrical furnaces steel mills in Butler, Pennsylvania and Mansfield, Ohio. One is lab producing plant in Dearborn, Michigan; 2 is steel finishing plants, primarily dedicated to automotive carbon steels and other high value-added applications in Rockport, Indiana and Dearborn, Michigan. Two, finishing plants dedicated to stainless and electrical steels located in Zanesville, Ohio and [Coshocton] , Ohio. Two, ERW plants, electric resistance welded plants dedicated to the production of tubular components for automotive and other high-end applications operating as AK Tube LLC in Walbridge, Ohio and Columbus, Indiana; and 10 highly technologically developed plants, dedicated to providing engineered hot and cold stampedes and assemblies for the auto sector, operating as Precision Partners Inc, each one is strategically located in close proximity to the automotive assembly lines that they supply with their engineered hot and cold stampedes and assemblies.

They are situated in Canada across the board from Detroit in Kentucky and in Alabama. As for our Toledo HBI plant, leading up to the shelter-in-place orders from the state of Ohio, we were in constant dialogue with Governor Mike DeWine and fought for the ultimate and rightful outcome that all of our operations should be considered essential. As part of those conversations, I offered up the construction at our Toledo HBI site which involved 100s of contractors, working within close proximity with one another would be suspended. While this was a prudent move from a cash preservation standpoint, I am eager to resume construction at the Toledo plant as soon as possible.

With the extended outage of the entire automotive industry, there has been no busheling scrap being generated in our country. This unprecedented fact has tightened the market considerably, and we now believe that the actual demand for our HBI will be even better than the good demand we are anticipating before the pandemic.

This brings us to the discussion of our liquidity. Needless to say our liquidity position has been a top priority. We have been running a number of market scenarios and testing their ultimate impact on liquidity differently from what is probably the outsiders perception, ours still generally carry a pretty low fixed cost position in the range of only 20% to 25% of our overall operating costs. What this means is that in extended idle scenarios our cost obligation to maintain our nonoperating facilities be significantly reduced. If idles were to continue for long periods of time even this fixed cost begins to slowly fall off. As you may have seen prior to raising additional capital, we published our extreme stress test in liquidity analysis. This scenario contemplates among other things automotive plants remaining shut down through the end of June and only 6 million live vehicles being produced between April 1st and the end of the year. Even in this hypothetical extreme situation, we would still have plenty of liquidity. That said because of all the uncertainty in front of us at that time we thought it was best to raise some additional capital as liquidity source. As such, we made the decision to use our secure debt capacity to issue $400 million in secured notes. While the interest rate on the new issue is not ideal, we knew going in and buying this insurance policy would not be cheap. However, due to the ample support from long term bond investors that know well that management matters most in times of crisis, we were able to price our deal at a coupon that turned out to be better than the initial indications, actually much better. As of today May 11th, we have more than $1.2 billion in total liquidity, which also includes an additional new $150 million Filo Tranche on our ABR. This first in last out Filo Tranche was another pocket of liquidity that we quietly added in the early stages of this crisis in a transaction we completed in late March. Thanks to our great relationships with our banking group and their commitment and full support to our company.

Those who have been following us know that I’m always looking for opportunities to reduce our debt balance and improve our capital structure. With our liquidity position shored up as a result of the previous secured debt transaction, we then use a chunk of our remaining secured capacity to repurchase $736 million of our unsecured debt, which we did paying a lot less than the $736 million, actually at a 25% discount to par, taking advantage of the prevailing trading levels of our bonds in the market. This liability management transaction alone was attractive to reduce to cut our total debt by $181 million. We are firm believers that all of the debt in our structure is worth its [pebble]. So we will always look for opportunities to take advantage of bonds trading at a discount.

As I said before, I don’t bit the cake and if there is an opportunity to create equity value out of thin air, I will take it. This same playbook helped us navigate through the 2015, 2016 downturn in the industry. After all these proactive and decisive moves on the financial side, we have done and we have a very manageable debt profile with a 4-year maturity window, no financial covenants and plenty of liquidity. While automotive demand has driven most of our production adjustments, we continue to serve our other steel end markets.

Throughout the pandemic, we sent and continue to send product to the infrastructure, manufacturing appliances and electric power markets. Regarding electrical steels, our most recent success is on the political front. Despite AK Steel being the only producer of grain-oriented electrical steel, or GOES, in the United States and in North America, the profitability of this business has been under pressure, with legacy standalone AK Steel recording negative EBITDA in the second half of 2019 on the production and sales of electrical steels.

This was a direct consequence of the actions taken by bad players in the marketplace, developing ways to circumvent Section 232 tariffs on steel coils by rerouting dumped GOES coils to Mexico and to Canada where the seel is cut into smaller pieces. These smaller pieces called laminations and cores were immediately sent tariff-free into the United States, taking advantage of Mexico’s and Canada’s favored trade stats. Without action by the federal government to level the playing field, 1,450 jobs at Butler Works in Pennsylvania and Zanesville works in Ohio were at risk. Fortunately, I have been dealing with officials in the Department of Commerce, the USTR, and in Congress, who understand the national security importance of this critical feedstock for the production of transformers used in our country’s electric grid. I am pleased to acknowledge the decisive action taken by Secretary of Commerce, Wilbur Ross, last week, with his order to have the DOC self-initiating a Section 232 investigation, covering the key electrical steel products impacted by this circumvention. The expedited and positive outcome of this process is critical to save the jobs of the employees of these 2 operations in Pennsylvania and Ohio.

At this point, we believe it’s abundantly clear in Washington, D.C. that a viable electrical steel business for Cleveland-Cliffs is the only way to resolve this very real national security issue. We look forward to an expedited and positive conclusion of the Section 232 investigation, self-initiated by the DOC.

As you can see, we have made all the necessary moves possible to steer through this crisis, while at the same time, we are integrating a newly acquired company. It hurts me that I haven’t been able to be on the plant floors with my fellow employees. But we have made it work very well so far. This environment has actually helped our integration in many ways as we have come together more closely in the face of a diversity. Our new Cleveland-Cliffs employees from AK Steel have adapted to our way of doing business. And as conditions improve, we have a lot to be excited about. As per our outlook for the remainder of this year, clear given the impact on both the steel side and the mining side, the speed and pace at which automotive restarts continue to occur, will be the most important factors driving our EBITDA performance this year. Based on our direct communication with our clients and the orders they have already released to us, we expect the vast majority of automotive production in our country to resume this week and next week and make no mistake.

The automotive business in this country will recover. Particularly with the new trend generated by the coronavirus pandemic against the previous widespread use of ride-sharing service providers and that in favor of privately owned vehicles. As private cars are perceived, rightfully so, as sanctuaries safe from infection, driving their own vehicles is what millennials want to do now. Car ownership is trendy again and that includes SUVs, empty car trucks, which consume a lot of steel produced by AK Steel and a lot of parts supplied by Precision Partners and AK Tube. April sales volume was not nearly as bad as we initially expected and there has been significant growth in car sales being consummated online without the buyer even visiting a car dealer showroom. We expect all this trends to continue. And very soon to be well recognized by the media and by investors in general.

With that, I will now pass it over to Keith Koci before giving my final remarks. Keith?

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [3]

——————————————————————————–

Thanks, Lourenco. I will begin with the discussion with some of the cost-cutting and cost deferral measures we have implemented before briefly touching on our first quarter results, which, as you know, were previewed with the market on April 15. This environment has pushed us to sharpen our pencil from a cost standpoint. And we have already taken meaningful actions across the board. Regarding the $120 million and year 1 synergies and permanent cost reductions, we committed to achieve when we announced the AK Steel acquisition, I am pleased to announce that we are already there with the initiatives we’ve already set in motion throughout the company. You’ll see a portion of the run rate savings associated with these actions in our Q3 numbers. And the full impact on our Q4 results, way ahead of the first anniversary of the acquisition of AK Steel in March 2021.

As for temporary cost reductions and deferrals, the most significant cost reductions are understandably coming from our idle plants and operations. As Lourenco noted, we have a high variable cost structure which allows us to ratchet down spending substantially during the idle period. Most of the steelmaking cost structure consists of raw materials which are nearly all eliminated in an idled scenario, with the exception of a few take-or-pay arrangements.

Energy is another piece that comes down quite a bit. Most of the fixed cost portion comes from the labor side, where in the event of a plant idle we continue to pay a portio of employee wages and health care for a period of time. We’ve also sharply reduced our capital expenditures. Right now, we are only incurring CapEx on sustaining and permission to operate projects at our facilities. In our stress case, this runs at about $15 million a month not including capitalized interest.

Our total CapEx in the first quarter was $140 million, $112 million of which was related to the HBI plant. We will still incur some HBI spend in the second quarter for work performed prior to the suspension of the work. Under construction — until construction returns, we will be running at the minimal sustaining rate. Between our steel and mining operations, we have already deferred approximately $100 million of 2020 sustaining capital, not including HBI.

Our total company-wide CapEx will range from $250 million to $350 million for the last 9 months of the year, depending on the timing of HBI construction restart. We have implemented pay deferrals ranging from 10% to 40% for our salary workforce and are temporarily suspending the 401(k) match. As you also know, we suspended our future dividends, which represented about $100 million per year on a proforma basis cash outflow going forward.

We are also benefiting from the acceleration of AMT refunds we expected to receive half in 2021 and half in 2022 and are now expected to be received this year, likely in the second quarter. In addition, we’ve been able to defer pension payments of $51 million to early next year and can defer remaining employer social security payments to the end of 2021 and ’22.

As for our results, we reported adjusted EBITDA of $23 million for the first quarter, which is mostly driven by the mining and pelletizing business. Results from our new Steel and Manufacturing segment only include the last 19 days of March, which, as you know, is when the pandemic effect began to impact our end customers. The stub period EBITDA for steel and manufacturing of negative $11 million is in no way indicative of AK’s performance in a regular environment. It just happened to coincide with the beginning of automotive shutdowns. Leading up to that point, as Lourenco noted, AK Steel actually generated $38 million in adjusted EBITDA, which does not show up in our results other than the opening balance sheet. Overall, during the stub period, we reported $218 million of total sales, of which $120 million or 55% was to automotive customers. Of the remaining sales, 25% was to distributors and converters, and 20% was to infrastructure and manufacturing markets. As a reference, AK Steel generated $1.2 billion of revenue between January 1 and March 12, the day before we closed the acquisition.

Our mining and pelletizing results were solid for always like first quarter on the back of 2.1 million long tons of pellet sales. The completed acquisition of AK Steel resulted in the accelerated — acceleration into sales of certain inventory produced previously for AK Steel, which is why the volume number came in higher than last year’s first quarter. The reported segment EBITDA of $82 million included about $30 million of eliminated margin from those intercompany sales to our Steel and Manufacturing segment. You will notice, we also had several items related to the acquisition that were carved out to arrive at adjusted EBITDA, including acquisition costs of $23 million, severance costs of $19 million, as well as recognition of inventory step-up of $23 million, which impacted steel and manufacturing cost of goods sold. We also realized a $3 million gain related to repurchase of some of AK Steel’s bonds at a discount. It should be noted that this gain will be significantly larger in the second quarter as a result of $181 million in discounts captured in our latest financing deal.

As Lourenco noted, our business outlook will be heavily dependent upon the rate of automobile production during the last 9 months of the year. We have implemented a new, more stable priced intercompany contract for pellets between our mines and our Dearborn and Middletown plants, which remove the influence of commodity prices but we will still transfer at a market rate with comparable margins to last year. As a result of this, sensitivities to commodity prices in our mining and pelletizing segment will be much less relevant than what we’ve provided historically.

To conclude, all of these initiatives and benefits combined with the additional capital raise completed in April have led us to the very comfortable liquidity position that Lourenco described. I will note that we implemented our cost-cutting measures in a way that does not jeopardize the great condition of any of our assets and does not cut anything related to worker safety which remain of the highest importance to us.

On that note, I’ll turn it back to Lourenco to wrap up our prepared remarks.

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [4]

——————————————————————————–

Thanks Keith. To make it abundantly clear, our vision for Cleveland-Cliffs has not changed. In the addition of AK Steel, AK Tube and Precision Partners to our company has dramatically enhanced our ability to execute. The deal closed just 2 months ago and in spite of the setback of the COVID-19 pandemic, we have already achieved at least 2 great things. One, as Keith disclosed a few minutes ago, the $120 million we had committed as year 1 synergies will be achieved way ahead of schedule, and we are confident that the final number will be fairly higher than the $120 million. And 2, we are able to move the Department of Homes to self-initiate Section 232 investigation on coils and laminations of grain oriented electrical steels, and that’s a real game changer in comparison with what was out there prior to our acquisition of AK Steel.

I came to Cleveland-Cliffs in 2014 to implement a strategy supported by one fundamental fact. The United States economy is the most reliable and the most resilient in the entire world. For the past 6 years, we have developed our business, having this core belief in mind. And we all know that this pandemic will ultimately pass. What’s most important for us right now is that the safety of our workers and the health of our company are being protected for the long-term.

Cleveland-Cliffs generates good pay middle-class jobs for Americas. And we do that while we enable supply chains for products that matter to our daily lives without depending on China or any other foreign countries that through their deliberate actions or by means of their passive aggressive inaction would inflict damage to the United States and to our great people. After we make it through this crises, we, as Americans, should look back and humbly assess what we could have done differently. When we do so, I truly expect that the public in general and investors in particular, will have a better appreciation for real companies like Cleveland-Cliffs.

With that, I’ll turn it back to Julian for Q&A.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Your first question comes from Lucas Pipes from B. Riley FBR.

——————————————————————————–

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division – Senior VP & Equity Analyst [2]

——————————————————————————–

Congratulations on closing the transaction during these difficult times and then also taking aggressive actions to bolster liquidity and, of course, to protect the safety of your workers. Lourenco, I wanted to ask on the liquidity side. You provided the extreme test case scenario of — I think it was $120 million of burn per month. And then you commented in your prepared remarks in the release that things are kind of getting better faster than you thought. So I wondered if you could update us on where you would see kind of the cadence of cash and liquidity over the course of this year?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [3]

——————————————————————————–

Thanks, Lucas. Look, the number is correct, the number that you mentioned, and that was the number we used when we released our stress test case scenario. This being said, our stress test case scenario was anticipating no automotive production all the way through the end of June and only cars being back in production in July. We also we’re anticipating a very low number of only 6 million cars being produced between the 9 months comprehended between April 1 and December 31. So we are way ahead of that. Several of our automotive clients have already restarted, Mercedes, BMW, Hyundai. Toyota and Honda coming back today. The remainder, including the big 3 would be back on the May 18 week. And we are going to start seeing numbers normalizing early in June, so at this point, I am really anticipating a brief normal pretty fair level of automotive production in the second half of the year. The other thing to be considered that people are really reluctant to enter in an Uber or a Lyft right now because they don’t know who was the last person inside. Other metropolis outside of the United States are reporting people really walking away from public transportation. So we are going to see renewed interest in car ownership. This morning on CNBC, the Chairman and CEO of AutoNation, was basically begging for the car manufacturers to come back to operations, start replenishing his inventory because his inventories are going down, they’re going down there. So I’m sure you best can find the interview on the YouTube.

So anyway, we are very optimistic. Another thing Lucas, we act on the balance sheet, I think that we’re seeing other companies doing right now or some did very recently. We did it very early and again, so we are first ones in and out. We’re done. We are not going to do anything anymore because we did what we had to do. So right now, my main concern is when we are going to restart HBI because I want to take advantage of the shortage that will be the new normal in the domestic marketplace in the United States.

——————————————————————————–

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division – Senior VP & Equity Analyst [4]

——————————————————————————–

That’s very helpful. Then I wanted to turn over to the electrical steel side. And I wondered if you could provide some color as to how big this market is in the United States? What your capacity is and then what the capacity utilization i.e. your production has been over the last few years? And also kind of in the context of this, if the disclosures this morning as we kind of all kind of update our models here on the — following the proforma models, AKS plus Cliffs? Is this kind of the level of liquidity we should expect — sorry, the level of disclosure we should expect going forward?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [5]

——————————————————————————–

Okay. So let me start with the electrical steels, and then I’ll have Keith answering the liquidity disclosure, stuff like that. So the market for electrical steels in the United States give or take is 250,000 tons a year. And that’s more or less AK Steel capacity in our (inaudible) in Butler, Pennsylvania and the finishing plant in Zanesville Ohio. We have the technology, the technology has been there before. Historically, it’s a well-known technology that by means of strange effects ended up in the hands of the Chinese, the Koreans and the Japanese. And then they start undercutting this market here in the United States by dumping grain-oriented electrical steels coils into the United States. Then Section 232 to took care of that. And then the clients — some of the clients found a way to circumvent because everybody is at least pre COVID-19 situation, everybody was addicted in low prices. And looking at the other side, how those low prices are being achieved. So they started moving in small machines to cut costs and lamination across the border to Windsor, Canada, across the border from Detroit and to Mexico into Matamoros, across the border from Brownfield, Texas. And so the coils instead of coming to the United States started going to Canada and going to Mexico. And then cutting the coils and laminations and sent by truck, back into the United States tariff-free, maybe Mexico, maybe in Canada, beautiful. The only product that neither Mexico or Canada produce a pound of electrical steel.

So we’re able to explain that very clearly to the USTR, Robert Lighthizer; through the Director of Manufacture of the White House, Dr. Peter Navarro; and through the Secretary of Commerce, Wilbur Ross, and they did that, for us here is basically the 4. The electrical steel business in due diligence for us was a minus $40 million EBITDA. So shutting down the electrical steel business is an immediate $40 million EBITDA improvement in our company. But that would put more than 1,400 people in Pennsylvania and Ohio out of a job. So 1,400 good families using good-paying jobs in Pennsylvania and Ohio were being displaced for the wrong reason.

So I will make more than $40 million out of this situation. But my default, my baseline is if the Department of Commerce, which, by the way, I fully expect that I will win this case, because they are self-initiated. So they got it and they will do it fast. But as soon, let’s put like this, as soon as the DOC concludes positively the same, we’re going to have a pretty profitable business. And we still have a lot of bad players to deal with. But we will do that in the aftermath. For now is that.

In due diligence, we accounted for an improvement of $40 million in EBITDA by shutting down but then we are able to do the right thing and appreciate the Trump administration for listening and understanding where the problem is and how we can fix it. And we are acting, and I believe that they will act fast. I have full confidence in the Secretary of Commerce, Wilbur Ross, to do the right thing. I know that the USTR ambassador, Robert Lighthizer, will work on the backlash, if any, drive passive-aggressive friends to the North Canada and friends to the South Mexico. And the passive-aggressive guys will end up shutting down, shutting down their complaints and life is good, and they’re going to go back to have a profitable business and supply this very serious national security issue that is coils and laminations and grant oriented steels for the electrical grid of the country. Lucas, did I — would like to hear about electric steels or not?

——————————————————————————–

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division – Senior VP & Equity Analyst [6]

——————————————————————————–

Very helpful. I appreciate that. Very helpful

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [7]

——————————————————————————–

So I’ll have Keith finishing with the disclosure. Keith, please go ahead.

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [8]

——————————————————————————–

Sure. Lucas. Yes, in the Q, you have the disclosure of — you’ll see $1.8 billion in rough terms on the borrowing base, $200 million in letters of credit and $800 million borrowed at the end of March. That’s how — that’s the breakdown on the…

——————————————————————————–

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division – Senior VP & Equity Analyst [9]

——————————————————————————–

And in terms of the segment disclosures, especially around the steel side, is that also what we should expect going forward?

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [10]

——————————————————————————–

That is correct, yes.

——————————————————————————–

Operator [11]

——————————————————————————–

Your next question comes from Matthew Fields from Bank of America.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [12]

——————————————————————————–

I hope you and your families are doing well. Just a couple of housekeeping ones first for me. So thanks for mentioning, I guess, you would have earned $61 million of EBITDA in the first quarter, had you owned 8-K the whole time. So that, I guess, is about $38 million of EBITDA that you didn’t own in the first quarter. So if we’re trying to do sort of a pro forma last 12-months EBITDA is that about $855 million on a combined basis?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [13]

——————————————————————————–

Before Keith chime in, I would like Keith to do it but before he chimes in, I would like to mention one thing, this is just a mathematical exercise. Remember we have already reduced so many — so much in terms of costs in the case due over here. We have already executed on so many actions in terms of reducing the costs base that this is just a proforma exercise to show how much a Q1 could have looked like. But again, this is before we cut what we have already cut in Q1 because we just did that after, of course.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [14]

——————————————————————————–

No, I appreciate that this is before the $120 million synergies and all the steps that you’ve taken.

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [15]

——————————————————————————–

Absolutely. Okay. So Keith, please go ahead.

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [16]

——————————————————————————–

Yes. That number is — that’s about correct. That makes sense.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [17]

——————————————————————————–

Okay. And then given the EBITDA and sort of CNTA levels and pro forma for the upsized issue that you did in April, does that mean that you are out of secured capacity at this point?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [18]

——————————————————————————–

Not true. We still have secured capacity. But it doesn’t mean that I’m going to use it. So I have no plans at this point to issue any debt or any equity, 0. We’re done. We have way more liquidity than we need to run this company. And I’m glad that after the issue of the high yield bonds to secure that $400 million, I was able in a matter of 48 hours to turn and do the second transaction that was liability management. And we cut almost $200 billion in debt just by using the deficit to buy other bonds, depends on the dollar because investors, sometimes they have their own problems with their investors. They are coping with the general public or the smaller firms making withdraws and that force them to sell. So we are there to buy (inaudible). But I think at this point, that there’s no reason for us to do anything now in equity — either in equity or in debt, but we do have some secured capacity left.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [19]

——————————————————————————–

Okay. Great. And then on the working capital side, obviously, first quarter is your big use of working capital. And then seasonally, you get traditionally a big release of working capital in the second quarter. Given all the sort of actions that have gone on with your footprint in idling and then potentially restarting is that going to — do we anticipate that, that’s going to be a similar trend this year? Or is it going to be — is working capital just can sort of completely off this year given the circumstances?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [20]

——————————————————————————–

Well, we have some positives on the working capital side. Remember, we have the pelletizing plants, and we are still delivering pellets. We’re just depleting our inventory, that will have a positive impact on working capital. So we are working on that front as well. So Keith, do you want to chime in on that as well, please?

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [21]

——————————————————————————–

Yes. Sure. Yes. And you’re right. This is — it will be a tough year to really get our arms around working capital prediction. But as Lourenco mentioned, we are generating cash here in the second quarter with pellet. Pellet inventories coming down. We’re obviously generating cash on receivables as well in the second quarter. So we’ll see cash flow coming in that way. And then as we ramp up production late in the quarter here, and into the third quarter, we’re going to end up consuming some cash. So I mean, our best guess right now is a neutral year in working capital, give or take, $50 million, $100 million. But it’s — it really depends on the timing and how robust the customers come back. But we’re overall looking at a neutral year right now with the caveat that it’s very, very difficult to predict.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [22]

——————————————————————————–

I appreciate that. I know that there’s just a lot going on, and it’s changing quickly. One of your blast furnace supply peers noted in their 10-Q that ArcelorMittal U.S.A., I guess, is trying to declare force majeure on a supply contract. Can you just give us a general sense of your confidence in the volumes that are sort of nominated for ArcelorMittal U.S. in 2020?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [23]

——————————————————————————–

Yes. Look, that, I don’t know what peers comment on that, but people that are outside, they — everybody has a mouth, they can say whatever they want. It doesn’t mean that they know what they’re talking about, that’s #1. #2 is that there is no change in terms of the nomination for ArcelorMittal are outside of the normal pattern. And #3, remember that not only ArcelorMittal but other contracts like Algoma, like Dofasco, they all have minimum levels of take-or-pay. So even in the unlikely and unexpected event because the worst is over. I assume that the steel mills are seeing the same thing we are seeing from Cleveland-Cliffs, at AK Steel, we are on the way back. So they needed the pellets to replenish their inventories. And now as soon as they come back with their friends or some of their friends, they will need pellets to run. So they will be above their minimum take-or-pay. But we are already at the minimum take-or-pay with the pace that we are supplying right now. So people talk too much, just ignore.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [24]

——————————————————————————–

Okay. And then one last one…

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [25]

——————————————————————————–

If you don’t get from me, Keith, or Celso or Paul, just ignore.

——————————————————————————–

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [26]

——————————————————————————–

Okay. The last one, just a sort of a bigger picture. Just can you sort of opine on why you think that there’s been this divergence between iron ore and that coal on the seaborne market? Iron ore has held up remarkably well, although coal is down 30%, 35% this year. Is it all supply? Is it all — some different customers, India versus China? Just what’s your thinking on that?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [27]

——————————————————————————–

It’s the same thinking that I had in 2014, 2015 and 2016, when I was very vocal about what was going on with iron ore. Coal like I used to say back then in 2015, 2016, coal is a lot less concentrated than iron ore. Iron ore is concentrated basically in 2 countries and 4 companies. Rio Tinto, BHP, and Fortescue in Australia; Vale in Brazil, done. So these 4 are on it and they don’t collude. They don’t bother their phone. They don’t want Zoom to make a video conference and set price. That’s not the way it works. But because they have the same type of cost structures in Australia, they operate out of the same ports in the same geographical area in the Pilbara, and Vale is out there in Brazil with lower costs, but higher freight at the end of the day, they all 4, look to on the same direction, more or less at the same levels. And at the same time, the only difference being the influence of the respective currencies, the Aussie dollar and the Brazilian real.

As far as coal, we had a much more diversified market. You have a much more supply and demand-driven situation. As far as iron ore, as long as the big players, do not want the price to go down, price will not go down, that’s as simple as that. Like I always said before, take the bad CEOs out of the picture like Rio Tinto did, like BHP did and Vale did, and Fortescue did not need that, but the other 3 definitely needed badly, Rio Tinto being the worst. And thanks, god, it was the first one to act. Things got fixed in their own. But in terms of coal, it’s a lot more out of anybody’s hands, so to be more into the market and the supply/demand perception.

——————————————————————————–

Operator [28]

——————————————————————————–

Our next question comes from Seth Rosenfeld from Exane BNP Paribas today.

——————————————————————————–

Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [29]

——————————————————————————–

If I may, I think in your prepared remarks, you commented on there maybe being a new supply agreement in place between the pelletizing and AK Steel business, if I heard you correctly. Can you just clarify on what, if any impact that will have on price realizations for the pelletizing business and also the cost structure for steelmaking? And then just to clarify, will that still be on a fully arm’s-length basis? I’ll start there for now.

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [30]

——————————————————————————–

Yes. We said that true that it will still be commercial based, but it will be less influenced by the ups and downs of the commodity in the marketplace. So to be more — a more stable number is still market driven. That’s exactly what we said in our prepared remarks.

——————————————————————————–

Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [31]

——————————————————————————–

Okay. Just to dive into a bit more, can you confirm, is that going to be a fixed-price contract, a cost-plus structure for the AK Steel business? Or will it still be tied like historically to some of those inputs you’ve discussed in years past?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [32]

——————————————————————————–

Look, Seth. It is what we explained, and we are not going to elaborate much more. You are going to come with a negative view on us on that. So there’s no efforts to clarify anything for it. So go ahead and write your report and say that I missed on this and that’s and what’s going to happen. No, I’m not going to give you any more information. You had enough. Do you have any other questions?

——————————————————————————–

Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [33]

——————————————————————————–

Okay. Yes, I do. My other question for you today was on the HBI business. And if you can give us a bit of color on in what market environment you planned on restarting the CapEx to build that and perhaps a range for expected ramp-up time line? Obviously, the scrap market strengthened a great deal in recent weeks. Can you touch on what that would mean for potential pricing if you’ve had more recent discussions with your potential EAF customers?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [34]

——————————————————————————–

You called the HBI plant once a widow maker. Remember that?

——————————————————————————–

Seth R. Rosenfeld, Exane BNP Paribas, Research Division – Research Analyst [35]

——————————————————————————–

Yes, I still remember that very, very well.

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [36]

——————————————————————————–

Okay. Okay. And my wife is still married to me. So our HBI plant in Toledo has not made a widow. So we are fine. We are only 3 months away from completion running the plant. And as soon as we finish, and as soon as we restart, it will be 3 months, will be done and producing HBI. We are going to have another very successful product to sell. I was not planning on any scrap shortages in the United States. Actually, the EAF industry in the United States is predicated on one thing that’s really America. There’s a lot of scrap available being generated all the time in the United States. This being said, that changed. Because manufacturing is down, automotive is down, so the scrap generation is down and this busheling scrap generation is further down. So the HBI that was fantastic, would be even more fantastic. But what would be the price that we’re going to sell, you are going to know after we report the first quarter of sales. I did not cut deals at fixed price going in. There are others that say the things the same, because they don’t know what they are talking about. This is the metallics market, it’s a transactional market. You know that, Seth, but you keep asking the same question, knowing the answer. No we do not have any fixed contracts to fixed-price contract with any client because that’s not the way that market functions. So we’re going to play in the market that exists already. And we are going to sell our product extremely well. And now that we have AK Steel, it will be even more bigger and we are going to be the company that will be totally independent from feedstock — iron feedstock because when I have our own pellets or when I have our own HBI, and we’re going to sell to companies that are eager that are following — they are putting pressure on us to come back and finish because they need them and they need badly. But all the rest, in terms of numbers, plug the number whatever numbers you want in your model, because I’m not going to give it to you.

——————————————————————————–

Operator [37]

——————————————————————————–

Your next question comes from Phil Gibbs from KeyBanc Capital Markets.

——————————————————————————–

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division – Director & Equity Research Analyst [38]

——————————————————————————–

A question on the pricing in the mining side was really robust and even higher dramatically year-on-year. And I know the pricing isn’t necessarily linked to what it used to be linked to, but just trying to gauge the bridge as we move on into the rest of the year?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [39]

——————————————————————————–

Keith, do you want to take that, please?

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [40]

——————————————————————————–

Sure, Phil. In the first quarter, we had a positive impact from the acquisition. We accelerated deferred revenue related to a legacy contract that had an impact on the price. That more than offset a kind of a negative onetime true-up on HRC for the first quarter. So you had offsetting effects that kind of netted to about $2, just to give you a little help. I mean, based on current commodity prices, we would kind of see around something in the low 90s in terms of a selling price on pellets for the year based on current prices and depending on how things move, but that’s where we’re right now Phil.

——————————————————————————–

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division – Director & Equity Research Analyst [41]

——————————————————————————–

You’re saying low 90s in terms of what you’d be getting on realizations today, not a yearly average? I just want to be clear on that.

——————————————————————————–

Keith A. Koci, Cleveland-Cliffs Inc. – Executive VP & CFO [42]

——————————————————————————–

That’s the — that would be the yearly average based on today’s commodity prices.

——————————————————————————–

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division – Director & Equity Research Analyst [43]

——————————————————————————–

Okay. So 1Q and then the rest of the year. Okay. Great. And Lourenco, on the side of HBI, I know the project was stopped due to COVID. Now you’re looking to restart the construction. Any thoughts on when realistically that can be done with having to get people back on-site and up and running and just some timing and what near-term hurdles or lack thereof there could be?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [44]

——————————————————————————–

Yes. Look, we are going to restart that plant, the construction of that plant sometime in the second half. At this point, see, it’s very difficult for me to tell you when, exactly when. Because one point, that’s the point that we have just mentioned, which we believe we have a good plan in place to execute on that. But so in other words, we believe we can bring people and put them to work without creating any health or safety issues for the men and women working in the construction. So that part has been addressed, and we believe we have it resolved.

On the other hand, I also have to be mindful that we’re going to have to remobilize, we’re going to have to redo things that we had all in place at that point. So I don’t know how long it will take to bring these people back to the site and to have everything moving again. But one thing I will tell you, as soon as we have that on site, it’s 3 months, and we will be up and running. And HBI will be one of our best success stories ever. So but bear with me, we don’t have an exact point in time yet when we are going to be able to bring these people back. I don’t regret because at the end of the day, I negotiated with Governor DeWine at the very beginning of the pandemic, I would like to keep my other plants in Ohio open and Governor DeWine rightfully so was very concerned about the first impact.

And I could explain and convince him about the countermeasures that we developed on the fly, and we put in place that’s now being adopted everywhere. In terms of plexiglass, separating operating points, social distancing enforcement with painted spots on the floor of the plant floor and stuff like that, and this became the norm after we did. But I could not really in all earnest justify keeping our construction site open when you clearly have — we had no plans for it. Not having 2, 3 people on top of each other, doing things especially when we’re rewiring and turning electrical equipment on, so now we do. We’re ready. But I don’t have a time yet because now we need to remobilize, and that will take a little while. But we definitely will restart in the second half and will hopefully still be producing HBI made in Toledo in 2020 to be seen.

——————————————————————————–

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division – Director & Equity Research Analyst [45]

——————————————————————————–

Lourenco, one — my last one here is just when did you see the automotive order book at AK Steel starting to get better? Clearly, the weakness started happening in late March and early April was the probably the darkest days, it sounds like. But what — I guess, when or when did the — when did the bounce off the bottom happened in your mind and what’s gotten you excited along those lines?

——————————————————————————–

C. Lourenco Goncalves, Cleveland-Cliffs Inc. – Chairman, President & CEO [46]

——————————————————————————–

Look, we are already seeing the orders coming. And we are already seeing the release for just-in-time coming in. So it’s already happening. Each plant is different, not even car — each car manufacturer is different, each plant is different. But the general trend is that they are starting with 1 shift and then going 2 shifts and then going to full capacity. And I believe that we’re going to be at full capacity in the second half. That’s what the trend is showing right now. And there’s a lot more ways to enforce social distancing in a car manufacturer than anywhere else. We are seeing Tesla in a big fight with the California right now because of that. So — and we don’t have that in Michigan. We don’t have that in Alabama, in Tennessee and another place that we sell steel to car manufacturer and the Texas, so we’re in good shape, but it will pick up fast. The main concern was, oh people are not buying cars, no, they are. Consumer is buying cars. So cars are moving out of the box. There’s a lot of financial incentives to sell cars right now. The dealerships are already asking for replenishment. So the pressure is on, and I believe that much earlier than, even we ourselves anticipated, we are going to see the automotive business in this country normalize. And I also believe that with the anti-Uber trend, we are going to see a lot more car ownership than we have seen before. And that will be a fantastic positive that, again, we are not anticipating, but we will take it and will take advantage.

Sure. I think we’re out of time. So with that, I will send it back to Julian to wrap up the call. And thank you very much for being with us. And as always, we will continue to keep you posted, and we will continue to inform you about developments. Thank you very much, and have a great week.

——————————————————————————–

Operator [47]

——————————————————————————–

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

Source Article

Next Post

It took her two hours to get to Beach High. But she’s now off to Harvard on a full ride

Heavyn Lee would start her day at 5 every morning to begin her journey to Miami Beach Senior High. She would get up, take a swig of chocolate milk and run to catch the 183rd Local, the Miami-Dade bus that would take her from her Miami Gardens home through North […]