Earnings Call: Q4 2020

Feb 25, 2021

Good morning, ladies and gentlemen. My name is Mei, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs 4th Quarter and Full Year 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. 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. 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 Today's conference call is also available and being broadcast at cleveland cliffs.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 Lorenzo Goncalves, Chairman, President and Chief Executive Officer. Thank you, May, and good morning to everyone on the call. Life at Cleveland Cliffs has been intense, And we have a number of developments to discuss today. We completed the acquisition of ArcelorMittal USA on December 9, 2020. And a couple of weeks earlier, we completed the construction and begun Operating our direct reduction plant in Toledo, Ohio. We have also, one more time, With our financial expertise to good use and took advantage of opportunities presented by the Capital Markets to improve our balance sheet. And last but not least, we have recently announced our public commitment to aggressively reduce Our greenhouse gas emissions, 25% by 2,030. I will begin with the most transformational piece, the acquisition of ArcelorMittal USA, including the totality of IN Tek and Iron Coat, which ArcelorMittal previously shared ownership with Nippon Steel. The very first point I would like to make is the most important part of the acquisition, and that's the people that are now working for Cleveland Cliffs. I could not be more pleased with the buy in We have received from the workforce previously working for ArcelorMittal, not just from the leadership team, but also from the employees at The Short Floor. If there is a single reason why we are doing so well As we integrate the new assets to our existing footprint, that's the buy in from these new Cleveland Cliffs employees. That came also with the enormous support and help coming from the employees that were with us before, including the ones that joined Klipsch from AK Steel. It's fair to say that the entire workforce, and that Our union partners all recognize that Cleveland Cliffs' unique Business model is now the envy of the steel industry, and they seem to be proud of that. We are 2. Ideas without strategy are nothing, and the strategy without execution It's irrelevant, but one can only execute if the people involved believe and buy in. Our great workforce integrated and unified under a common strategy and disciplined execution It's the reason why we have been so successful. To our entire team, thank you all Our competitive advantage is also predicated on A few things. We operate the entire production flow from the extraction of iron ore out of the ground All the way to manufacturing of complex auto parts and components. Said another way, Cleveland Place has reinvented the meaning of the word integrated, as in integrated steel mill. The award now includes mines, pellet plants, direct reduction, Blast furnaces, DOFs, EAFs, AODs, hot strip mills, Blake mules, cold rolling mules, electrolytic thinning lines, hot dip galvanizing lines, Electro galvanizing lines, cold and hot stamping, precision welding, laser manufacturing and complex All these resources give Cleveland Cliffs full control On costs and quality and results, Eclipse having a tangible competitive advantage over our competitors. Also, as we process in our downstream facilities, it's still produced by other companies, We have a window into what others are actually capable or not capable to do in automotive. Such insights was a determinant factor in guiding our decision to acquire AM USA. The assets we acquired from AM USA are complementary to the ones we already had And that will save us from spending a significant amount In CapEx, to make the AK Steel assets able to produce certain grades that we can produce Indiana Harbor or Cleveland Works. For the ones that like to talk about Who is gaining market share from whom is the steel business? Let me remind you one thing. 1 year ago, Cleveland Cliffs was producing and selling 0 tons of steel. And we are now, 1 year later, The largest flat rolled steel company in North America. There's a pretty sizable gain in market share, I believe. Even more importantly, in comparing what we have at Cleveland Cliffs with what we see from others, We feel extremely comfortable that our leadership position in automotive is very solid. The acquisition of AM USA Elevated our participation in automotive to 5,000,000 tons per year. On top of that, we also supply 1,500,000 tons of automotive grade slabs to ArcelorMittal, Nippon Steel in Calvert, Alabama. Even with increasing tons from 3,000,000 to 5,000,000, we actually reduced our percentage Our participation in the auto sector from 70% as AK Steel standalone to 40% as the combined Cleveland Cliffs, allowing us to benefit faster from higher market prices We also supply 100% of our iron ore needs in house, And that's extremely important. The steel making assets we acquired, both from AM USA and from AK, Mike have been historically at a competitive disadvantage on that regard due to having to purchase pellets from us. But now the advantage is kept all within equivalent place. Another point to consider, Different in the front, the scrap based nonunion shops, we do not pay our employees based on tons produced. They do that. We don't. Unlike these other steel producers, Our business model does not prioritize the production of tons, and we are not in the pursuit of capacity We prioritize value over volume. We prioritize delivering on time, and we accommodate the demands of our clients, particularly automotive clients. We, in 2021, are applying to the newly acquired assets the same methodology we applied to AK in 2020. And that will bring the new assets to the same high level of delivered performance we have established at AK Steel since we implemented our way of doing business last year. Our clients know that and appreciate the Our asset optimization process is off to a great start as well. We have already started moving slabs and coils between the former AK and former AM facilities To reduce logistics costs and to improve our customers' delivery requirements, This material movement continues to be optimized and should increase over time. With that and several other initiatives, We are well on the way to reach our synergy target of $150,000,000 by the end of this year. Next, on to our Toledo plant. We are delighted to have completed construction of the most modern direct reduction plant in the world and to begin production of HPI late last year. Those who have been following us are well aware of the value This product brings to both to Evolent Cliffs and to the entire industry. Our natural gas base, HBI, It's not only a cost competitive premium alternative to imported pig iron and scrap, but we will also reduce Scope 2 greenhouse gas emissions in our industry as a whole. Additionally, once Hydrogen becomes commercially available. Our plant is already capable of using up 30% of hydrogen as a partial replacement for natural gas with no equipment modification needed and up to 70% with minor modifications, which would even further reduce emissions from the baseline. We are progressing Through our planned ramp up period, steering through a cold winter and making the appropriate adjustments to bring the plant up to its full production level by the Q2. We are currently making HBI Exclusively for our own internal use, and we will start to ship products to 3rd party customers later in March. The timing of the start up of HBI plant is extraordinarily positive for us With the obvious scarcity of domestic prime scrap in the marketplace, This scarcity of scrap should only grow as new EAFs start up in the United States, And we will have more bias for the same scrap, good for our HBI And good for Cleveland Cliffs. We are also benefiting from a favorable steel price environment. This is particularly true since we acquired AM USA. This latter Acquisition has given us more exposure to spot HRC prices than when We only own the AK Steel with AK's outsized percentage of fixed price automotive contract Sales in the product mix. With our very relevant position as a player in the newly consolidated U. S. Domestic Market, we are taking a disciplined approach to supply. We will continue to manage our customers' needs, And we will not restart capacity on a whim just to add tonnage to the spot market. That would not be good for anyone, including Cliffs Business and our workforce. As I said, We don't pay off people based on tons produced, which is a practice that has infected this industry. We let our order book guide our production levels. Right now, the order book is in a good place, particularly for consumer goods as well as from the stainless steel clients and service centers in general. Demand from automotive remains strong, and the auto OEMs Continue to struggle to keep up with resilient consumer demand. So far, We have seen only minor short term demand impact from a widely publicized chip shortage, All of which, as we have been told by our automotive clients, will be made up for during the year. In the meantime, we have been selling more steel to select service centers and manufacturing clients outside the automotive sector, enhancing Our presence with these clients, this is actually a very positive demand development for these Select clients because they are increasing their business with Cleveland Cliffs, a company that is very accustomed with producing high quality And also very good for us because we are accelerating the benefit from higher steel Market prices ahead of annual contract renewals with automotive clients. The Vanover volume philosophy also guides our near term production decisions. As has been publicized, we will be taking our Middletown facility down for a 45 day maintenance outage to do some work inside the blast furnace, but not a full reliance. In order to continue to meet our strong We have restarted the smaller equivalent number 6 blast furnace to make up for the lost Middletown Once Middletown comes back, we will have another maintenance outage at Indiana Harbor 7. We currently have 10 blast furnace in our portfolio and are keeping between 68 furnace In simultaneous operation, at any given time, we will probably have some maintenance to perform. We will manage All these assets appropriate without having any shortfalls with our customers, While also not flooding the market with steel, value over volume is a simple philosophy That will carry on into the future. And it's why you're not going to hear me talk about capacity utilization or even market share, except in automotive, but just because our leadership position on this one segment is too obvious. Only as more slight of the recent steel price run up positively impacted our 4th quarter Adjusted EBITDA performance of $286,000,000 due to how contract prices work And usually applied lagging mechanisms and the fact that we only control the AM USA assets For the last 23 days toward the end of the year, our risk to profitability in the Q4 of 2020 We'll dramatically improve in the Q1 of 2021. In addition, We can constantly say that the second quarter will look even better than the first quarter. This very good Q1 that we are in now, as rising prices become further reflected, The high shipments pickup pace and external pellet sales pickup with the reopening of the Great Lakes. This current steel price environment has also highlighted the competitive advantages that our unique business model has. As we all know, EAFs use scrap as their primary feedstock. The price for a ton of bushelene Scrap in the Midwest has almost doubled from where it was a little over a year ago. Meanwhile, the cost of our primary iron feedstock, iron ore pellets we produce ourselves out of our own mine It's basically the same as it has been for the past 5 years. Because of this, Cliffs has actually been your proverbial low cost producer. To make it clear, This is not even a title I care to have because there is so much more to making steel than a low production You cannot reach safety first if you are obsessed with tons per employee. You can't invest capital to protect the environment if you are governed by your production cost number. And you will not pay your workforce well if cash cost is our main metric. This is actually a capital intensive industry, and we must work to generate return on invested capital And not for bragging rights based on a questionable and not always true low cost Hopefully, this current environment is a lesson on the bank statements May comparing cost provisions, and we can put that subject to rest for good. It's being said. We don't believe this currency scrap dynamic will be short lived. China has publicly stated their target of doubling EAF capacity from We turned 100,000,000 metric tons to 200,000,000 metric tons over the next 5 years. The increase alone is bigger than the size of our entire domestic steel industry and will require a lot of scrap. By 2025, China will be producing 2.5 to However, to move from where they are today to the level that they plan to be, China does not have The infrastructure in place to collect and deliver all that scrap and the void We'll be filled by imported scrap into China. That will come in large part From the United States, which has by far the largest and most mature scrap infrastructure in the world. This is something we at Cleveland Cliffs predicted several years ago. And one of the reasons why we built our direct reduction plan, with the already very large existing EAF capacity in the United States, the new EAF furnaces being built by the domestic mills Here in the U. S, and the massive new EAF capacity coming online in China, All fighting for the same amount of scrap available, we at Cleveland Cliffs feel very comfortable The capital structure underlying this best in class business model was improved once again 2 weeks ago, as you may recall, last April, at the beginning of the pandemic, When the automotive industry was out of operation, we issued a tranche of high coupon secured bonds As insurance captain, now that business conditions have normalized, we sought to Use the outstanding amount of the secured notes as much as possible. And the only method to achieve that was by using The 35% equity cost provision from the indenture of the notes, the sole purpose of issuing the small number of 20,000,000 shares was to use this clawback provision And retire the maximum amount possible of these high coupon notes without paying a make whole panel. This coincides with a block sale of about half of ArcelorMittal CLF common shares that they received as part of the payment we made to them when we acquired AM USA. The secondary shares were already outstanding and had no impact on share count. We also successfully placed $1,000,000,000 of unsecured notes at the lowest coupons we have ever achieved As a high yield issuer, respectively, 4.625% and 4.875% For 8 10 year issues, these outstanding coupons and the same of the leveraged finance market support to our business model, strategy and execution. And at the end of the With this capital markets activity, we replaced secured debt. We don't secure debt. Lowered interest expense, cleared our maturity runway entirely all the way to 2025 and Further improved our liquidity by using a portion for ABL repayment. Finally, in January, we publicly announced our commitment to reduce greenhouse gas emissions By 25% by the year 2030, covering both the Scope 1 and Scope While we have transformed as a business, we will continue to operate Cleveland Cliffs on the same environmentally responsible manner we have always done. Climate change is one of the most important issues impacting our industry and our plants. Our commitment includes using more natural gas to reduce our As we do in our direct reduction plant, producing HBI, implementing clean energy and carbon capital Technologies and becoming more transparent on disclosing our product. With that, I'll turn it over to Keith Cosi before giving my final remarks. Keith? Thanks, Lorenzo. Before I get into the specific results that were foreshadowed with our pre announcement a month ago, I will first discuss our new business segmentation. You saw in today's release that we are now split into 4 segments, but the bulk of the operational and commercial activity will take place in our steelmaking The foundation for this is driven by how the management team views our business. The strategic rationale Behind our 2 major acquisitions was to form 1 large and competitive fully integrated steel company, which is exactly what this segment represents. This segment captures effectively all of the production activity that begins at our mine sites, including our pellet plants and other raw materials operations and ends with our steel and finishing plants. Products sold from this segment include slabs, hot rolled, cold rolled, coated, galvanized, stainless, electrical, Our downstream units will remain as separate segments Due to the different commercial nature of these businesses, though they remain an important piece of our integrated entity. Because of this reporting change, We will not have any significant noticeable intersegment eliminations going forward, other than the small impact from the finished steel sold to our downstream segments, resulting in a much smoother and cleaner model. As for our results, Our 4th quarter adjusted EBITDA of $286,000,000 represented 127% increase over last quarter and And a 158% increase over last year's Q4. The sequential increase was driven by the following: Increased steel shipments, higher prices, better costs due to increased production volumes and reduced idle costs, The stub period contribution from the AM USA assets and increased third party pellet prices. In the steelmaking Of our 1,900,000 net tons of shipments, we shipped 1,250,000 net tons from the 8 ks side and picked The remaining 600,000 from our 23 days of ownership of AM USA. We expect to more than double this amount in the first quarter With total shipments of approximately 4,000,000 net tons. You will notice our average net selling price declined in the 4th quarter Compared with the prior quarter, which was purely related to mix, the AM USA assets we acquired Do not sell stainless or electrical steels, which carry a much higher average selling price, bringing the overall average down. Our shipments during the quarter were 44% coated, 22% hot rolled, 18% cold rolled and 16% other steel, which includes stainless, electrical, slabs, 3rd party pellet sales during the Q4 were about 2,900,000 long tons, Which consists of approximately 1,600,000 long tons sold to AM USA prior to the acquisition date. Going forward, our external pellet sales volume should be 3000000 to 4000000 long tons per year, The remainder of our output being used internally by our blast furnaces and direct reduction facility. Our steel supply contracts are roughly 45% annual fixed price with resets throughout the year And 55% HRC Index Linked. That latter piece further breaks down to about 40% on pricing lag, Between monthly and quarterly, with the remaining 15% on a spot basis that currently have lead times Up to 3 months for hot rolled and 4 months for cold rolled and coated products. As Lorenzo noted, given this structure and the short stub period For the new AM USA acquisition, the recent run up in steel prices should accelerate in our results in the Q1 and continue its advancement into the Q2. When we completed the AM USA acquisition, We upsized our ABL facility from $2,000,000,000 to $3,500,000,000 which is currently more than fully supported By our inventory and receivable balances. This has provided us with a sizable liquidity balance of $2,600,000,000 as of this week, Of which approximately $850,000,000 is earmarked for bond redemptions set to take place in March related to the capital markets transactions we completed earlier in February. Most of the other significant changes to our balance sheet, like PP and E and goodwill are attributable to standard Acquisition Accounting. As for cash flow, our 4th quarter was impacted primarily by changes in working capital, most notably receivables and inventory. Because of the factoring arrangement AM USA had in place prior to the acquisition that was terminated at closing, we began rebuilding the receivable in December, which was factored into our valuation for the acquisition. We will continue to build working capital in the Q1, After which it will then normalize and become a source of cash for the remainder of the year. Our 4th quarter capital expenditures of 147,000,000 Took into account spending for the AM USA assets during the last 23 days of the year and included $61,000,000 related to the Toledo plant, Where we have about $60,000,000 in run out spend going into 2021. This is included in our $600,000,000 to $650,000,000 capital budget for 'twenty Which includes about $500,000,000 in sustaining CapEx as well as other small projects In closing, with the completion of our 2 transformative acquisitions and the recent capital structure activity we completed 2 weeks ago, The company is on solid financial ground with no cash taxes to pay and manageable CapEx, interest, post Employment obligations, we are primed to generate significant free cash throughout 2021. We will use this excess free cash flow to continue to reduce our debt balance and we will have ample opportunity to do so And now, I will turn it back to Lorenzo for his closing remarks. Thanks, Ki. What a year 2020 was and what a phenomenal company we have During 2020, rather than panic during the most challenging days of the pandemic, We went on the offensive and took advantage of the amazing opportunities out there to improve not only ourselves, But also to change for good the steel business environment in the United States. As the new Biden administration starts to work towards infrastructure, manufacturing, Environmental responsibility and good pay middle class union jobs, we believe we have just built The perfect company to thrive in these challenging times that we're in. We are ready to make our mark on the industry with our 25,000 employees all rowing in the same direction, And we can't wait to show you what we can accomplish. With that, I will turn it over to May for Q and A. Thank you, We have our first question from Seth Rosenfield from Exane. Your line is now open. Good morning. Thanks for taking our questions. If I can kick off please with a few questions on the integration of the Arsenal Hotel assets. I'm wondering if you can give us a bit of color, I guess, in terms of what perhaps has surprised you most about the asset post acquisition. How comfortable are you with asset quality? Is there any need to invest more CapEx going forward? You should flag at this stage. And we understand that A lot of what happened in late 2020 or a number of challenges with their delivery performance. What do you think can be done in order to improve that and really bring that Good morning, Seth. Asset quality of ArcelorMittal is a notch below the asset quality that we found at AK Steel. But that's way above the average of the industry. I did not see any massive concerted efforts to reduce the reported cost That I saw in other companies during the last several years happening at ArcelorMittal USA. This being said, it was clear that some more maintenance CapEx Should have been spent in at least at the very least during the last 1 or 2 years. So we are going to have to play a little catch up, But this is all reflected in the numbers that we are anticipating. So nothing to be worried about. Long story short, Even though it's not like AGXU that we found equipment pretty much in good shape, Bangladesh, our middle is not that they have the same case, but I cannot call them that. And the money involved to bring them up to May, which we have already started spending, by the way, is not anything to be worried about. As far as delivering performance, Keep in mind one thing. The same people that are complaining about delivery performance now are the ones that when Hot load prices were $440,000,000 They were not buying because they were waiting for price to go further down. Don't forget that. Now hot oil prices are above $1200 And we are doing everything we can to take good care of these clients. But there are clients and We are taking care of the ones that deserve, 1st, the ones that don't deserve that much, 2nd, And we also serve the others with the amount of availability that we have left. Yes, that's the nature of the beast. We are not going to overcrowd the market just to see These clients are walking away from us with absolutely no concern if things change. And things Changing this business, unless we do as much as we can to keep things the way they are, and that's exactly Long story short, we are working for 1, ourselves, Cleveland Cliffs and our employees 2, for our shareholders Thank you. That's very clear. If I can ask a separate question, I think you touched on this just now, but how do you think about serving your customers from a volume perspective? I think in the past, At the time of the AC acquisition, you were very vocal in saying you weren't going to increase production in the case of just chasing after high prices. Today, it looks like demand is also very strong, How would you classify different customers? Is it an issue that you're prioritizing the contract auto customers over distributors and traders? At what point would those louder customers become more attractive to you? Look, it's very difficult to compare, Seth, in a company Because 1 year ago, we're just iron ore. 6 months ago, we were Basically, AK Steel. And AK Steel was a 70% plus automotive supplier. So the rest of the market was not really a matter of concern because it was marginal. Now we are 40% supply of automotive, so we have a 60% for the rest of the market. The good news is that our way of doing business, Because we came from a Cleveland Cliffs and an AK Steel background, it's to supply on time, it's to deliver just in time, Yes, to take care of the customer needs. So we do that naturally. We had one excellent moment of Fixing automotive inventories when we were going through the horrible 3 months at the beginning of the pandemic When automotive shutdown and we fixed our inventory. We are doing the same right now with the actual middle assets And a little bit of help we are getting from the chief manufacturers that are not delivering the chips to automotive. And by the way, It was the same thing. Automotive shutdown, and the chief manufacturers had to return to their investors, and they started to sell it to other people And other industries, and now they are coming back to the automotive. And like I mentioned in my prepared remarks, things will be fixed during the year. But our way of doing business, the systems we have in place, the people that are running commercial, Seth, just to let you know, are basically the people that were running So that's our default position. Our production planning is geared towards delivering So even though it's far from perfect at this point, it's a lot better than our competition. And in this race, you don't need to be deep into the fastest lap all the Fine. But we absolutely need to do better than the competition. So we know exactly what the competition can do, and we are doing better than the competition. That's why we are gaining market share. We just need to improve our delivered performance of both the competition. That's what you're doing. Okay, Seth. Perfect. Thank you. Thanks. We have our next question from Lucas Pipes from B. Riley Securities. Your line is now open. Hey, good morning, everyone, and congratulations on a tremendous year. Thanks, Luca. Lorenzo and Keith, when I go through the historical results For CLF, AKS and ArcelorMittal USA and I add in synergies, I Take out an EBITDA, call it, in the kind of high $2,000,000,000 range for prior market peaks. But then Steel pricing during these prior market peaks was much lower than it is today. So I wondered if there is a perspective on your earnings Okay. Look, we're not going to discuss modeling In the investors' call, but just to directionally guide you through how things work. And contract prices with Automotive, they stay in place for a year. So Whatever we negotiated during the pandemic when the automotive clients were not Even operating, it's still in place. What we negotiated in December when they were back, but Still with a lot of scars on the time that they were not in operation, we were still in place. So the automotive portion We lag in terms of spot price performance that you see reported in the market every day. That's Kind of one side of that you can call bad news, not bad news. Otherwise, not every single company out there would be trying to Desperately to grow their participation in automotive. It's a net, net positive. But as far as pricing, It lags what you're seeing in the marketplace. But the good news is that with the acquisition of the asset And to these AGA clients, even though it's still not a real spot transaction, it's a lot closer and a lot faster to Realize again. I said in my prepared remarks, we are now down to 40%, maybe 38% participation in automotive. So that Means that we have a lot more in the market to HVAC and appliances and cool hot van, Stuff like that. So we are selling more in that market, and we are anticipating and accelerating the realization of And of course, it's a lot easier to work in a price environment in which hot rolled is above $1200 per tonne per net tonne and IODEX is $174 per long tonne. It's a lot, lot of users. So we're good. We're good. We're going to have an EBITDA this year that will be higher than the revenues of the previous year When we're Cleveland, please alone. Very few companies can say that I transformed my yearly revenues in my yearly EBITDA And actually, the year the EBITDA is a little higher. So very few can say that we can, and we will do that. I appreciate that. Thank you, Lorenzo. And then I wanted to follow-up on the value over volume Strategy, kind of we typically think of integrated steelmakers and integrated supplies more like baseload given the fixed cost nature of So my question is how should we think about volume more broadly? I think you mentioned 6 to 8 furnaces running Could you translate that into kind of a normalized volume run rate? And then how, if at all, would you adopt The strategy to, let's say, a new market environment, for example, continue the AF capacity additions or Your administration taking another look at Section 232 tariffs. Thank you. Yes. Look, we are not Very concerned about what the government will do or not do on the regulatory environment because President Biden has been Very clear that he's not going to give away the farm to China. That's all one needs to know. So if outsiders are expecting that China will have a free ride, they are off to a very bad start Because that's not going to happen. The new USTR that we will expect it to be doing well today in her hearing It's from the trade. She understands, And she is good as good as or down the same line of thought of Ambassador Goebbels like Hyatt. So there's no such a thing as a dramatic change on the approach to international trade. The nitty gritty of the details and the Section 232, no Section 232, that's a separate issue. We just can't allow Foreigners to control the supply of things that are super relevant to our business. Even the CEO of Wharton saying this morning, I read on CNBC that they can't continue to Work with materials, imported materials for batteries if they are going to produce A massive amount of electric vehicles. That's good news because we have the producer of no reentered electrical steel for batteries here in the United So everything is shaping up extremely well for our business. Value over volume is also The fact that we acquired Arsenal and Middle USA, now we don't need to spend 1,000,000 and 1,000,000 of dollars to upgrade Our hot strip near Milltown to produce stock that I already can do at equivalent or at Indiana Harbor. That's a savings that We are going to have out of the back, we're already enjoying that. So that's value of the volume. I'm not going to produce more tons Just to create a situation that we will have more out there in the market And we will start to see price deteriorating. We will do our part to protect price, and that's the Right thing to do from the return on capital investment standpoint. We are not going to print money out of the blue In order to do all the improvements that we need to make in the next 10 to 20 years to transform the steel business in a real green business, and it's It's possible. The first step in our company has been taken because we have the most modern and the Only plant in the world that can use hydrogen as of today. So we are ready for that, just waiting for the hydrogen. That's not our business. So as soon as it's available over the fence, we'll take it because our plant is ready. So we are investing real money. We invest $1,000,000,000 in That's not something that you can do if you're not generating profits. So it's value. It's not volume. It's volume only if the volume comes with value. If it doesn't come with value, we are not Trying to sell steel to the ones that were waiting for prices when prices were The hot band price were $4.40 They're waiting for lower prices to buy. We don't want to deal with these people. We hope that they continue to be weak. Lorenzo, very much appreciate your perspective. Congratulations again, and Next is Phil Gibbs from KeyBanc Capital Markets. Your line is now open. Hey, thanks. Good morning. Good morning, Phil. Hey, Lorenzo and team, you've got a handful here or more than a handful, obviously, contracts Actually the auto and slab and then you've got a nice big piece of spot business as you pointed out. I How should we be thinking about pricing cadence in the steelmaking segment As we move into the year and just kind of the timing of some of these step ups, I mean, you've got an integrated model, so this is obviously very leveraged To pricing at this point. And so I think we're just trying to get a feel for, are we looking for a $50 step up in price, dollars 100 step open price, something less than that because some of these contracts don't kick in yet. So I just think a magnitude would or just a General direction would be helpful. Yes. Direction, if you will, as far as automotive prices, You make no mistake. You should expect prices to continue to step to increase And step up every time we renegotiate the contracts, not only because we are putting to this renegotiations, But also because this contract slag when we negotiated last year, we negotiated in a completely different environment. And now the prevalent market prices around the business are a lot more benign to us and to our negotiation than they were A year ago or even 6 months ago. That's an undeniable truth. So these prices will continue to appreciate. Also, We have a meaningful business now selling labs to AMNS in Calvert, Alabama. And that's also a business that will generate good revenues because these automotive qualities labs And supports that business over there for Automotive. So it's another leg up. And that's Indexed to the international prices for slab, so that's a good thing and will be a big contribution. Don't forget HBI. HBI is all leveraged to things that are very expensive these days, iron ore with soyodext at 170 And scrap, that's pretty expensive, and it will become more expensive. So this I'm not going to commit with any numbers, but the trend for prices price realization is up. So I'm not saying the price will go to $1200,000,000 $13,000,000 $14,000,000 That's not what I'm saying. What I'm saying is that with the $1200,000,000 that we're seeing right now, We are going to be catching up with this pricing level. Demand is good. That's the most important thing. Demand is Fantastic. The clients are complaining that are not receiving steel. Remember, these folks run 30 centers, and They don't want to carry inventory. That's weird. That's strange. I run a service center company for 10 years. Guess what? Service centers Carry inventory. That's their goal. That's their business proposition. If a service center doesn't want to carry inventory, he He or she is in the wrong line of business. That's something else to do. Open up on Petra's GameStop because that will really provide a lot of wealth to that person. He or she is in the business carrying inventory. So they complained, but they don't do the part. So we are fine with what we have. Prices are going up. We are going to be paying down debt very fast. We have a goal to finish this year with leverage in terms of Debt divided by EBITDA is 2.5x or less and we will accomplish that. Thanks, Lorenzo. Appreciate that. And just a question for Keith On the share count, obviously, a lot of moving pieces. How do you account for the preferred shares? So just Trying to pinpoint what a share count is going to be for Q1 and then also Q2 because I know you had the timing of the offering. Yes, Phil. So we ended the year with 477,000,000 common shares outstanding. We issued 20 here in the Standing, we issued 20 here in February, so that 20 will get averaged out In the Q1, on a prorated basis, but for the full year, you can almost count the entire 20 to be in the numbers. Your potential dilution would be the preferred is being carried as mezzanine equity. So it will be you can Pretty much count the preferred equivalent of $58,000,000 common that will impact earnings per share And that would pretty much carry throughout the year. And then Depending on where share prices land, like say for example using today's share price, the converts would have roughly around a 20,000,000 Share dilutive impact as well if you want to calculate dilution on the converts. That should pretty much get Which is Kleenex converts, it sounds like it's around $570,000,000 That's a decent number? Right. That is correct. Yes. Okay. And then last one for Lorenzo, and I'll jump off. The HBI project to your point, very timely. And you mentioned you'll be shipping to some 3rd party customers in the March here, some of that I would imagine is trialing just because you're getting up to speed here pretty quickly. But Where do you think you're going to be this year in terms of your mix in the back half in terms of external shipments versus internally consumed shipments? Thanks very much. Phil, we are using our HBI in house because from the cost standpoint and productivity standpoint, it makes a lot of sense. For example, we are using a lot of HBI in our geoboard, Twofold. Using HBI saves us on coke, So generates less CO2. It's an environmentally positive, especially in an area that has been historically Very ready to complain even though they have nothing to complain at this point even without HBX. But We prioritize Dearborn because it's probably our most delicate area in terms of environmental concerns. So we are doing that. And the second thing is that because saves a lot of money by doing that. So we are happy with that. So that's one location that we're in use. Where else is this in our own EIS because scrap has been extremely expensive in the market As you know, we have a lot of EIFs. So we are delivering HBI to To our EIS in Pennsylvania, and it has been a very positive net positive cost wise Because we are doing that. All this being said, we are not going to ignore The potential clients and now competitors that helped us get to where we got. I always I keep saying that we would not be here if we were not able to produce the grade pellets. And we only Develop the ability to produce the aggrade pellets in Northshore because one day, Nucor opened their doors for us To develop the pellet with them in Trinidad. And I'll be forever thankful to NUKOR for that. And of course, NUKOR will be the first one Giving HBI from us in March and followed by Steel Dynamics, not far from that. And North Star Group We'll be next. You asked me for numbers. It's very difficult to give a precise number at This point, because the nature of this business is transactional. It's a month to month negotiation and by design. It's not that we don't want to have long term contracts. So we want to have some contract. That's not how the market works. So we play with the market. We don't change the market. So And we are happy with that because that allowed us to use in house and with a big advantage. But the numbers that we're working with internally is that we are going To be selling half to the outside world and using half in house. That's a pretty good guidance for you to use. Thank you. Thank you. We have our final question from Alex Hacking from Citi. Your line is now open. Good morning, Lorenzo and Keith. Thanks for the time. I wanted to start on capital allocation, if I may. I think, Lorenzo, you just mentioned maybe you could get to 2.5x net debt by the end of the year. At what level do you become comfortable with net debt enough to start having a discussion around Either ramping up capital returns or making more strategic investments. Thanks. Thank you. Alex, look, first of all, I'm comfortable today Because it's all planned and it's all being taken care of. With the latest transaction, the latter transaction that we just Announced, we again recovered our 4 year window with no significant maturities, and that's how We have been managing the company forever. So the 2.5x or less at the end of the year is the goal, is feasible and will be achieved. This year is the year that the entire cash generated by the company, except for the Very good and conservative assumptions on CapEx that are not To start any equipment all the way around, we're actually bringing, like I explained during the call, bringing some equipment Back to a better place. But even with that, we feel like we have enough to massively pay down debt. We should pay more than $1,000,000,000 in debt this year just with cash generation. We don't have any acquisitions in our horizon either at this point. And even that To calm people down that we are not going to be continuing to expand, we feel like this year should be spent on integrating, perfecting, Improving delivery performance from the AMUSA assets, bringing these assets to the same level of delivery performance that we already have from the Former EK Steel assets, all these things are on the making and gives us very Peace of mind and make us very comfortable with how things will be taken care of this year. So That's pretty much it. As far as returning capital to shareholders, look, I am convinced that people that invest on Cleveland Cliffs, They're not investing for business. They're not investing for and if they are, they're investing in their own company at this point because with all the growth that we demonstrated With all the potential that we have right now in terms of continuing to To generate real equity by paying debt and moving the numbers from the debt side To the equity side for the same enterprise value, that's what I should be doing, and that's exactly what I'm going to be doing. So 1 year ago, when we were talking in this call, I was talking about iron ore. This year, I'm talking about being The leader in flat gold steel in North America and making sure that the market behaves and these prices that we're seeing right now are in good shape. On behalf of our shareholders, we generate return on invested capital. 1 year from now, we'll be talking about a company with very little debt, And then we'll talk again. I hope I covered your the point of your question. If not, please, by all means. Yes, not. Let me know. Thank you. That was great. And then let me just follow-up on one other question, if I may. So, firstly, congratulations on the sustainability goals that you put in place. Do you envisage significant CapEx investments Associated with reducing the carbon footprint or is it more a series of smaller incremental investments That will enable you to work for meaningful CapEx, I kind of missed what you have to set up for that. Can you repeat? Sorry, meaningful CapEx associated with hitting your emissions targets, your 2,030 The meaningful CapEx that I had to deploy, we already did, was to put our Direct reduction plan in place. That's done. So you are talking $1,000,000,000 in Bolivar and Almost $100,000,000 in upgrades in our Northshore Mining operation in Silver Bay, Minnesota. So we have already invested that massive amount. Everything else will come in incremental events, and they We do not demand a lot of CapEx. Also, some of these investments are done and will continue to be done by our partners, like the Investment made by WACC in the African New Zealand to replace power supply From traditional source of fuel to a brand new state actually 2 brand new state of the art plants Using echo there. So we are there. We are moving there. We are going to continue to introduce HBI in our blast And that will continue to reduce our consumption of coal and coke. So All these things have environmental impact, and actually, they are positive to our cost. I tend to agree when I hear President Biden Talking that environmental compliance can be done and can be done generating good paying union jobs, I check Mark that and reducing costs. I checked Mark on that as well. The investments, the massive amounts of CapEx in our case I'm not that relevant or at the very least they have already been done. That's great. Thanks, Lorenzo, and congrats on all