Earnings Call: Q2 2020

Jul 30, 2020

Good morning, ladies and gentlemen. My name is Lishana, and I am your conference facilitator today. I would like to welcome everyone to Cleveland Cliffs' 2nd Quarter 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 forth in reports on Forms 10 ks 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 it 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. Thanks, Lachona, and good morning to everyone. Over the past few months, our company has put on full display the strong resilience that I have highlighted in the past. Despite dealing with a period of time in which our largest end market, the automotive sector, was effectively closed, we were able to preserve and enhance our business. Very early on and ahead of any official mandates or guidelines, we implemented initiatives to protect the health and safety of our employees. We then adjusted our footprint for both the sharp reduction in demand as well as its gradual recovery. By taking down and then restarting 15 facilities over a 3 month period. At the same time, we improved our strong balance our strong liquidity position and preserved our healthy balance sheet. In addition, acting as fast as only Cleveland Cliffs can do. We were able to find a way to create $181,000,000 in equity by executing a perfectly timed liability management transaction. Fast forward to today, with our customers in the automotive sector back to more normal levels of activity, we have resumed production at all of our facilities that were temporarily idle, except the Northshore mine, which will be back in operation next week. With that, we are back on track and ready to fulfill our vision for the new Cleveland Cliffs, which includes our mines and pellet plants, 8 ks Steel, 8 ks Tube, Precision Partners and our new HBI plant. With our HBI plant in operation later this year, we will be able to add mini mills to our portfolio of clients and with that spread our exposure to other sectors beyond automotive. As you know, Cleveland Cliffs is essentially a supplier to the automotive industry, both directly through our subsidiary, 8 ks Steel, and indirectly through our 3rd party clients for blast furnace pellets. While we already are at the place where other steel companies would like to be with more than 60% of our production and sales dedicated to automotive, our 2nd quarter results were a direct consequence of the almost complete and sudden shutdown of the entire automotive sector, interrupting our revenues and generating costs associated to, I believe, some of our assets. As unusual and unexpected as it was, That is what happened in Q2. As the second half of the year progresses, the steel shipments will continue to improve and idle expense will fall back to 0. The 2nd quarter did not change anything related to our strategy. Our fully integrated footprint from captive iron ore mines to high-tech carbon and stainless steels and auto parts gives us a unique technological advantage no one else can replicate. In the demanding business of supplying steel to the automotive industry, chemical and meteorological consistency is critical. We can do this very well because among other things, we have our own iron ore production and our self sufficient intelligence. We also have the right equipment to produce the highly specified materials our automotive clients need, including blast furnaces and DOFs for carbon steel, as well as electric arc furnaces and AODs for stainless steel and state of the art downstream facilities for both carbon and stainless steels. Equally important, we also have the dedicated brainpower and the R and D capability to develop the skills of the future cars and that's something others in this market will not be able to accomplish anytime soon. Our clients know that. Our competitors do too. In the current U. S. Automotive industry, our level of technical capabilities is more important to our clients than it has ever been. One unique element of automotive demand in the United States has historically been the prevalence of fleet sales such as rental cars, which in the past have accounted for about 20% of all new vehicles sold. Different from retail clients, fleet buyers do not care as much about the quality of the car. To them, it's all about cost. So over the past 3 decades, we have seen cost, not quality, become the primary value for many American carmakers. However, this approach is quickly becoming antiquated. Due to the pandemic, fleet sales are sharply down, whereas the retail car buyer has been largely unaffected as sales to the American consumer of late have remained close to pre COVID projections. The American automotive market is now a consumer driven market. The pandemic has made car ownership trendy again. And while fleets buy cars because they are cheap, people buy cars because they are reliable, cool and fun to drive. After decades of foreign competitors gaining market share in the United States By recognizing this trend, American based car companies are starting to fight back. We finally have American car companies innovating again after a long period having their lunch eaten by global competitors. Tesla is the best example. Knowing that a car is actually just 1 ton of steel on wheels, a theoretical $200 per ton price increase for highly specified galvanized steel would theoretically force an increase on the final price tag of the car by only $200 and no consumer would choose not to buy a car just because the car is now $200 more expensive. Maybe fleet buyers would change their minds due to a $200 price increase per car, but not individual consumers. On the other hand, an equivalent price tag decrease of $200 would not be compelling enough to make anyone not planning to buy a car to decide to do so, but that would certainly drive all the qualified steel suppliers out of business in the United States and also in other countries such as Japan, Germany, South Korea or France, just to name a few of the countries that are home for steel companies with technological expertise to supply all the needs and demands of the automotive industry of the present and of the future. Our goal with the new Cleveland Cliffs is to be able to recover the value lost in the supply chain over the course of the last several years. For decades, the steel companies have allowed highly specified steels, carrying a lot of technology and value to the client to be treated and priced as commodity as if anyone would be able to produce and supply the same materials. That's simply not true. In order to continue to invest and support the challenges of the automotive industry of the future, the steel suppliers, Cleveland Cliffs included, must realize a return on their investment, and we will. One problem we have been fighting since we acquired AK Steel is the proliferation of gossip and deliberate attempts to influence the market. All these guys have news that go around the steel market these days. And there's parallel universe of misinformation. Steel mills are always one step away from flooding the market with unnecessary and unwanted products. Prices of scrap and steel products are always going down or if not will go down soon. And HRC is a proxy for everything else in the steel business. Well, I'm pleased to inform that HRC, as defined by the CRUs, AMMs and Platts of the world, is commodity grade steel and has nothing to do with automotive. It's a fine product for many applications like in the energy market, but not for automotive steel. In fact, we at Cleveland Cliffs and AK Steel do not care much about HRC because hot rolled is just a small fraction of the product mix we sell. As far as carbon steels, what we really care about is automotive grade galvanized steel and other products used in high end applications such as exposed parts. Our goal with future contract renewals will be to make it very clear that over the course of the next years we start receiving the proper value for what we do for our automotive clients. We have already won the hardest battle of this war because our customers love our products and our ability to deliver high quality consistently and on time, as demonstrated by the award we recently received from General Motors as Supplier of the Year for the 3rd year in a row. The next phase is translate this support into higher margins, which we will be implementing and accomplishing in due course. As you may recall, we did the same thing with iron ore pricing back when I started at Cliffs. Back in 2015, the big players in Australia and Brazil were completely irrational, raised to the bottom. And iron ore pricing was forecasted by every potent to stay below $40 In perpetuity, we at Cliffs were the ones who called out the underlying absurdity of such a reckless attitudes toward pricing. Ultimately, rationality was restored to the market. Since then, we have enjoyed appropriate pricing and the current number above $110 per metric ton is no longer a surprise. We are pleased that the recent recovery in manufacturing activity and demand has allowed us to bring our temporarily idle assets back to operation. The move is that of the construction of our Toledo HBI plant, who COVID related restrictions on the number of workers allowed on-site, we're able to come up with a solution to start producing HBI before the end of this year. Due to these restrictions, we will need another 4 months to complete construction and to start operation, but the intensified demand for locally sourced ore based metallics made finding a way to restart construction sooner rather than later, a top priority for us over the last couple of months. Last but not least, I would like to provide a brief update on the achievements of the synergies we committed to get when we acquired AK Steel back in March. We announced last quarter that we had already set in motion the $120,000,000 in synergies that we expected to realize within 1 year. As of today, I'm pleased to announce that we have identified and set in motion a total of $151,000,000 in synergies, exceeding our original target by $31,000,000 These additional synergies have come from a deeper understanding of our real needs at the overhead and operational levels 4 months into the acquisition of AK Steel by Plivancur. I will now pass it over to Chris Koussi for a discussion on our quarterly results before giving my final remarks and opening the call for Q and A. Keith? Thanks, Lourenco. As you noted, our 2nd quarter results reflected the full impact of the COVID-nineteen pandemic on the volume and cost side of each business segment. On a positive note, due to the contracts we have in place and the value added nature of what we supply, overall pricing for both our steel and iron ore products was not impacted by the demand environment. Our quarterly consolidated adjusted EBITDA loss of $82,000,000 was driven by lower than typical steel shipments as well as $150,000,000 in cash idle costs that were incurred as a result of the several facilities that were temporarily taken down during the quarter. In the steel and manufacturing segment, as expected, the most significant impact on shipments was from our automotive carbon side, which were about 250,000 tons for the quarter, down 65% compared to last year's Q2. However, momentum began to pick up by the end of Q2, and over 70% of the auto carbon shipments we recorded in the quarter went out in June or 177,000 tons. That rate has accelerated into July as we expect to record about 210,000 tons in auto carbon shipments. And that is further evidence that the 2nd quarter was truly an anomaly. In addition, the bulk of the idle cost recorded for the quarter came from this segment, which will be substantially reduced in Q3 as all temporarily idled facilities, including the Dearborn blast furnace last week, have resumed operations. As for mining and pelletizing, sales volumes of 4,800,000 long tons remained solid due to the take or pay arrangements we have in place and our customers need to replenish inventories that were depleted during the winter. Pricing per long ton also held in the mid-90s as the strong IODEX performance offset weaker HRC prices and pellet premiums. Our cost per ton was impacted by idle expense, which will be mitigated in future quarters now that Tilden has resumed operations and Northshore is slated to restart next week. Because our blast furnaces are still working through pellet inventory sold to them prior to the acquisition, most of our 1,000,000 long tons of intercompany sales were eliminated from corporate EBITDA, translating to about $32,000,000 in negative margin. Net inventory will begin to be released in the 3rd quarter, though we will still show some eliminated margin through the end of the year. Quarterly SG and A expenses were $62,000,000 of which $28,000,000 flowed through corporate EBITDA and most of the remainder through our steel and manufacturing segment. Our full year 2020 SG and A expectation has come down substantially to about $210,000,000 which represents about a 50% reduction from what the combined company would have reported last year, a clear illustration of the synergy achievement $145,000,000 in cap spend during the quarter, about $90,000,000 were HBI payments for work done in Q1. The remainder was sustaining capital and capitalized interest. We expect another $250,000,000 in capital spend for the remainder of the year with about $110,000,000 of that related to the completion of HBI. We maintained our healthy liquidity throughout the pandemic and we currently have above $1,100,000,000 available to us between our cash balance and ABL availability. We received our second $60,000,000 AMT tax refund of the year on July 14. Based on our current business projections, as well as the anticipation of over $100,000,000 in working capital related cash inflows, we expect to generate positive free cash flow in the second half of the year, which factors in the HBI CapEx. This would allow us to exit the year at a higher liquidity level than where we were at the end of Q2. In closing, we have weathered through the most stressful periods of the pandemic and taken the necessary actions to preserve our strong financial position, which allowed us to maintain the desired comfort necessary to restart our Toledo HBI project. We expect a fairly strong second half of the year, which should ultimately amount to our 2nd quarter pandemic driven results to be viewed as a blip in history and in advance of a robust recovery. Lorenzo? Thank you, Keith. Just like the American economy, our company has already proven its own resilience. The pandemic has changed a lot of things, but not the need for our high end products in an increasingly discerning marketplace. We are ready to look past the impact of customers' shutdowns and look into the future where our competitive advantages will always prevail. With that, I'll turn it back over to Lashona for questions. Please. Your first question comes from the line of Lucas Pipes with B. Riley FBR. Hey, good morning, everyone. Good morning, Lucas. So, Lorenza, I appreciated your comments on commodity grade steel versus your highly specialized steel products. And I guess we will see your Q2 carbon price in the 10 Q pretty soon, but would you be able to walk us through your carbon steel prices and costs in the Q2 and where you would expect them to go in the second half of the year? Thank you very much. Well, we do not have a lot of exposure to commodity type of pricing because as you know, Lucas, our contracts are set in stone for 1 year timeframes. And therefore, the prices that we are basically selling to the automotive clients these days, and I'm talking 2 thirds of our business, plus. So it's a lot. We're set in place long time ago in a different pricing environment. So we're not going to forecast any numbers towards the second half of the year, but the prices are still good. The prices are still in good shape. What happened in Q2 was all demand related. They shut down. The last time that we had something similar to what happened in the automotive industry was during World War II, just to give an idea. So it was a complete shutdown. It came without a lot of anticipation or advice. So we are past that. June, the last month of Q2, we're positive. We have stainless in the mix. The stainless was not very affected. We have electrical steels in the mix. Electrical steels are not very affected. So we have a lot of positive things, but automotive was really bad. Going forward, we are seeing automotive in very close to normal levels. Big car manufacturers working 3 shifts and production levels are in the second half will be back to normal and that will change dramatically the footprint. We're going to be able to show the power of the combination of equivalent clips and AK Steel. Thank you for that, Lorenzo. And to hone in on the second half, you're great to hear that you'll be cash flow positive. Are you able at this point to provide some sort of range? Are we talking $50,000,000 more than that, less than that, kind of a rough ballpark? And I believe Keith mentioned the ATM refund was obtained in July. Any other kind of discrete cash items that we should consider for the second half of this year to get to that free cash flow positive number? Thank you. I will let Keith answer that. Keith, please. Yes, Lucas. Yes, the $60,000,000 is a part of it. We're also anticipating about $100,000,000 release out of inventory during the second half of this year. That's going to be a contributor to the positive free cash flow. It's we're not going to disclose the exact amount, but your $50,000,000 to $100,000,000 is probably about right on what we're looking at right now and positive free cash flow for the second half. We'll wait to see how things go and there's definitely some potential for some upside to that too as the automotive market recovers. Your next question comes from the line of Scott Schier with Clarksons. Hi, good morning, everyone. Good morning, Scott. Following up on a few of Lucas' questions, could you provide any kind of color or commentary around kind of your auto contracts and any early talks or expectations for how 2021 is shaping up? We are in an ongoing process because we supply so much to Automotive that we're always in an ongoing process of negotiating with Automotive. We, of course, do not, as you know, Scott, do not supply a color or detail on any commercial endeavors that we are doing and taking care of with clients. But overall, it's very positive. The clients understand our position. The clients are getting more and asking for more, not for less from AK Steel. We are the one stop shop. We can produce great structural steels directly through AK Steel and indirectly through AK Tube. We can provide auto parts through PPHC Precision Partners. We can provide carbon steels, galvanized, electro galvanized. We exposed parts, not non exposed parts, so they like that a lot. So we are in great shape as far as conversations with our great clients, and we're adding new. It's not just the traditional ones. We are being very upfront and very open to entertain conversations and deals with the likes of Tesla and Nicolai and Rivian and several other new names that are coming. And we are very happy also that our traditional customer base like General Motors and Toyota and Ford and Volkswagen and others are going the same direction. So we are looking to the future. And it's not a thing that we are going to go in a month by month or quarter by quarter basis. This is strategic. That's where we are at. And not all car manufacturers will survive, but some will. And one thing I will tell you, Scott, we from Cleveland Creek, the K Steel will be there with all these folks, particularly the ones that are not price driven blindly, the ones that understand that if they really want to compete and win in the stock marketplace, they need to partner with us. They need to make money, we need to make money. The times of imposing price decrease with steel mills are over as far as the United States of America. We are not going to allow that to happen to Cleveland Cliffs AK Steel. We don't want to go out of business like several mills in Europe are going out of business. We are not going to do the same thing with ourselves. But the good news is that the new wave of cars that are coming and the new wave of car builders that are starting to gain momentum here in the United States, they have this technological mindset. That's exactly where we are. Okay. That's very helpful. I appreciate that color. Switching gears, are you able to kind of provide any expectations around second half EBITDA, especially on the AK Steel side, specifically in terms of volumes for the second half? Now that some auto manufacturers are getting back to 3 shifts, are you expecting a return to a more normal run rate of volumes by the end of the year? Yes. Look, I think we provide a lot of color regarding what's happened in the 2nd semester. But Keith, do you want to to elaborate a little bit on the numbers a little bit? Yes. Sure. Yes. We won't disclose an EBITDA forecast, but we will we are counting on about 85% of normal in terms of automotive volume for Q3, and we're looking to 100% of normal by That's what we've got baked in that free cash flow assumption. Okay, great. I appreciate that and thanks for taking my questions. Looking forward to seeing the rest of the year play out. Thank you so much, Scott. Thanks, Scott. Your next question comes from the line of Matthew Fields with Bank of America. Hey, Laurenti, Keith. Lorenzo, your comments on the fleets were interesting earlier in your prepared remarks. Obviously, we're seeing problems with the rental cars and Hertz has had a big issue with trying to reject their fleet contracts through their restructuring. How do you view kind of the consumer able to or not able to make up for the lack of sleep buying this year and maybe next year? How does that sort of play out into the overall SAAR picture? We have to see how these things will play, Matt, because despite of all these new trends, the overall consequence for us as steel suppliers has been a positive, because the demand is there so much so that we're seeing they are running full capacity or close to full capacity in the U. S. In several cases and at full capacity in a few cases already at full capacity. So they are unaffected so far. And we are not the only ones supplying the automotive industry. So I can only give you the perspective of clicks on clicks from the point of view of my subsidiary, AK Steel. So far so good. The ones we are selling to are buying, and they are buying more, and they're asking for more, and things are picking up good. I'm not so sure about competition because I don't know, that's not my thing. We brought capacity back at the right time. For instance, the Dearborn platforms is back with 22 years. We were able to bring it back in a very uneventful process, fantastic jobs of our people in Dearborn and our technological team of blast furnaces, including help from people from Midtown. So great technological capability, hats off for the blast furnace guys to bring back that furnace so smoothly in Dearborn. But we made changes in our footprint already like the defensive idling of the hot strip mill at the airport. Now we have only 1 integrated company. We are going to have hot strip mill in Middletown in the second half that we run at full capacity, full nominal capacity. The hot strip mill hasn't run at full nominal capacity for a long, long time. So we adjust our footprint already to supply the market that we have. But the overall market is not taken care of by AK Steel alone. Others participate and as far as I know, some other integrated news are really hurting. But we are good. We're in good shape. All right. And then Keith, you mentioned that the SG and A levels are kind of way down from the combined companies. I guess, is that a big part of the additional synergies you're able find? Or can you give us sort of a little breakdown about that 150 of synergies kind of by bucket? What are the big chunks of that number? Yes, sure, Matt. The $151,000,000 right now, you've got about $69,000,000 that would be in the SG and A category, dollars 82,000,000 is cost of goods sold. So you're breaking it down, dollars 81,000,000 in total for like public company duplicate overheads, dollars 56,000,000 in asset optimization and another $14,000,000 for coming from the supply chain. The actual so the reductions in SG and A are really dramatic. You're seeing the synergy piece of it is really probably only about half of it. There is a couple of other factors that are going into that. We do have some accounting classification changes on the expense side. So some a sizable chunk of the SG and A costs that were being charged to SG and A last year by 8 ks are now under the cliff's methodology are being inventoried and run through cost of goods sold. So you're also seeing that as a factor. And then the third factor is just the fact that costs are obviously down for other reasons. The synergies are what we consider permanent cost reductions. The other cost reductions are just the ones that come down as a result of having a year where profits are lower, so you've got lower incentive compensation, you've got lower travel costs because of the COVID. So there's a number of other factors hitting it as well. Did that help you, Matt? Yes, that's great. And then is there any additional pull through Precision Partners included in that number? Or is that still yet to come? Yes. We are starting to see some movement in that direction. But Q2 was not definitely not the moment to execute on that because as you know well, Matt, the end market was shut down. Actually, Precision Partner was the first one to shut down and the first one to come back. But the work has been done. I'll give an example. Tesla, that was not a traditional client of AK Steel in the past, is working with us both with the Precision Parts and AK Steel. So we're working all together. Precision Parts is not part of the plant. So we are doing a lot of things. And I'm mentioning Tesla because everybody is interested in Tesla, but it's happening with other manufacturers as well. So we are very excited with executing the plan that we put together for this combined company and we are going to be delivering on these results in a lot shorter period of time than people do. Okay, great. And then last one for me. Assuming you have no more secured capacity, which hopefully you can confirm that, what's the plan if there's any or the outlook on any debt reductions in the back half of the year? If you have some cash coming in from AMT or working capital release, do you think there's some target or strategy on kind of being able to buy back more unsecured debt at a discount for the back half of twenty twenty? First of all, we have now one thing in place that allows us to continue to reduce debt without necessarily buying back debt on the market. That's ABL. I'm sure you noticed that we paid down the ABL in Q2 Despite of all the difficulties of the Q2, we were able pay down the ABL with cash. And any excess cash flow generated will be used primarily to continue to pay down the ABL. That's the first thing. Second thing is that as far as the secured capacity that you've mentioned, keep in mind that 2024s secured will start to be available for us to redeem coming January very close to par at 102.5. So that's our next target note in our treasury portfolio to address outside of the ABL. We have a plan. We have a plan and we will continue to execute the plan. We've created the cushion, the 5 years cushion that we normally do in my I normally do in my companies, did with Metals USA, did with Cliffs and doing now with the new Cliffs. So we have a plan, we'll continue to execute, everything is lined up and we will restore the security capacity as soon as we take down the 24s at the right time. And this will be done at the right time. But again, I would like to insist on that. The primary source of reducing debt right now is paying off the ABL. And that's where the cash will go. All right. That's very helpful. Thank you and good luck in the back half guys. Thanks a lot, Matt. Thanks, Matt. Your next question comes from the line of Alex Hacking with Citi. Yes, good morning. I have a couple of questions on Toledo. Could you remind us of your expectations for sales there next year? And then also kind of remind us where you stand in terms of offtake with customers? I know you had a lot of previous discussions and then also in terms of how those discussions have evolved in terms of the potential pricing structure. Thank you. Toledo next year, we'll be running to achieve nominal capacity. If we are going to be able to achieve that by the end of the year, it remains to be seen. Remember, when we were planning to start in June pre COVID, we knew that it would ramp up in the second half of the year, and 2021 would beat nominal capacity. Now we're going to be stocking at the very end of the year, so more likely in December. So to make sure that we do everything properly and we don't trip over ourselves, we can't assure that we are going to be running at 1,900,000 tons next year. But we if we don't get to 1,900,000 tons, we're going to get really close because we on the other hand, we don't believe that the ramp up will be a long one. We have enough knowledge about our plant and about our processes to know that the ramp up will be smooth. As far as offtake with clients, I have already explained that way too many times. HBI sells into the metallics market, into the scrap based market, and that's not how the clients work. I addressed that in 2017 when I did not I elected not to cut long term deals to do project finance and went there out of issuing bonds and issuing other financial instruments and doing that without having project finance. So we are 100% confident that we are going to sell that product and sell that product at the right price. More than that, Alex, we already developed the procedures to use HBI as coolant in the BOFs, particularly the off spec material that will be generated as we ramp up the plant, and we will use that both in Middletown and Geocord. And we also have the procedures to use in our highly sophisticated EIFs at both Butler and Mansfield, our own plants, and that will be in spec material. So off spec in DOF, on spec in our EIF, we have the procedures. We can even work with our clients to develop the right way to melt HBI, and we are going to be very successful profitable, and HBI will be a big contributor to HBI. Okay. And then profitable, and HBI will be a big contributor to HBI to our EBITDA. Okay. Thanks, Lorenzo. And just a follow-up, if I may. Thanks for the color. How much of that $1,900,000 could you potentially consume internally then? $250,000 to $300,000 in a steady state year would be a very conservative number. And we will do that not because we want to just make the material disappear. It's because, as you may know, AK Steel is a buyer of scrap. So we are going to be saving money by doing that, and we're not going to be doing anything to jeopardize our ability to generate EBITDA. So we will not be for that material, not be having the same impact on the HBI side, but we're going to be having a positive impact on the cost side of the AK Steel facilities that I mentioned. So it's cost advantageous to do that, but the numbers in the ballpark of 250,000 tons. The rest will be sold in the marketplace. We have a lot of interest coming from the usual consumers in the EAF side. And we are not planning to sell to the blast furnace side because we don't want to give the competition the advantage that we will enjoy in our costs by using a middle tower and Tier four. Okay, perfect. Thank you so much and good luck in the second half. Thanks. Your next question comes from the line of Matt Fotirosso with Jefferies. Good morning. Thanks for taking the question. And thanks for the color on sort of the plan there at AK Steel around not treating your product as commodities. I'm wondering, how do you think about pushing price around your steel products at AK Steel relative to some of the aluminum competition? How does like Novelis and some of the other aluminum guys factor into that equation? Well, aluminum has been trying to become a mainstream material in car for a long, long time. And except for the F-one hundred and fifty, they have never succeeded on pretty much anything that they tried. The biggest problem with aluminum is called the consumer. Consumers of F-one hundred and fifty with aluminum don't like the car. That's the fact that we have evidence of that. So Ford never really advanced beyond the F150. And as far as I know, there are no plans for that. Another example of the failure of aluminum is the fact that the Tesla S was aluminum and the Tesla 3 is predominantly almost everything here. So no matter how skin the cat, aluminum will continue to be a wannabe. No matter what any aluminum company will say, they will continue to be outside looking in. And the technological developments that I was talking about make steel better than aluminum. And from the overall cost standpoint for the car, a lot better. So I don't have any problems with the aluminum and the automotive industry. Okay. And then similar question on the iron ore side, I guess, just relative to competition. I mean a lot of the great work you did on the iron ore contracts, I suppose, is a function of your position in the market in North America. How do you think about, I guess, some of the U. S. Steel iron ore pellets freeing up as they close some of their blast furnaces and look to market their iron ore into the market? And then if you had any comments or thoughts on the implied valuation of that deal with Stelco that was announced a little while ago, that would be interesting as well. I have no opinion on their deal with Stelco, and it would not be appropriate to comment on that. But as far as the pellet market here in the United States, everything is playing exactly as we planned, we at Cleveland Cliffs. Let me recap. Our contract with our biggest client, Parts and Body Metal goes through 2026. So it's totally out of reach for anyone else. The contract is extremely well done, and we are happy. They are happy. Life is good. The second biggest client is AK Steel, and I don't need to comment on that. I'll just emphasize that we are not going to consume any pellets other than quick one crystal. The third plant is Algoma. And Algoma, by design, we let the 2 addendums expire by 2020 because we needed the pellets to feed our HBI plant. So it's happening as planned. One contract will continue all the way through 2024 and 2 other contracts will expire by the end of the year because we have a better use and a more profitable use of these pellets feeding our plant in Toledo to produce HBI. So again, going as planned. And the rest is the extra capacity that we built to produce Doctor grade pellets, which we thought that we would find a good market for the pellets. And I'm pleased to inform you that we already have a multiyear contract to supply the extensive Doctor grade pellets production to a very good company and a very good operator of HBI plant in Trinidad. So we're in great shape with that. So we're replacing bottom line. We are replacing Algoma with Bluecor. That's a hell of a good trade off for us. And replacing base run of the new pellets that will supply Algoma in Canada with highly specified grade pellets, coated pellets to LUKOR in Trinidad. So in fantastic shape. Okay. And maybe one last very big picture question. I mean, a lot of the conversations we have related to your company and just the broader steel industry is, how do we think the sort of share in the domestic steel market shifts between EAFs and blast furnaces over the coming decade? Do you have any big picture thoughts? It seems like EAF's kind of shot up to 2 thirds of the market fairly fast, but maybe it's plateauing a bit. Any high level thoughts on how you see that playing out going forward? And I guess to some extent, your HBI product maybe aids the EAFs to some extent as they're able to produce better products with your pure iron inputs. But just high level thoughts on that would be helpful, I think, for the market. Matt, you already answered your own question. You said it right. They did a fantastic the electrical furnace operators did a fantastic job in during the last, let's call, 30 years to grab the market share that was available to them And they did win a very well executed plan, taking advantage of their flexibility, the fact that they are nimble, the fact that they can do a lot of things for a lot less cost and that's all great. Now when push comes to shove, we are getting to that last stretch that technology matters. The R and D support matters. The ability to produce the steels that their equipment doesn't allow them to produce matters. And we are going to continue to defend that, Nick, as you can understand from my speech here. And we are not going to even use price because we are so confident that what we do is differentiated that we will continue to explain and educate on that. We know a lot of EAFs that are extremely incompetent. And if you pay attention to the landscape, you are going to see that not everybody is booked or not everybody is still dynamic in the EAF. These are 2 great companies, great operators. But you go beyond that, you might find a CMC that's also a good company. And then we will start to have some difficulties to identify and find the good operators. On the other hand, when you look to the automotive footprint throughout the entire world, you are going to see that in Japan, Nippon Steel, JSE, they are less pronounced operators. Why is that? Japan has a lot of scrap. Why Japan doesn't migrate to EAFs and give DeepOn Steel and JFCE a run for their money in the automotive business. I will answer the question because they can't. Same thing with South Korea with PSCO. PSCO is, by and large, for the automotive business, are blessed for steel mill even though they have been used like we do too at AK Steel. So things are not as simple as you read in the glossy press. So let's take one step back and look exactly what kind of steels we're talking about. We are talking about steels that we cannot produce through the EIF route. Some they can and they are doing and they are doing a good job and then they are growing their participation, but the limit is there. Will our HBI help them? Yes, marginally. But what they can do today with pig iron, they will not be able to do much better with our HBI. More efficiently, yes. More repetitively, yes. With a better and narrower chemical composition, absolutely. But this will not be a differential for them. The differential will be that they will have a supplier in the country instead of having to import from Ukraine or Russia or whatever. So we are pretty much at the top of what was the transition to EIFs to blast furnaces. And guess what? There's a new operator in the EIF in the blast furnace sector called Cleveland Cliffs that is a competitor warrior, understands the business, understands the technology involved to produce these tools for cars, has the R and D capability. I am absolutely impressed with the depth of knowledge that I found at AK Steel in both the R and D department and product development departments. And we are going to continue to leverage that to pair with our ability to supply feedstock to that great company. And that's how the business will go going forward. Helpful as always, Laurenti. Thank you. Thank you, Matt. Your final question comes from the line of Phil Gibbs with KeyBanc Capital. Hey, Lorenzo, Keith and team, good morning. Thanks for taking my questions. The I apologize if you talked about this already, but the synergy number, I think, was north of 150,000,000 dollars How much of that did you achieve in the Q2? And how much relative to that number on an annualized basis do you have to go? Yes. So we were at a run rate in June, we hit a run rate of $84,000,000 So we picked up $7,000,000 alone in the month of June. So that for the quarter was about $17,000,000 By the beginning of Q4, we should be at that 120 that we talked about on the last call and the full 151 will kick in by January 1, 2020. Are you going to say something, Lorenzo? I'm sorry. I'm sorry, Phil. Okay. What? No, I thought you're going to say something, Lorenzo. That's all. No. So when we think about it, you've got a full $150,000,000 next year, Keith, and this year given what you've realized so far and what you expect to realize in the second half, is that that gets you somewhere around $50,000,000 plus or minus? Yes, that's pretty close Phil, yes, like $65,000,000 or something like that for the current year, somewhere around. Okay. Yes, there are more than that. It could be like in the $65,000,000 to $70,000,000 $65,000,000 to $70,000,000 So you're getting that extra juice in next year's numbers then in terms of the synergies having them for a full year and then also stepping them up? That's correct. Where did you find more? Look, the more we integrate and the more we understand, the more we develop the way we do business with AK inside the footprint, the more we can do things. I'll give an example I'll give an example that was not part of our original plan. AK Tube now is part of the commercial effort of AK Steel 100%. And AK Steel was treated as a separate company. We are in the process of doing the same thing with Precision Partners, not to the point that Precision Partners will become a department of AK Steel because that's what AK tube is right now. But the level of integration makes for things that we did not predict coming from the outside to see that we can do these things in the real life. Another thing is that due to our ability to absorb new things in our office in Cleveland, or actually, we still don't have our people back in the office, but with our home office is equivalent, we continue to reduce the savings in Westchester. So the time and the knowledge of the new corporation makes for this process of absorbing synergies to become kind of a natural thing. And things are coming in a very exciting way. Another point that I need to clarify is that with the combination of AK Steel into Cleveland Cliffs, we're able to redo a number of big contracts with serious advantages for the company money wise. And that's also a big portion of what this number, this boosted number is coming from because now we have a much bigger, I'll give an example, railroad transportation. And we created things that were not part of our regional plan. The fact that we no longer have hot strip in Dearborn made for more transport between Dearborn and Middletown, which is not a good thing. But it is a good thing because in the big scheme of things, we're saving a lot of money and we are optimizing our middle town hot strip mill. But with that, we're able to redo the entire thing with railroad transportation, and we're able to enjoy a lot of costs in this SG and A and not even just SG and A contract type of expenditures. And then just as a follow-up, and again, apologize if I missed this. In terms of your pellet shipments this year in the business, was there an update in terms of what you think that will be? And then sub question, assuming $450,000,000 hot band and $110,000,000 iron ore in the current pellet premium, where does that put you for pricing in the back half as well? Thanks. Pete, do you want to take that? Yes. We really had we didn't really give guidance on pellets in what we put out so far, but we see the pellet shipments should Q3 should be very similar to Q2, maybe slightly improved and then we should see a pickup in Q4 as well as we normally see as the blast furnaces need to stock up before the locks close for the winter. So kind of the volume output. If pricing were to stay where it is today, we'd end up the year probably in the low 90s on a pellet price and you might see a true up in Q3. So maybe Q3 would be a little bit lower, but it would average out to low 90s for the full year rate if prices stay where they are today. Very helpful. Appreciate it. Thanks so much. Thanks, Joe. There are no additional questions at this time. All right. Thank you very much. Appreciate it. And it was a pleasure to be with you guys on the phone today. It is an exciting time for Cleveland Cliffs. Thanks for your interest, and we will keep in touch. You all have a great day. Thank you. Bye now. Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.