Earnings Call: Q1 2020

May 11, 2020

Good morning, ladies and gentlemen. My name is Julian, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland Cliffs First Quarter 2020 Earnings Conference Call. 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 available for replay. The company will also discuss results excluding certain special items. Reconciliations 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, Julian, and good morning, everyone. I hope everyone listening on today's call is safe and healthy. Starting my remarks, I want to begin with a note of appreciation for our employees throughout the entire company. I couldn't ask for more dedicated people to navigate through the crisis with me. You have been deemed essential by the states we operate in and you have always been essential to the long term health of our company. We appreciate how well you have adapted to this new situation and how aligned we are on the importance of workplace safety throughout our several operating locations. Because of you, on the other side of this pandemic, we will emerge stronger, safer, healthier and more productive. It is remarkable what we have accomplished during these challenging times we have been through. As you may know, we have navigated through crisis before. While the situation right now is a bit different, it certainly has not taken us out of our comfort zone. Actually, this is our comfort zone because differently from when the tide is high, making all boats float, this is a time when management really matters. As I will lay out on this call, we have acted promptly and appropriately and we will continue to do so. More importantly, nothing we have seen or done over the past 2 months has changed our perception on the combined company we envisioned prior to the acquisition of AK Steel by Cleveland Cliffs. We have acquired a steel company with highly concentrated exposure to high end markets and very little exposure to sales of commodity steel products, particularly HRC. Among these high end markets, the most important for our company is the automotive sector, a market which all steel companies would like to become part of. And we already are a major league player, supplying virtually all auto manufacturers in the United States. Also, we are the sole producers of electrical steels in North America and that's a crucial national security item, a concept we have been able to communicate in Washington DC since we acquired AK Steel, as confirmed by the recently announced Section 232 investigation, self initiated by the Department of Commerce. We are also self sufficient in iron ore pellets, our most important feedstock. And very importantly, we do not depend on scrap, a feedstock that will be scarce at the other side of this crisis. Shutting down manufacturing, particularly automotive manufacturing and continuing to operate the steel mills, particularly the less crack point steel mills created an unprecedented situation in our country. The scrap is being consumed, but it's not being generated. When our HBI plant comes online soon, we'll have another relevant product to sell and another way to capitalize on our strength. Before anything else, I would like to call your attention to our Q1 results. Had AK Steel been under our control for the entire quarter, our reported adjusted EBITDA would have been $61,000,000 This includes the results from both legacy Klipsch and AK Steel in the period prior to the acquisition. Those that follow Cliff's know that Q1 has always been our lowest tonnage quarter due to the seasonality associated to the shutdown of the Great Lakes during the winter months. From now on, with the case due to the mix, the impact of seasonality on our results is substantially reduced. During the 1st week post acquisition, the most significant development impacting our business occurred with virtually all of the automotive manufacturing plants we serve announcing full shutdowns. As you may recognize, even before the acquisition of AK Steel by Cleveland Cliffs, our largest end market has always been the automotive industry through AK Steel and through our other major pellet clients ArcelorMittal. And because most of our exposure to automotive steel products is on adjusting time basis, we had to make immediate adjustments to a large portion of our production. These adjustments included idling production at Dearborn Works, stopping operations at all precision partner plants, significantly curtailing AK2 production and implementing an extended outage at 1 of our electric arc furnace plant, Mansfield Works. All of these facilities are meaningful suppliers of the automotive sector. While we are still far from normal, we have been encouraged by the timing and pace of production restarts announced across the automotive industry. If the automotive manufacturers continue to restart production as planned, as they actually have already started to do, our operations will normalize throughout the balance of the second quarter, delivering products to our customers more reliably than before. In fact, one item for improvement we uncovered during the due diligence process at AK Steel was the status of its just in time inventory. While we do not believe a K Steel just in time inventory was worse than the competitors' inventory positions, it was definitely not as good as we believe it should be. In a normal world with no coronavirus and business as usual, we had planned to fix this issue throughout the entire year 2020. And by the end of the year, we would have our inventories in better shape. One silver lining of this automotive shutdown was that it allowed us to accelerate our execution on this issue. And I can confidently say that we are now only 2 months after the acquisition in a comfortable position to deliver our steel with perfect reliability on adjusting time. As soon as the automotive plants are back in full force, they will be amazed at how much AT and T still has changed and how ready we are for their requirements. The automotive production stoppages will ultimately trickle back to our raw material operations. As such, we first indefinitely idle the AK's metallurgical coal mine in Pennsylvania. Later on in April, we then temporarily idled Cliffs, Northshore and Tilden iron ore mines, which account for 2 thirds of our annual pellet production. Due to the timing of the crisis hitting at the end of the winter, our blast furnace clients were in serious need of pellets for inventory replenishment, even if their immediate intent was to keep their blast furnaces on idle. With that, our sales to our 2 major third party pellet customers, ArcelorMittal and Algoma have actually persisted at a healthy rate since the Great Lakes reopened at the end of March. Even better, our take or pay volume for these merchant agreements give us a lot of certainty for future pellet sales and our primary demand reduction comes from our own facility, Dearborn in Toledo. The idling of our mines facilities will actually allow us to reduce some pellet inventory and will contribute in large part to the approximately $100,000,000 inflow from working capital release in the 2nd quarter, a number we made public when we publicly released our extreme distress cascade scenario last month. While most of our facility idles are temporary, one that will remain permanent is the Dearborn hot strip mill. We anticipate returning to production very soon for most of Dearborn workers, but when it resumes Dearborn should be viewed as 2 separate facilities. A hot end to produce labs including blast furnace, BOF shop and continuous casting and a best in class finishing facility including the modern PLTCM, between lined tund and cold rolling mill and the galvanizing lot. The Dearborn finishing facility, which we consider to be at par with our flagship Rockport Works, will utilize as feedstock hot rolled coils produced in our Middletown hot strip mill. One thing we found in due diligence is that the Dearborn hot strip mill was the weak link of the plant. Given the strength and capabilities of the Middletown Works hot strip mill, the Dearborn hot strip mill is not necessary and suboptimal to operate. With this reconfiguration, we can now optimize our powerful Middletown hot strip mill by adding Dearborn Slabs to the in house slab feed. We estimate this improvement will save us several $1,000,000 in annual costs even after of course considering the additional freight to move slabs and coils between the two plants. Going forward, our wholly owned subsidiary AK Steel will have the following plant configuration. A single one fully integrated steel mill in Middletown, Ohio 2 electric arc furnace steel mills in Butler, Pennsylvania and Mansfield, Ohio 1 is lab producing plant in Dearborn, Michigan. 2 is steel finishing plants, primarily dedicated to automotive carbon steels and other high value added applications in Rockport, Indiana and Dearborn, Bishop. 2 finishing plants dedicated to the stainless and electrical steels located in Zanesville, Ohio and Coshocton, Ohio. 2 ERW plants, electric resistance welded plants dedicated to the production of tubular components for automotive and other high end applications operating as AK Tube LLC in Walbridge, Ohio and Columbus, Indiana and 10 highly technologically developed plants dedicated to providing engineering hot and cold stenthes and assemblies for the auto sector operating as Precision Partners Inc. Each one strategically located in close proximity to the automotive assembly lines that they supply with their engineered hot and cold stamps and assemblies. They are situated in Canada across the board from Detroit, in Kentucky and in Alabama. As for our Toledo HBI plant, leading up to the shelter in place orders from the state of Ohio, We were in constant dialogue with Governor Mike DeWine's team and fought for the ultimate and rightful outcome that all of our operations should be considered essential. As part of those conversations, I offered up that construction at our Toledo HBI site, which involved hundreds of contractors working within close proximity with one another, could be suspended. While this was a prudent move from a cash preservation standpoint, I am eager to resume construction at the Toledo plant as soon as possible. With the extended outage of the entire automotive industry, there has been no bushling scrap being generated in our country. This unprecedented fact has tightened the market considerably and we now believe that the actual demand for our HBI will be even better than the good demand we were anticipating before the pandemic. This brings us to the discussion of our liquidity. Needless to say, our liquidity position has been a top priority. We have been running a number of market scenarios and testing their ultimate impact on liquidity. Differently from what is probably the outsider's perception, our steel mill assets generally carry a pretty low fixed cost position in the range of only 20% to 20 5% of our overall operating costs. What this means is that in extended idle scenarios, our cost obligation to maintain our non operating facilities is significantly reduced. If idles were to continue for long periods of time, even these fixed costs begin to slowly fall off. As you may have seen, prior to raising additional capital, we published our extreme stress test case and liquidity analysis. This scenario contemplates among other things, automotive plants remaining shut down through the end of June and only 6,000,000 light vehicles being produced between April 1 the end of the year. Even in this hypothetical extreme situation, we would still have plenty of liquidity. That said, because of all the uncertainty in front of us at that time, we thought it was best to raise some additional capital as liquidity insurance. As such, we made the decision to use our secured debt capacity to issue $400,000,000 in secured notes. While the interest rate on the new issue is not ideal, we knew going in that buying this insurance policy would not be cheap. However, due to the ample support from long term bond investors that know well that management matters most in times of crisis, We were able to price our deal at a coupon that turned out to be better than the initial indications, actually much better. As of today, May 11, we have more than $1,200,000,000 in total liquidity, which also includes an additional new $150,000,000 pilot tranche on our ABL. This first in, last out pilot tranche was another pocket of liquidity that we quietly added in the early stages of this crisis in a transaction we completed in late March, thanks to our great relationships with our banking group and their commitment and full support to our company. Those who have been following us know that I am always looking for opportunities to reduce our debt balance and improve our capital structure. With our liquidity position shored up as a result of the previous secured debt transaction, we then used a chunk of our remaining secured capacity to repurchase $736,000,000 of our unsecured debt, which we did paying a lot less than the 736,000,000 dollars actually at a 25% discount to par, taking advantage of the prevailing trading levels of our bonds in the market. This liability management transaction alone was to reduce to cut our total debt by $181,000,000 We are firm believers that all of the debt in our structure is worth its Far better. So we will always look for opportunities to take advantage of bonds trading at a discount. As I said before, I don't fight the through the 2015, 2016 downturn in the industry. After all these proactive and decisive moves on the financial side, we are done and we have a very manageable debt profile with a 4 year maturity window, no financial covenants and plenty of liquidity. While automotive demand has driven most of our production adjustments, we continue to serve our other steel end markets. Throughout the pandemic, we sent and continue to send product to the infrastructure, manufacturing, appliance and electric power markets. Regarding electrical steels, our most recent success is on the political front. Despite AK Steel being the only producer of grain oriented electrical steels or GHOST in the United States and in North America, the profitability of this business has been under pressure with legacy standalone AK Steel recording negative EBITDA in the second half of twenty nineteen on the production and sales of electrical steels. This was a direct consequence of the actions taken by bad players in the marketplace, developing ways to circumvent Section 232 tariffs on steel coils by rerouting dumped gold coils to Mexico and to Canada, where the steel is cut into smaller pieces. These smaller pieces called laminations and cores were immediately sent tariff free into the United States, taking advantage of Mexico's and Canada's favored trade status. Without action by the federal government to level the playing field, 1450 jobs at Butler Works in Pennsylvania and Zansville Works in Ohio were at risk. Fortunately, I have been dealing with officials in the Department of Commerce, the USTR and in Congress who understand the national security importance of this critical feedstock for the production of transformers used in our country's electric grid. I am pleased to acknowledge the decisive action taken by Secretary of Commerce Wilbur Ross last week with his order to have the DOC self initiating a Section 232 investigation covering the key electrical steel products impacted by this circumvention. The expedited and positive outcome of this process is critical to save the jobs of the employees of these two operations in Pennsylvania and Ohio. At this point, we believe it's abundantly clear in Washington, very real national security issue. We look forward to an expedited and positive conclusion of the Section 232 investigation self initiated by the DOC. As you can see, we have made all the necessary moves possible to steer through this crisis, while at the same time we are integrating a newly acquired company. It hurts me that I haven't been able to be on the plant floors with my fellow employees, but we have made it work very well so far. This environment has actually helped our integration in many ways as we have come together more closely in the face of a diversity. Our new Cleveland Cliffs employees from AK Steel have adapted to our way of doing business. And as conditions improve, we have a lot to be excited about. As for our outlook for the remainder of this year, clearly, given the impact on both the steel side and the mining side, the speed and pace at which automotive restarts continue to occur will be the most important factors driving our EBITDA performance this year. Based on our direct communication with our clients and the orders they have already released to us, we expect the vast majority of automotive production in our country to resume this week and next week. And make no mistake, the automotive business in this country will recover, Particularly with the new trends generated by the coronavirus pandemic against the previous widespread use of ride sharing service providers and back in favor of privately owned vehicles. As private cars are perceived, rightfully so, as sanctuaries, states from infection, Driving their own vehicles is what millennials want to do now. Car ownership is trendy again and that includes SUVs and pickup trucks, which consume a lot of steel produced by AK Steel and a lot of parts supplied by Precision Partners and AK2. April sales volume was not nearly as bad as we initially expected And there has been significant growth in car sales being consummated online without the buyer even visiting a car dealer showroom. We expect all these trends to continue and very soon to be well recognized by the media and by investors in general. With that, I will now pass it over to Keith Scosi before giving my final remarks. Keith? Thanks, Lorenzo. I will begin with a discussion of some of the cost cutting and cost deferral measures we have implemented before briefly touching on our Q1 results, which as you know were previewed with the market on April 15. This environment has pushed us to sharpen our pencil from a cost standpoint, and we have already taken meaningful actions across the board. Regarding the $120,000,000 in year 1 synergies and permanent cost reductions we committed to achieve when we announced the AK Steel acquisition, I am pleased to announce that we are already there with the initiatives we have already set in motion throughout the company. You will see a portion of the run rate savings associated with these actions in our Q3 numbers and their full impact on our Q4 results, way ahead of the first anniversary of the acquisition of AK Steel in March 2021. As for temporary cost reductions and deferrals, the most significant cost reductions are understandably coming from our idle plants and operations. As Lorenzo noted, we have a high variable cost structure, which allows us to ratchet down spending substantially during the idle period. Most of the steelmaking cost structure consists of raw materials, which are nearly all eliminated in an idled scenario, with the exception of a few take or pay arrangements. Energy is another piece that comes down quite a bit. Most of the fixed cost portion comes from the labor side, where in the event of a plant idle, we continue to pay a portion of employee wages and healthcare for a period of time. We've also sharply reduced our capital expenditures. Right now, we are only incurring CapEx on sustaining and permission to operate projects at our facilities. In our stress case, this runs at about $15,000,000 a month, not including capitalized interest. Our total CapEx in the Q1 was $140,000,000 $112,000,000 of which was related to the HBI plant. We will still incur some HBI spend in the Q2 for work performed prior to the suspension of the work. Under construction until construction returns, we will be running at the minimal sustaining rate. Between our steel and mining operations, we have already deferred approximately $100,000,000 of 2020 sustaining capital, not including HBI. Our total company wide CapEx will range from $250,000,000 to $350,000,000 for the last 9 months of the year, depending on the timing of HBI construction restart. We have implemented pay deferrals ranging from 10% to 40% for our salary workforce and are temporarily suspending the 401 match. As you also know, we suspended our future dividends, which represented about $100,000,000 per year on a pro form a basis cash outflow going forward. We are also benefiting from the acceleration of AMT refunds we expected to receive half in 2021 and half in 2022 and are now expected to be received this year, likely in the Q2. In addition, we've been able to defer pension payments of $51,000,000 to early next year and can defer remaining employer Social Security payments to the end of 2021 2022. As for our results, we reported adjusted EBITDA of $23,000,000 for the Q1, which is mostly driven by the mining and pelletizing business. Results from our new steel and manufacturing segment only include the last 19 days of March, which as you know is when the pandemic effect began to impact our end customers. The stub period EBITDA for steel and manufacturing of negative $11,000,000 is in no way indicative of AK's performance in a regular environment. It just happens to coincide with the beginning of automotive downs. Leading up to that point, as Lorenzo noted, AK Steel actually generated $38,000,000 in adjusted EBITDA, which does not show up in our results other than the opening balance sheet. Overall, during the stub period, we reported $218,000,000 of total sales, of which $120,000,000 or 55 percent was to automotive customers. Of the remaining sales, 25% was to distributors and converters and 20% was to infrastructure and manufacturing markets. As a reference, AK Steel generated $1,200,000,000 of revenue between January 1 March 12, the day before we closed the acquisition. Our mining and pelletizing results were solid for an always light first quarter on the back of 2,100,000 long tons of pellet sales. The completed acquisition of AK Steel resulted in the acceleration into sales of certain inventory produced previously for AK Steel, which is why the volume number came in higher than last year's Q1. The reported segment EBITDA of $82,000,000 included about $30,000,000 of eliminated margin from those intercompany sales to our steel and manufacturing segment. You will notice we also had several items related to the acquisition that were carved out to arrive at adjusted EBITDA, including acquisition costs of 23,000,000 severance costs of $19,000,000 as well as recognition of inventory step up of $23,000,000 which impacted steel and manufacturing cost of goods sold. We also realized a $3,000,000 gain related to repurchase of some of AK Steel's bonds at a discount. It should be noted that this gain will be significantly larger in the Q2 as a result of the $181,000,000 in discounts captured in our latest financing deal. As Lorenzo noted, our business outlook will be heavily dependent upon the rate of automobile production during the last 9 months of the year. We have implemented a new more stable priced intercompany contract for pellets between our mines and our Dearborn and Middletown plants, which remove the influence of commodity prices, but we will still transfer at a market rate with comparable margins to last year. As a result of this, the sensitivities to commodity prices in our Mining and Pelletizing segment will be much less relevant than what we've provided historically. To conclude, all of these initiatives and benefits combined with the additional capital raise completed in April have led us to the very comfortable liquidity position that Lorenzo described. I will note that we implemented our cost cutting measures in a way that does not jeopardize the great condition of any of our assets and does not cut anything related to worker safety, which remain of the highest importance to us. On that note, I'll turn it back to Lorenzo to wrap up our prepared remarks. Thanks, Keith. To make it abundantly clear, our vision for Cleveland Cliffs has not changed and the addition of AK Steel, AK2 and Precision Partners to our company has dramatically enhanced our ability to execute. The deal closed just 2 months ago and despite of the setback of the COVID-nineteen pandemic, we have already achieved at least 2 great things. One, as Keith disclosed a few minutes ago, the $120,000,000 we had committed as year 1 synergies will be achieved way ahead of schedule. And we are confident that the final number will be fairly higher than the $120,000,000 And 2, we are able to move the Department of Commerce to self initiate a Section 232 investigation on cores and laminations of grain oriented electrical steels and that's a real game changer in comparison with what was out there prior to our acquisition of AK Steel. I came to Cleveland Cliffs in 2014 to implement a strategy supported by one fundamental fact. The United States economy is the most reliable and the most resilient in the entire world. For the past 6 years, we have developed our business having this core belief in mind. And we all know that this pandemic will ultimately pass. What's most important for us right now is that the safety of our workers and the health of our company are being protected for the long term. Switzerland Cliffs generates good paying middle class jobs for Americans And we do that while we enable supply chains for products that matter to our daily lives without depending on China or any other foreign countries that through their deliberate actions or by means of their passive aggressive inaction would inflict the damage to the United States and to our great people. After we make it through this crisis, we as Americans should look back and humbly assess what we could have done differently. When we do so, I truly expect that the public in January and investors in particular will have a better appreciation for real companies like Cleveland Cliffs. With that, I'll turn it back to Julianne for Q and A. Thank you. Your first question comes from Lucas Pipes from B. Riley FBR. Your line is open. Hey, good morning, everyone, and congratulations on closing the transaction during these difficult times and then also taking aggressive actions to bolster liquidity and of course to protect the safety of your workers. Lourenco, I wanted to ask on the liquidity side. You provided the extreme test case scenario. I think it was $120,000,000 of burn per month. And then you commented in your prepared remarks in the release that things are kind of getting better faster than you thought. So I wondered if you could update us on where you would see kind of the cadence of cash and liquidity over the course of this year? Thank you. Thanks, Lucas. Good morning. Look, the number is correct, the number that you mentioned, and that was the number we use when we released our stress test case scenario. This being said, our stress test case scenario was anticipating no automotive production all the way through the end of June and only cars being back in production in July. We also were anticipating a very low number of only 6,000,000 cars being produced in the 9 months comprehended between April 1 December 31. So we're way ahead of that. Several of our automotive clients have already restarted, Mercedes, BMW, Hyundai. Toyota and Honda coming back today, the remainder, including the big three, will be back on the May 18 week. And we are going to start seeing numbers normalizing early in June. So I'm at this point, I'm really anticipating a pretty normal, pretty fair level of automotive production in the second half of the year. The other thing to be considered that people are really reluctant to enter in an Uber or a Lyft right now because they don't know who was the last person inside. Other metropolis outside of the United States are recording people really walking away from public transportation. So we are going to see a renewed interest in car ownership. This morning on CNBC, the Chairman and CEO of AutoNation was basically begging for the car manufacturers to come back to operation and start replenishing his inventories because his inventories are going down, they're going down fast. So I'm sure you guys can find the interview on YouTube. So anyway, we are very optimistic. Another thing, because we act on the balance sheet, I think that we're seeing other companies doing right now, or some did very recently, we did it very early in the game. So we're the first ones in and out. We're done. We're not going to do anything anymore because we did what we had to do. So right now, my main concern is when we are going to restart HBI, because I want to take advantage of this scrap shortage that will be the new normal in the domestic marketplace in the United States. That's very helpful. Thank you. Then I wanted to turn over to the electrical steel side. And I wondered if you could provide some color as to how big this market is in the United States, what your current capacity is and then what the capacity utilization, I. E, your production has been over the last few years? And also kind of in the context of this, with the disclosures this morning as we kind of all kind of update our models here on the following the pro form a models AKS plus Cliffs, is this kind of the level of liquidity expect sorry, the level of disclosure we should expect going forward? Thank you. Okay. So let me start with the electrical steel and then I will have Keith answering the liquidity disclosure stuff like that. So the market for electrical steels in the United States, give or take, is 250,000 tons a year. And that's more or less AK Steel capacity in our lead cut furnace mill in Butler, Pennsylvania and the finishing plant in Zanzibar High. We have the technology. The technology has been armed for historically. It's a well known technology that is by means of strange facts ended up in the hands of the Chinese, the Koreans and the Japanese. And then they start undercutting this market here in the United States by dumping grain oriented electrical steels coils into the United States. Then Section 232 took care of that. And then the clients, some of the clients found a way to circumvent because everybody is at least pre the COVID-nineteen situation. Everybody was addicted in low prices and looking at the other side how those low prices were being achieved. So they started moving small machines to cut cores and lamination across the border, to Windsor, Canada, across the border from Detroit and to Mexico, Matamoros, across the border from Brownsville, Texas. And so the quarries instead of coming to the United States, it started going to Canada and going to Mexico. Then cutting the course and laminations and sand by truck back into the United States, tariff free, made in Mexico, made in Canada. Beautiful. The only problem is that neither Mexico nor Canada produce a pound of electrical skews. So we're able to explain that very clearly to the USTR, Robert Lighthizer, to the Director of Manufacturing of the White House, Doctor. Peter Navarro and the Secretary of Commerce, Hugo Boras, and they got it. They got it. For us here is basically the 4. The Electrosteel business in due diligence for us was a minus $40,000,000 EBITDA. So shutting down the Electrosteel business is an immediate $40,000,000 EBITDA improvement in our company. But that would put more than 1400 people in Pennsylvania and Ohio out of a job. So 1400 good families using good paying jobs in Pennsylvania and Ohio were being displaced for the wrong reason. So I will make more than $40,000,000 out of this situation. But my default, my baseline is this, the Department of Commerce, which by the way, I fully expect that I will win this case, because they are self initiated. So they got it and they will do it fast. But as soon as let's put it like this, as soon as the DOC concludes positively this thing, going to have a pretty profitable business. And we still have a lot of bad players to deal with, but we'll do that in the aftermath. For now, it's that. In due diligence, we accounted for an improvement of $40,000,000 in EBITDA by shutting down. But then we're able to do the right thing and appreciate the Trump administration for listening and understanding where this problem is and how we can fix it. And we are acting, and I believe that they will act fast. I have full confidence in the Secretary of Commerce, Wilbur Ross, to do the right thing. I know that the USTR ambassador, Bob Lighthizer, will work on the backlash, if any, from our passive aggressive trends to the North Canada and the friends to the South Mexico and the passive aggressive guys who end up shutting down, shutting down their complaints and life is good and they're going to go back to have a profitable business and supply this very serious national security issue that is, of course, in laminations and grain oriented steels for the electrical grid of the country. Lucas, did I cover what you'd like to hear about electrical steels? Very helpful. I appreciate that. Very helpful. So I'll have Keith finishing with the disclosure. Keith, please go ahead. Thank you. Sure. Hey, Lucas. Yes, in the Q, you have the disclosure of you'll see $1,800,000,000 in rough terms on the borrowing base, dollars 200,000,000 in letters of credit and $800,000,000 borrowed at the end of March. That's the breakdown on the And in terms of the segment disclosures, especially around the steel side, is that also what we should expect going forward? That is correct, yes. Okay. Okay, great. I really appreciate all the information and best of luck and thank you very much. Thanks, Lucas. Your next question comes from Matthew Fields from Bank of America. Your line is open. Hey, Lorenzo. Hi, Keith. I hope you and your families are doing well. Just a couple of housekeeping ones first for me. So thanks for mentioning, I guess, you would have earned $61,000,000 of EBITDA in the Q1 had you owned 8 ks the whole time. So that I guess is about $38,000,000 of EBITDA that you didn't own in the Q1. So is if we're trying to do a sort of a pro form a last 12 months EBITDA, is that about $855,000,000 on a combined basis? Before Keith chimes in, I would like Keith to do it, but before he chimes in, I would like to mention one thing. This is just a mathematical exercise. Remember, we have already reduced so many so much in terms of costs from the K Steel overhead. We have already executed on so many actions in terms of reducing the cost base that this is just a pro form a exercise to show how much a Q1 could have looked like. But again, this is before we cut what we have already cut in Q1 because we just did that after, of course. No, I appreciate that this is before the $20,000,000 synergies and all the steps that you've taken. Absolutely. Okay. So Keith, please go ahead. Yes. That number is that's about correct. That makes sense. Okay. Thanks. And then, so given that EBITDA and sort of CNTA levels and pro form a for the upsized issue that you did in April, is that mean that you're out of secured capacity at this point? Not true. We still have secured capacity, but it doesn't mean that I'm going to use it. So I have no plans at this point to issue any debt or any equity, 0. We're done. We have way more liquidity than we need to run this company. And I'm glad that after the issue of the high yield bonds to secure that $400,000,000 I was able in a matter of 48 hours to turn and do the second transaction that was liability management. And we cut almost $200,000,000 in debt just by using the CUSIP to buy other bonds cents on the dollar because investors, bond investors, sometimes they have their own problems with their investors. They are coping with the general public or smaller firms withdrawals that force them to sell. So we are there to buy. Don't fight the tape. But I think at this point that there is no reason for us to do anything not in equity neither in equity nor in debt. But we do have some secured capacity left. Okay, great. And then on the working capital side, obviously, Q1 is your big use of working capital and then seasonally, you get traditionally a big release of working capital in the second quarter. Given all the sort of actions that have gone on with your footprint and idling and then potentially restarting, Is that going to do we anticipate that that's going to be a similar trend this year? Or is this going to be is working capital just sort of completely off this year given the circumstances? Well, we have some positives on the working capital side. Remember, we added the pelletizing plants and we are still delivering pellets. We're just depleting our inventory. That will have a positive impact on working capital. So we're working on that front as well. So Keith, do you want to chime in on that as well, please? Yes, sure. Yes. And you're right. This is a it will be a tough year to really get it and get our arms around a working capital prediction. But as Lorenzo mentioned, we are generating cash in the Q2 with pellet inventories coming down. We're obviously generating cash on receivables as well in the Q2. So we'll see cash flow coming in that way. And then as we ramp up production late in the quarter here and into the Q3, we're going to end up consuming some cash. So I mean our best guess right now is a neutral year in working capital, give or take $50,000,000 to $100,000,000 but it really depends on the timing and how robust the customers come back. But we're overall looking at a neutral year right now with the caveat that it's very, very difficult to predict. I appreciate that. I know that there's just a lot going on and it's changing quickly. One of your blast furnace supply peers noted in there that the 10 Q that ArcelorMittal USA, I guess, is trying to declare force majeure on a supply contract. Can you just give us a general sense of your confidence in the volumes that are sort of nominated for ArcelorMittal U. S. In 2020? Yes. Look, Matt, I don't know what peers comment on that, but people that are outside, they everybody has a mouth. They can say whatever they want. It doesn't mean that they know what they're talking about. That's number 1. Number 2 is that there is no change in terms of the denomination for ArcelorMittal outside of the normal pattern. And number 3, remember that not only ArcelorMittal, but other countries like Algoma, like, Dofasco, they all have minimum levels of take or pay. So even in the unlikely and unexpected event, because the worst is over, I assume that the steel mills are seeing the same thing we are seeing from Cleveland Cliffs at AKM Steel. We are on the way back. So they needed the pellets to replenish their inventories. And now as soon as they come back with their furnace or some of their furnace, they will need pellets to run. So they will be above their minimum take off pace. But we are already above the minimum take off pace with the pace that we are supplying right now. So people talk too much. Just ignore. Okay. Thanks. And then one last one. If you don't get from me, Keith or Celsu or Paul, just ignore. Okay. The last one, just sort of a bigger picture. Just can you sort of opine on why you think that there's been this divergence between iron ore and met coal on the seaborne market? Iron ore has held up remarkably well, while met coal is 30%, 35% this year. Is it all supply? Is it some different customers, India versus China? Just what's your thinking on that? It's the same thinking that I had in 2013, 2015 2016, when I was very vocal about what was going on with iron ore. Both, like I used to say back then in 2015, 2016, coal is a lot less concentrated than iron ore. Iron ore is concentrated basically in 2 countries and 4 companies. Built into BHP, 4 ks SKU in Australia, Vale in Brazil, ton. So these 4 own it. And they don't conclude. They don't own the phone. They don't own Zoom to make a video conference and set price. That's not the way it works. But because they have the same type of cost structures in Australia, they operate out of the same ports in the same geographical area in the Pilbara and Vale is out there in Brazil with lower costs, but at higher freight, at the end of the day, they all 4 fluctuate on the same direction, more or less at the same levels. And at the same time, the only difference being the influence of the respective currencies, the Aussie dollar and the Brazilian real. As far as coal, we have a much more diversified market. We have a much more supply and demand driven situation. As far as iron ore, as long as the big players do not want the price to go down, price will not go down. That's as simple as that. And like I always said before, to take the bad CEOs out of the picture like Rio Tinto did, like BHP did and Vale did, and Fortescue did not need that, but the other 3 definitely needed deadly real team to be in the worst. And thanks to God, it was the first one to act. Things got fixed in our own. But in terms of coal, it's a lot more out of anybody's hands. So it should be more into the market and the supply demand perception. That's very helpful. Thanks again and good luck with the continued integration. Thanks, Matt. Thanks, Matt. Your next question comes from Seth Rosenfeld from Exane BNP Paribas. Your line is open. Good morning. Thank you for taking my questions today. If I may, I believe in your Thank you. Thank you. I believe in your prepared remarks, you commented on there may be a new supply agreement in place between the palletizing and AK Steel business, if I heard you correctly. Can you just clarify on what, if any impact that will have on price realizations for the pelletizing business and also the cost structure for steelmaking? And just to clarify, will that still be on a fully arm's length basis? I'll start there. Thank you. Yes. We said that too that it will still be commercial based, but it will be less influenced by the ups and downs of the commodity in the marketplace. So it will be a more stable number, still market driven. That's exactly what we said in our prepared remarks. Okay. Just to dive into a bit more, can you confirm, is that going to be a fixed price contract, a cost plus structure for the AK Steel business? Or will it still be tied like historically from those inputs you've discussed in years past? Look, Seth, it is what we explained and we are not going to elaborate much more. You're going to come with a negative view on that one. So there's no efforts to clarify anything for you. So go ahead and write your report and say that I missed on this and that. That's what's going to happen. No, I'm not going to give you any more information. We have enough. Do you have any other questions? Okay. Yes, I do. My other question for you today was on the HBI business and if you can give us a bit of color on in what market environment you planned on restarting the CapEx to build that and perhaps the range for expected ramp up timeline. Obviously, the scrap market strengthened a great deal in recent Can you touch on what that would mean for potential pricing if you've had more recent discussions with your potential EAF customers? You called the HBI plant once a widowmaker, remember that? Yes, I still remember that very, very well. Okay. And my wife is still married to me. So our HBI plant in Toledo has not made a widow. So we are fine. We are only 3 months away from completion and running the plant. And as soon as we finish and as soon as we restart, it will be 3 months, we'll be done and producing HBI. We are going to have another very successful product to sell. I was not planning on any scrap shortages in the United States. Actually, the EIF industry in the United States is predicated on one thing that's really America. There's a lot of scrap available being generated all the time in the United States. It is being said that changed because manufacturing is down. Automotive is down. So the scrap generation is down and this bushling scrap generation is further down. So the HBI that was fantastic would be even more fantastic. But what would be the price that we're going to sell? You are going to know after we report the Q1 of sales. I did not cut deals at fixed price going in. There are others that say the things, they say because they don't know what they're talking about. This is the metallics market. It's a transactional market. You know that, but you keep asking the same question knowing the answer. No, we do not have any fixed contracts, fixed price contract with any client because that's not the way that market functions. So we're going to play in the market that exists already, And we are going to sell our product extremely well. And now that we have AK Steel, it will be even more playground. And we are going to be the company that will be totally independent from feedstock, our own feedstock because when I have our own pellets, we're going to have our own HBI and we're going to sell to companies that are eager, that are following, that are putting pressure on us to come back and finish because they need badly. But all the rest in terms of numbers, plug the number whatever numbers you want in your model, because we're not going to give you 2. Okay. Thank you very much. I hope you the age guide time goes very well and I hope the scrap price stays high without all of your auto customers being shut down. Your next question comes from Phil Gibbs from KeyBanc Capital Markets. Your line is open. Hey, thanks. Good morning. I had a question on the pricing. I mean the pricing in the mining side was really robust and even higher dramatically year on year. And I know the pricing isn't necessarily linked to what it used to be linked to, but just trying to gauge the bridge as we move on into the rest of the year? Thanks. Keith, do you want to take that, please? Yes, sure, Phil. Yes, in the Q1, we had a positive impact from the acquisition. We accelerated deferred revenue related to a legacy contract that had an impact on the price. That more than offset the kind of a negative one time true up on HRC for the Q1. So you had offsetting effects that kind of netted to about $2 Just to give you a little help, I mean based on current commodity prices, we would kind of see around something in the low 90s in terms of a selling price on pellets for the year based on current prices and depending on how things move, but that's where we're at right now, Phil. You're saying low 90s in terms of what you'd be getting on realizations today, not a yearly average? I just want to be clear on that. That would be the yearly average based on today's commodity prices. Okay. So 1Q and then the rest of the year. Okay, great. And Lorenzo, on the side of HBI, I know the project was stopped due to COVID. Now you're looking to restart the construction. Any thoughts on when realistically that can be done with having to get people back on-site and up and running and just some timing and what near term hurdles or lack thereof there could be? Yes. Look, we are going to restart that plant, the construction of that plant sometime in the second half. At this point, Phil, it's very difficult for me to tell you when exactly when because one point that's the point that you have just mentioned, which we believe we have a good plan in place to execute on that. But so in other words, we believe we can bring people and put them to work without creating any health or safety issues for the men and women working in the construction. So that part has been addressed and we believe we have it resolved. On the other hand, I also have to be mindful that we're going to have to remobilize. We're going to have to redo things that we had all in place at that point. So I don't know how long it will take to bring these people back to the site and to have everything moving again. But one thing I will tell you, as soon as we have that on-site, it's 3 months and we will be up and running and HBI will be one of our best success stories ever. So, But bear with me, we don't have an exact point in time yet when we are going to be able to bring these people back. I don't regret it because at the end of the day, I was negotiating with Governor Duane at the very beginning of the pandemic. I would like to keep my other plants in Ohio open. And Governor DeWine rightfully so was very concerned about the first impact. And I could explain and convince him about the countermeasures that we developed on the fly and we put in place that now have been adopted everywhere in terms of plexiglass, separating operating points, social distancing forced on the with painted spots on the floor of the plant floor, stuff like that. And this became the norm after we did. But I could not really in all earnest justify keeping our construction site open when not having 2, 3 people on top of each other doing things, especially when we're rewiring and was turning electrical equipment on. So now we do. We're ready. But I don't have a time yet because now we need to remobilize and that will take a little while. But we definitely will restart in the second half and we'll hopefully still be producing HPI made in Toledo in 2020 to be seen. Lorenzo, when did my last one here is just when did you see the automotive order book at AK Steel starting to get better? Clearly, the weakness started happening in late March and early April was the probably the darkest days, it sounds like. But what I guess when did the bounce off the bottom happen in your mind and what's gotten you excited along those lines? Thanks. Look, we are already seeing the orders coming, and we are already seeing the release for just in time coming in. So it's already happening. Each plant is different, not even carbon each car manufacturer is different. Each plant is different. But the general trend is that they are starting with 1 ship and then going to 2 ships and then going to full capacity. And I believe that we are going to be at full capacity in the second half. That's what the trend is showing right now. And there's a lot more risk to enforce social distance in a car manufacturer than anywhere else. We are seeing Tesla, the big fight with the California right now because of that. So and we don't have that in Michigan. We don't have that in Alabama, in Tennessee and other place that we sell steel to car manufacturers, then the Texas folks were in good shape. But it will pick up fast. The main concern was all people are not buying cars. No, they are. The consumer is buying cars. So cars are moving out of the box. There's a lot of financial incentives to sell cars right now. The dealerships are already asking for replenishment. So the pressure is on and I believe that much earlier than we even we ourselves anticipated, we are going to see the automotive business in this country normalize. And I also believe that with the anti Uber trend, we are going to see a lot more car ownership than we have seen before. And that will be a fantastic positive that again, we are not anticipating, but we will take it and we will take advantage. So I think we're out of time. So with that, I will send it back to Julian to wrap up the call. And thank you very much for being with us. And as always, we will continue to keep you posted and we will continue to inform you about the developments. Thank you very much and have a great week. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.