Earnings Call: Q3 2019

Oct 23, 2019

Good morning, ladies and gentlemen. My name is Denise, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland Cliffs 2019 Third Quarter 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 clevelandcliff.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I'd like to introduce Keith Kose, Executive Vice President and Chief Financial Officer. Please begin. Thanks, Denise, and thanks to everyone for joining us this morning. I'll start the call with some remarks on the quarter before turning it over to Lorenzo for his comments. Overall, Q3 was highlighted by exceptional operating performance and capital spending under control at our HBI plant. Total company adjusted EBITDA was $144,000,000 for the quarter. Adjusted EBITDA from our Mining and Pelletizing segment was $183,000,000 on 5,800,000 tons of sales volume, roughly in line with expectations and with a greater portion of third party sales than anticipated. Intercompany sales to our Toledo HBI plant were 346,000 tons. That resulted in a $13,000,000 inventory profit elimination which is reflected in the corporate segment. Our Q3 intercompany sales were lower than previously guided as we diverted a portion of Doctor grade pellet tonnage to the seaborne market. Those sales have yet to be recognized due to the additional time needed to complete export transactions. As you saw in this morning's release, we updated our full year sales volume expectation to 19,500,000 long tons to reflect timing and economics on the export sales we discussed last quarter, with some exports likely falling into next year and some held in inventory. This implies about 6,000,000 long tons of sales expected in the Q4, a slight increase in volume from Q3 and includes the remaining approximately 500,000 tons of intercompany sales. Our Q3 minuteing and pelletizing price realization of $96 per long ton, though healthy, fell below our previous outlook range, due primarily to the steep declines in both the pellet premium and domestic steel pricing relative to the last data guidance points used. There were no significant changes in mix and therefore the price realization should have been reasonably predictable based on sensitivities we have provided in the past. Because pricing in our contracts are based on annual average rates for the relevant commodity indices, pricing reported in prior quarters reflected actuals and estimates at those points in time. To the extent actual pricing veers from these estimates, we always true up what had been recorded in previous periods. In many cases, these true ups are not noticeable. But in a quarter like this one, where the pellet premium fell nearly $30 and the HRC price fell over $100 from their guidance points, the true up became more sizable. Our latest full year revenue guidance range has been updated to reflect current commodity prices and falls generally in line with revenue sensitivities that we have historically provided. From a cash cost standpoint, our Q3 print of $63 per long ton came in 6% lower than last quarter. This was a result of strong cost performance at the operational level and deferrals of certain major spend items as well as lower revenue linked costs. We had previously guided to the high end of our range based on elevated revenue projections and the corresponding effect on royalties and profit sharing. With the lower index pricing along with operational outperformance, we were able to bring cost down this quarter and lower our full year expectation to the middle of our $62 to $67 per ton guidance range. With this boost from the cost side, in spite of all of the pricing related noise, our cash margin on pellet sales for the quarter was a solid 34%, an industry high number among U. S. Producers. As for CapEx, we spent $160,000,000 in the 3rd quarter, dollars 138,000,000 of which was toward our HBI plant in Toledo, Ohio. We have now spent $344,000,000 there this year and we remain ahead of our original startup schedule. Due to revised timing of certain payments, we have reduced our expected CapEx spend outlook by $25,000,000 for the current quarter and for the current year, which is now in the $625,000,000 to $675,000,000 range. As we enter into the final phases of major spend toward project completion, we remain very comfortable with our liquidity position. At the end of the Q3, we had $400,000,000 in cash, an untapped $450,000,000 ABL facility and a debt maturity profile with nothing due until 2024. As a result, we were more than comfortable paying a special dividend on top of the regular dividend this month. We have designed our capital structure to weather volatility. Even in the midst of a major capital project and a 3 year low in steel prices, we have returned approximately $325,000,000 to our shareholders this year. And as you know, we remain on a clear path to strong positive free cash flow generation starting in the middle of next year. At that time, our free cash flow will be defined as EBITDA minus $220,000,000 on an annualized basis. With that, I will turn it over to Lorenzo. Thank you, Keith, and good morning, everyone. I will start today calling your attention to a very important point. After our very profitable second quarter here at Kilion Cliffs and despite all the skepticism toward the iron and steel industry throughout the entire Q3, Cleveland Cliffs delivered profits again in Q3. Our 3rd quarter numbers one more time for you. Adjusted EBITDA was $144,000,000 Our net income was $91,000,000 and our earnings per diluted share were $0.33 Also, last week, we paid our regular quarterly dividend and we added a special dividend on top of that. Why am I stating all these things? Just to emphasize an obvious thing that is apparently not so obvious. Regardless of all the noise in our space and in the overall market, Cleveland Cliffs actually makes money and pays dividends. With that out of the way, I'll talk about the most exciting event of the Q3, which occurred on the last day of September, when we topped out the 457 foot tower at the construction of our HBI plant in Toledo, Ohio. To those investors who have asked about critical path items and key milestones to look forward to, that was it. When you drive through Toledo, you will not be able to miss the majestic structure that our dedicated construction team has erected. We still have a lot of work to do and capital left to deploy, but we remain well on track to bring Cleveland Cliffs into the next generation of steelmaking by the first half of next year. We are currently in different stages of technical and commercial negotiations with several steel companies who are interested in our HBI. These companies need metallics, and they have been importing pig iron from mainly Russia, Ukraine and Brazil. Differently from imported steel, imported big iron is not subject to any trade restrictions yet. But who knows if that may be the case in the future, given the current and future geopolitical situation. Remember, we here at Cleveland Cliffs, we plan in advance and we have proved that to be the case time and time again. Also, many electric arc furnace steelmakers prefer to source metallics without longer duration contracts, which we are totally fine with. However, given the uncertainty of the supply and competition from other steelmakers, some have shown a desire to guarantee volume for longer stretches of time. We are happy either way. Whatever works for our clients works for Cleveland Cliffs. Long story short, as far as our commercial arrangements with our HBI customers, we are exactly where we intended to be. Now moving on to the quarter. The most surprising event of the quarter was the unnatural drop in the pellet premium, which from August to September represented the largest month over month change in history. The lower pellet premium affected our view on the economics of certain planned export sales. For a moment, in June, July, export sales could net us a healthy margin. But given the pellet premium drop, these export sales became less attractive. As always, we once again acted in the best interest of the company and its stakeholders, And that explains the reduction in our full year volume outlook. As we have always done, we do not choose volume over value. We prefer value. We do not sell extra tons at a loss just to be able to use a bigger denominator when calculating cost per ton as other companies usually do. Here at Cleveland Cliffs, we prefer profits. Despite a healthy underlying commodity price expressed by our robust IODEX throughout the entire quarter, the pellet premium tanked in Q3. That was purely a consequence of commercial incompetence by the biggest supplier of pellets to Europe. Let me give you a little background on what happened. Regardless of the internal economic slowdown in China and the restrictions on unfair trade imposed by Section 232 in the United States, The Chinese mills and their surrogates continue to overproduce steel on pace to surpass 1,000,000,000 metric tons this year and up almost 10% from last year. With the U. S. Out of reach, the excess steel produced in China need a new dumping ground and their best option at this time was Europe. The diversion of Chinese steel into Europe directly or through surrogates as well as a generally weak European economic environment have negatively affected the European steelmakers, which are the largest consumers of seaborne iron ore pellets. The biggest supplier of pellets to Europe is Vale, and they historically sign annual contracts with these steel makers with a negotiated pellet premium that's set for the entire year. And that number flows into an index called Atlantic Basin Pellet Premium. That brings us to the 2 bad commercial moves made by Vale. 1st, in light of the weakness in the European market and the inability of the steel mills to be profitable in such environments, the European steel makers begged Vale for relief and Valley conceded. Specifically, Valley abandoned contracts that were signed to cover the entire year and cut them off to give these folks a break, which then impacted the Atlantic Basin Index. The other bad move from Vale came earlier, actually late last year prior to Brumadin. Rather than just continue their practice of negotiating a flat premium that incorporated both the quality of the pellet as well as its iron ore content based on the 62% iron IODEX, Vale decided to start using the 65% iron content index instead of the IODEX. Next, the steel mills reacted against the change because while the 62 percent IODEX is affected by iron ore produced by all three majors, Rio Tinto, Vale and BHP, the 65% is essentially a Vale index, mainly supported by Vale operations in Brazil. Well, the move to the 65% backfired badly on Vale's face. Since Vale promoted the change, the differential between the 65% index and the IODEX has collapsed from $30 last year to $6 currently, a massive drop directly impacting the calculation of the Atlantic basin premium. While we know that you cannot control what others do, this type of irrational behavior is hard to predict as it amounts to a self inflicted wound. Said another way, what Vale has done negatively affects not only itself, but also all other pellet merchants and should not be ignored or overlooked. This all being said, the greater differential component of the pellet premium gives us confidence that we should start to see a recovery in the Atlantic Index soon. As the differential recovers, the pellet premium will directly recover along with it. A $6 grade differential is absurd and only tells us that China actually does not care about the environment. If premiums for 65% or do not recover, that's basically an admission from the Chinese that they are happy to continue to pollute the environment with reckless abandon. It would help if the members of the press, influential figures from the business and academic sectors and public officials at all levels and both parties actually talk about pollution made in China. Unfortunately, as we have seen in several current events, so far, no one and that includes Apple, Google, General Motors, or even the NBA is actually willing to risk losing exposure to that 1,400,000,000 person market. With that, China continues to get a free pass to pollute the world and destroy jobs everywhere, while they grow their own middle class and destroys ours. Luckily, Cliffs is a U. S. Focused company and we do not care about offending an enemy country of the United States, one that's actively making our planet a worse place to live. We really hope that extreme levels of pollution in China will one day be treated seriously instead of being willfully ignored by big corporations and their short term property driven CEOs, by greedy universities collecting full tuition from an already absurdly enormous and growing number of Chinese students and by coward foreign governments unable or unwilling to protect their citizens against economic aggression and job destruction. More than anything, we believe that the absurd levels of pollution in China should become a decision making point on the investment thesis of ESG Driven Institutional Investors. We actually believe that these investors might play a major role going forward. From our part, we at Cleveland Cliffs will continue to educate these ESG driven institutional investors regarding the completely different environmental impact of iron and steelmaking in the United States and everywhere else, particularly in China. Our quarterly results were also affected by weak domestic steel pricing. HRC is now below the $500 per short ton mark. A lot of this just has to do with global conditions. The world still produces a lot of artificially cheap steel laced with pollution, subsidies and currency manipulation, with obviously China as the main culprit. While the current lower steel price in marketplace puts more pressure on blast furnaces than on EAFs, none of the integrated companies supplied by Cliffs have idled any furnace. Furthermore, fears about EAFs taking all blast furnace market share at once are totally unrealistic. While some lesser efficient blast furnaces have already shut down, the best in class ones are surviving. And we will actually stay in place for several years. There is not even enough high quality scrap and metallics to allow for EAFs to match the tonnage and quality levels that the best integrated steel mills currently produce and sell to high end applications. It always goes unnoticed even taken for granted, but this has been another fantastic year for Cleveland Cliffs operations. I think the main reason why there is so much focus on pricing and commodities from Cliffs investors is because they know that our operators never give them anything bad to talk about. Every month, quarter and year, we produce high quality pellets in a safe, responsible and environmentally friendly manner. When was the last time we missed the production targets or had a major cost blowout or had a major operational incident or even a minor one? It just doesn't happen, because we have the best operations in the mining business. This level of expertise, stability and consistency at the operational level allows us to remain steadfast in our strategy, which hasn't changed since I came to Cliffs 5 years ago. We are emphasizing our competitive strength in the differentiated American steel markets. Our strategy is geared towards the 2 unique characteristics of the U. S. Steel industry. One, that our blast furnaces are 100% fed with pellets. We are the only ones that have that in the entire world. And 2, that a majority of the steel produced in our country uses the electric arc furnace route. You will not find any major steel producing economy with either of these characteristics throughout the entire world, which is why you will not find any companies like Cliffs in the world. We are perfectly fit to thrive in this distinct business environment of the American Steel Industry. For a long term, we have been supplying a blast furnace market with pellets made in USA. And going forward, for the majority share, electric arc furnaces to maintain or grow their share, they also need a steady source of metallic feedstock made in USA, which we are soon bringing to the Great Lakes with our first of a kind HBI plant. Wrapping up, we understand cyclicality and we embrace volatility. During the last several years, we have taken care of our balance sheet and have positioned ourselves to withstand the inevitable bad times. At this point, we are a dividend paying company and a CapEx driven growing enterprise. 5 years ago, nobody would think that that would be even remotely possible, except of course us. We knew we could do it and we have done it. Now, when others panic, we see opportunity, actually several different opportunities. We have seen this play out before and can embrace the cycles rather than panicking and changing strategy like others usually do. And because cycles drive things down and then up, they start top of our HBI plant in the first half of next year will happen when things will be heading up in the cycle. With all of the advantages I have laid out, including our rock solid operations, our unique position in the industry and a history of taking advantage of cyclicality, we at Cleveland Cliffs have a lot to be excited about. I will now turn the call over to Denise for the questions. Thank you. Your first question comes from Lucas Pipes with B. Riley FBR. Your line is open. Hey, good morning, everyone. Good morning, Lucas. Lorenzo, obviously, there's been a lot of volatility on the pricing front. IODEX, you've alluded to all three of them. Lucas, Lucas, Lucas, Lucas, you are going on and off. I can't hear you. Sorry about that. Just to Denis, is it just me or you're also hearing that on and off? Sorry about that. To ask the question, Lorenzo, the question is at spot prices, do you have a sense for where the realized price would come in? Thank you very much. Lucas, we provided that in our press release. If spot were to hold up for the rest of the year, we provided a range of 97 to 102. That's where we would end up in 2019. And that includes any true up that would be recorded in Q4. So that's what would happen. And in terms of if we jump into 2020 and the current spot prices persist, yet would you be able to provide a range for pricing given the current economic prices for the Atlantic Tele Premium HRC prices and IODEX? Look, first of all, Lucas, we always provide sensitivity. But keep in mind, we are now at a time in this cycle that we have hot rolled coil in the United States at the rock bottom in terms of prices. Nucor already released results and was abundantly clear that they see prices starting to go up. And we expect others to reiterate that as they release results in the next few days. And I explained the stupidity that Vale implemented with the pellet premium that's now being correct as we speak. And the IODEX continues to be very strong. Remember, a few years ago, let's say, in 2015, 2016, if we were to follow where the commodities desk were saying that price would be in 2019, we would be below $40 maybe below $30 We are this one at $87 and we have been above $90 for a long, long time and above $100 for a while. So we are in good shape. So as things get back to normal, I can't even say they improve, they get back to normal as far as hot rolled price and pellet premiums are going to be in good shape in 2020. But we are not there yet. As Keith said, we are going to inform those sensitivities at the right time, so not yet. Okay. I appreciate that. And then just a follow-up question on the Atlantic pellet premium. Lorenzo, I very much appreciated your perspective on what happened and what drove the price lower. But just in terms of what could be a catalyst to reset prices higher, What are your thoughts on that? And when do you see that playing out? Thank you very much. Yes. The main catalyst at this point is the improvement of the price of the 65% iron content. Remember, Vale replaced by their own making the IODEX with the 65% or at least they were working on that when Brumadinho hit, started around October. So during October, November, December and part of January, the timeframe was wasted with Vale trying to convince their clients throughout the entire world that now the calendar is not changing. I'm just changing from the 62% to the 65%. Very smart because 62%, they don't control, but the 65%, They believe that they did because they are the only one producing 65% and above. So that backfired badly. Rookies make these mistakes. Remember, Vale now is a combination of bad operations and a bunch of rookies that have no clue what they are doing there. So we were subjected to that. And then Brumadinho hit and there was panic. And you know what happened with price after panicking. Not all mills embarked on that stupidity contest and then they came back and forced the valley down. But now things are going back to normal. The 65% is back to a normal differentiation between itself and the 62 percent IODEX, and that will be the most important vector to fix the pellet premium. Because now the pellet premium that Platts makes public, calling the Atlantic based pellet premium, is a number engineered back from the 65% pellet premium plus the 65% iron content plus the actual pellet premium that was fixed in the past or now recalculated based on the contracts that were renegotiated with the clients, and then they recalculate what's called the Atlantic based premium. But the 65% going up will force the Atlantic based pellet premium to go up. And that's what we expect to happen very soon. That's very helpful. I appreciate all your color, Lorenzo and team. Best of luck. Thank you. Thanks so much. Your next question comes from Curt Woodworth with Credit Suisse. Your line is open. Thanks. Good morning, Keith and Lorenzo. Good morning, Curt. So Lorenzo, in terms of sort of the decision to lock up vessel capacity and kind of offset some of the deferrals you were seeing, can you give us a sense of what your export volume was 3Q and your expectation for 4Q? And can you quantify the amount of deferrals that you saw and did those just get pushed out into 2020 or how does that work? Yes, look, thanks for the question because that will help me clarify one very important point. We reduced our yearly forecast from 20,000,000 tons to 19,500,000 tons, so by 500,000 tons. Based on the 500,000 tons that we're planning to export in Q3, and we didn't. And we did not because with the reduction in the pellet premium that we saw in the marketplace that I have already discussed a lot during this call, the export business that we are planning to take care of in Q3 were no longer profitable for us. So the answer is we missed the export by 500,000 tons in Q3 and we are maintaining everything that we planned for Q4, which has been characterized by underlying nominations by our domestic customers not being affected by anything. So we did not have any further reductions in nominations related to Q4. We're good for Q4. So the 500,000 tons were not exported in Q3 as we originally planned. Okay. That's helpful. And then when you look at your contract structure for next year, can you give us a sense if demand does stay weak, what is the level of, I guess, volume banding parameters that companies can choose, I. E, if there's like a 1,000,000 ton contract, is it like a 10% banding in terms of what the take or pay could look like, just to get a sense of the sensitivity? Thank you. Yes. Look, we don't go as you know, Kurt, we don't go in a contract by contract thing with outsiders, including research analysts. But I would like to emphasize a few points that are very important. None of our blast furnace customers idled blast furnaces other than AK still shutting down Ashland, that was 2 years ago, in the recent past, including the entire year and more even more important during this last quarter, none of our blast furnace customers idled any blast furnace. Certain contracts have minimums, others don't. And we are going to need additional pellet sales to Toledo next year at approximately 1.5 1,000,000 long tons. So that's pretty much it where I can tell. The other thing that's very important to have in mind is that for next year, we have one thing that we never had before. We're going to have the upgrade optionality. We will have above and beyond the de agrade pellets that we are using for our own plant in Toledo. We are going to have the opportunity And we plan to continue to sell the agreed pellets to Nucor. And we plan to continue to sell Doctor grade pellets to Nucor. What type of premium do you get for Doctor grade pellet? Well, the Doctor grade pellet commands a premium that's slightly higher than the Atlantic based pellet premium. So we can use that number as a reference. Great. Thank you. It's a flat number as well. Okay? Thank you. Okay. Yes. Thanks. Your next question comes from Alan Spence with Jefferies. Your line is open. Thank you. Good morning, guys. Good morning, Alex. I had a couple of questions. First, on the cash cost, the guidance for midpoint of the 62 to 67% range. Given the impact from royalties and profit sharing, which of your 2 provided ASP ranges is that one based on? Alan, I'll have Keith respond to this one. Yes, it's really based on either of those. It's more of an internal view that we don't necessarily historically share. But you can kind of use the sensitivities and kind of gauge where it's going. But it's neither of the two ranges that we put out there. Okay. Thank you. And in terms of the true ups that we that happened in Q3, it sounds like that was just on the pellet premiums in HRC. In a downside scenario, where would benchmark IODEX need to go before that triggers a negative true up? Do you have that Heath? Yes. I mean, the year to date average is 95, spot is currently 86. So if it stays below the year to date average of 95 throughout Q4, you'll see a little bit you'll see a bit of a true up there in Q4. Okay. And the last one for me. Once HBI starts up mid next year, how are you thinking about capital allocation? Obviously, with the contribution from HPI, CapEx falling away, free cash flow will be significantly higher. You mentioned debt maturities are well pushed out. How do you consider buybacks versus dividends at that point? Well, first of all, CapEx will go back to normal. We will go back to the historical levels, which here in this company, we always consider between $3.50 per ton. So if you multiply by 20,000,000 tons for sake of having a number that's easy to deal with, It will be for mining and pelletizing between $60,000,000 $70,000,000 tons of CapEx and another $30,000,000 for continuous, the number will be less than $100,000,000 on an ongoing basis. And the other question was about dividends. We will continue to pay dividends and we plan to increase dividends as soon as we no longer have to spend money on HBI. Okay. And I guess I assume buybacks will be opportunistic as they might be relevant? Look, buybacks are another way to return. Why I went all the way through buybacks was basically to restore the share count that was original before we had to make transaction that clearly increased the share count. So not take share count back to the 270,000,000 shares. We're happy with that. I don't believe that we're going to be prioritizing buybacks. We are going to prioritize dividends. We like what we did. We did because it was the right thing to do at the right time. Shareholders are all in support. Research analysts were all in support, but that was it. The rationale behind was share count, not because we believe that's the best way to return money to the shareholders. The best way to return money to the shareholders is by means of a dividend that so far is a very robust regular dividend. And every now and then, when the cash is available and when the conditions support adding a special dividend. So we're going to be more into the dividend side with the regular dividends and special dividends. Okay. That's perfect. Thank you very much guys. Thanks, Ella. Your next question comes from Matthew Fields with Bank of America Merrill Lynch. Your line is open. Hey, everyone. Hi, Matt. I know you're feeling strongly about that pricing environment getting better in terms of steel and the premium. But in the case that sort of steel prices in the U. S. Don't improve dramatically, where do you feel comfortable with your balance sheet? Like what's the overall debt level where you feel comfortable being able to continue to pay a dividend and sort of operate HBI and even grow the dividend? Like what's the overall debt level where you feel comfortable to weather down cycles? Well, first of all, as far as debt levels, we're comfortable right now because we it's not just debt levels. Our debt is totally under control. And even more important, we have no maturities until 2024. So we are in a position that we put ourselves there. So very few companies can say that I have no maturities for the next 5 years. That's clear. And we did that to ourselves. That's the very first thing. So that for us at this point is just interest and the interest for us is $120,000,000 a year. So things need to be really bad for us to be concerned about debt at this point, because we are not going to be not even close to that level as we proved that in Q3. We know how to deal with this type of a volatile pricing environment. One other thing is that if we think about really bad scenario as far as pricing is staying in place, so many companies will go down so earlier than Cleveland Cliffs because they haven't done what we have done that the situation will correct itself just by means of this natural selection, if you will. The weaker will go away and the stronger we will survive, making for a smaller number of players in our marketplace that hasn't changed in terms of size. So we should be in great shape. But this is just a theoretical exercise. That's not how things work. You are starting to see some movement among boards and retirement of CEOs and traditional companies buying newbies. And we're starting to see panic all around. And LG likes that a lot. I have been building my career on seeing others panic and making my moves. So stay tuned. But if prices don't go up, then it can be like a playground for us here. So speaking of traditional companies buying newbies, which I assume you're referring to S. Steel Big River. Love to get your thoughts on that transaction and the potential implications of U. S. Steel potentially shutting down a couple of their older mills and being even longer on the pellet side? Matt, surprising thing is you believe in that I'm going to express my opinion on that transaction in my earnings call. But I can only wish to the players of their good luck, but they will need a lot. All right, fair enough. Thanks very much. Thank you, Matt. Your next question comes from Seth Rosenfield with Exane. Your line is open. Good morning. Good morning, Seth. A couple of questions. First on your cost base and then moving on to HBI, please. On cash cost, obviously, you saw a pretty significant reduction Q over Q, which benefited your results in the quarter. Can you just comment on the impact of deferred maintenance and contributing to that reduction? How sustainable is that? Or should we expect some sort of swing back higher maintenance spend in the coming quarters? And then secondly on HBI, please. If you could please share your updated thoughts on pricing methodology. I think in the past you've guided prices based on some combination of prime scrap, pig iron, HRC. Given the progress you're making with customers, what do you think now is most likely pricing methodology? With your past guidance, the HVAC could be maybe 3x more profitable than traditional pelletizing. Is that still a realistic target for us? Thank you. Yes. Look, let me start from the second, the HBI pricing methodology. You already described the methodology as far as what we have released in terms of public information. So there's no change on that. And we are going to be referring big iron delivered to the Great Lakes as well as bushling scrap. These are the 2 main parameters that will be used in our pricing calculation. And we're going to have to leave at that. As far as the deferred maintenance, I will have Keith answer in a more numerical way. I just want you to know Seth and everybody else in this call that we don't defer maintenance to the point of putting equipment at risk. We have proven that in 2015, 2016 when things are a lot uglier than they are right now. Right now, they are actually very pretty. So we might move things here and there, but that's normal course of business. And then things that we don't do in November, late November or December, we do in January of the following year. So Keith Yes, the impact, Seth, was about $0.50 on the standard cost for 2019. Some of that will go into the Q1 or the full year average of 2020, but not the full impact of the $0.50 Thank you very much. Just a follow-up with regards to HPI, if I can push please, given that you have given the guidance in the past of 3 times more profitable, Is that still a reasonable target for us? Yes. Look, we are now in a very strange moment for prices to reference other prices. For a normal range of prices, yes. For this artificially squeezed price index? Not really. But because we know that this pricing is not going to stay, I will keep my previous guidance because things will recover to a more normalized levels. Great. Thank you very much. Thanks, Seth. Your next question comes from Brian Lalli with Barclays. Your line is open. Hey, good morning guys. Good morning, Brian. Good morning. Lorenzo, maybe as a bit of a follow-up to Matt's question earlier and appreciate that you're making this investment to reduce some of your exposure, excuse me, to the blast furnaces and for the blast furnaces. Obviously, they're still consuming over 3 quarters of your pellets even once Toledo comes online. So maybe just some strategic sense for her, sort of how do you see that market evolving as all this new capacity in the EAFs is coming online and sort of where do the older furnaces sort of live longer term? And how does that impact you guys? Thanks. Yes. Look, this investment in Toledo came at a time that we here at Cleveland Cliffs identified the trend of EAFs. It's starting to not only continue to grow, but it's starting to tap into the share of business that was historically captive of blast furnace producers, integrated steel produce. So we identify the trend and we make the move. We made the move and we are happy with the move. But we also know that these things take time to materialize. So it's not like all the announced investments will all start up on the same day now. That's not the way it happens. Not all will be finished on time. We also know that. And some will be canceled as we have already heard a few walking back their own statements. So we know it's coming. We know this is a trend that will continue to play out, but we also know that it takes time. Some of the blast furnace producers more than others are extremely resilient and extremely competitive. A good thing that 2 of those resilient and competitive ones, ArcelorMittal and AK Steel, they are the number 1 and number 2 clients of Cleveland Cliffs. So we are seeing a lot more volatility in the part of the business that's outside the Cleveland Cliffs customers. That's also a good thing. So we are going to see a lot of replacement of EAF replacing blast furnace going forward, but not necessarily from the blast furnace business that is now under the control of the Fluid and Coops clients. That's how we see. And we are proud to be part of their competitiveness. So we work with them to make their blast furnace better, their pig iron better, their steel better and they do all the rest. So that's how it works. So this is a trend that will continue, Brian. But this is not something that we are going to expedite anything. So and then the next follow-up question is, so are you coming with more after HBI-one? Yes, we will come with something. We will come with something after HBI-one, could be HBI 2, could be something else. But we are going to continue to follow the trend. We are going to continue to evolve Cleveland Cliffs to adapt to an American steel market that will continue to produce steel. So by premises, the United States will continue to produce steel 5 years from now, 10 years from now, 20 years from now. And Cleveland Cliffs will be right sized to supply the American steel market 5 years from now, 10 years from now, 20 years from now, exactly as we are right now. We are right sized for the market that exists right now. That's great. Thanks. Yes, you answered my follow-up question. I was going to ask if you have any thoughts on when you might make a decision on doing something in the future and appreciate it. It could be years out. So thanks for the time, Lorenzo. Thanks, Brian. I'll take one more question, and then we'll be done. Again, to ask a question Okay. All right. Okay. Paul Fine is telling me here that time's up, and he controls this thing. So thank you all. Very good. Appreciate. It was a tough quarter. We showed that we do well even in tough quarters. Q4 should be the beginning of a trend going up. And I look forward to speak with you guys early in 2020. Thank you so much and have a great Thanksgiving, great Christmas and we will survive and I hope that half of you will because some will not. Bye now. This concludes today's conference call. You may now disconnect.