Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Generated strong cash flow of $362 million in Q2, driven by higher shipments and lower costs.
- Reduced net debt by $237 million, bringing the net debt balance down to $3.4 billion.
- Successfully reduced share count by 7.5 million shares, enhancing shareholder value.
- Achieved a $50 million reduction in SG&A expenses compared to the same period last year.
- Continued progress on value-enhancing projects, including partnerships with the US Department of Energy.
Negative Points
- Lower-than-expected realized pricing in Q2, leading to a $50 decline in average selling price quarter over quarter.
- Weak demand from service centers and other buyers of commercial grades, affecting sales mix.
- Continued challenges in the steel pricing environment, impacting overall profitability.
- Pending resolution of trade issues with Mexico, which continues to be a major problem in the marketplace.
- Significant idle expenses related to the Weirton plant, totaling $217 million year-to-date.
Q & A Highlights
Q: Lourenco, I wanted to ask about the transformer opportunity, and I wondered if you could maybe speak to the payback on the investment and the technical and human capital requirements to make this successful.
A: Lourenco Goncalves, Chairman of the Board, President, Chief Executive Officer: This opportunity is unique for Cleveland-Cliffs. We are the sole producer of Grain Oriented Electrical Steels in the United States, giving us a cost advantage. The plant can generate 30% to 40% EBITDA margin, contributing $75 million to $100 million annually, with a payback period of less than two years. We have 600 skilled employees ready to work in Weirton, West Virginia, making it an ideal location. This will be our first transformer plant, but not our last.
Q: Celso, you mentioned continued cost reductions into 2025. Could you elaborate on the items that could lead to these reductions and your volume outlook for Q3 and Q4?
A: Celso Goncalves, Chief Financial Officer, Executive Vice President: We expect costs to be down another $30 per ton next quarter due to lower coal, iron-ore, and scrap prices, along with a more service center-driven mix. We are maintaining our cost guidance for the full year and expect continued improvements. We are confident in maintaining at least the 4-million-ton level in volumes.
Q: Could you provide more details on the breakdown of the Weirton idle expenses adjustment added back to EBITDA?
A: Celso Goncalves, Chief Financial Officer, Executive Vice President: Year-to-date, it's about $217 million, with $40 million in Q2. These charges include employee-related costs, sub-pay, healthcare, severance, asset retirement obligations, PP&E impairment, and inventory impairment. We pulled forward most of the Q3 and Q4 charges into Q2, so the remaining charges are minimal.
Q: What are your goals for improving cash flow from the Automotive business?
A: Lourenco Goncalves, Chairman of the Board, President, Chief Executive Officer: We are being more selective with auto customers, focusing on those willing to pay for our sophisticated grades. We are not chasing price-sensitive customers. This approach has already started, with Automotive accounting for only 30% of our business this quarter, one of the lowest in recent quarters.
Q: Could you provide your thoughts on realized pricing heading into Q3?
A: Celso Goncalves, Chief Financial Officer, Executive Vice President: We believe we are at the bottom of a cycle, and things could change quickly this quarter. It doesn't make sense to guide to a specific ASP at this point. We feel overdue for a sharp bounce-back, so we are not providing specific ASP guidance.
Q: What needs to be done to get the Weirton plant ready for commissioning for transformers, and how long will it take to get the equipment?
A: Lourenco Goncalves, Chairman of the Board, President, Chief Executive Officer: The building is in great shape with utilities in place. It's a matter of placing orders for equipment and installing it. We aim for a start-up in the first half of 2026, but we might be able to start before the end of 2025. We will also seek support from the Department of Energy.
Q: Operating expenses were down significantly. Should we expect them to return to previous levels once pricing and profit recover?
A: Celso Goncalves, Chief Financial Officer, Executive Vice President: We are sharpening our pencils on all fronts, both operating and overhead. We expect this momentum to continue into the second half of the year.
Q: With the acquisition of Stelco, where does that leave your appetite for further expanding your flat-rolled presence in the US?
A: Lourenco Goncalves, Chairman of the Board, President, Chief Executive Officer: The acquisition of Stelco does not pose any additional problems for further acquisitions. Stelco operates in different markets and products, so there is no significant overlap. We are ready to explain this to the DOJ and expect the acquisition to close quickly.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
