Cleveland-Cliffs Inc. Q2 FY2025 earnings call

Key Points

• Adjusted EBITDA improved by $271 million in Q2 due to higher shipment volumes and lower production costs.
• Footprint optimization initiatives are underway and expected to impact the second half of 2025.
• Section 232 tariffs have supported the domestic steel and automotive industries, with April seeing multi-year lows in flat-rolled steel and light vehicle imports.
• The company has a vertically integrated business model, independent from imported feedstock.
• Completed a $150 million investment in a bright anneal line for stainless steel at Coshocton Works.
• Nippon Steel's entry into the market highlights the value of fully integrated steelmaking in the US.
• Q2 results were driven by better realized pricing, cost reductions, and record shipments; inventory reductions provided cash.
• Exploring sale of non-core operating assets and idled facilities for debt reduction; SG&A and CapEx budgets reduced by $50 million for full-year 2025.

In Q2, Cleveland-Cliffs Inc. saw adjusted EBITDA improve by $271 million. Shipment volumes were 4.3 million tons, a 150,000-ton increase from the prior quarter. Unit costs decreased by $15 per ton against initial expectations of a $5 per ton increase. The stainless steel business had a $150 million investment in a bright anneal line at Coshocton Works. The vertically integrated business model, using American iron ore, coal, and natural gas, differentiates the company from EAF competitors. Revenue contribution details weren't explicitly broken down by segment in absolute terms beyond the overall EBITDA and volume figures.

Forward-Looking Statements

• Q3 costs expected to be down $20 per ton from Q2, with further cost reductions in Q4. Originally, Q3 costs were expected to be down more than $20 per ton but some reductions were pulled forward to Q2.
• Full-year 2025 cost reduction target of $50 per ton remains on track, driven by footprint optimization, fixed cost reduction, improved efficiencies, and favorable cost mix.
• Expect free cash flow generation to increase, with deleveraging to continue as excess free cash flow is used to pay down debt.
• Volumes in Q3 expected to be around 4.3 million tons, similar to Q2.

Risks Discussed

• Federal Reserve keeping interest rates high is impeding automotive sector growth by making car buying unattractive.
• Canada's insufficient trade protections are affecting its steel industry, with the country still being impacted by foreign steel dumping.
• Dependence on continued enforcement of Section 232 tariffs for the strength of the domestic steel industry; lack of enforcement could harm the industry.

Q: How should we think about the cadence of cost reductions from here and working capital considerations?

A: Celso mentioned Q3 costs are expected to be down $20 per ton from Q2, with further reductions in Q4. Working capital release is expected to continue, with inventory reductions seen in Q2 expected to persist.

Q: Thoughts on CapEx expectations in 2027 and the Middletown project?

A: Lourenco stated the next reline is in 2027, not 2026. The Middletown project is revised due to hydrogen availability issues, and the company is working with the DOE to revamp it using American resources like iron ore and natural gas.

Q: Free cash flow generation in the second half and its sustainability?

A: Celso said Q2 free cash flow had a cash outflow of $67 million due to working capital release, but expects more working capital release in the second half, with potential for robust free cash flow generation as seen in prior years.

Q: Average selling price and volume expectation for Q3?

A: Celso indicated shipments in Q3 are expected to be around 4.3 million tons, similar to Q2. Average selling price composition involves different contract lags and resets throughout the year.

Q: Canada economy slowdown impact on steel sales?

A: Lourenco discussed Canada's need for significant trade protections to support its steel industry, expecting some politicians in Canada to take action to address the issue.

Q: Coke contracts and benefit, and appliance market impact?

A: Lourenco said internal coke production provides a benefit north of $100 per ton. In the appliance market, more production in the US is occurring due to Section 232 duties, as appliances using US steel avoid tariffs when imported.

Q: Foreign investment in Cleveland-Cliffs?

A: Lourenco stated the company is asset-rich and undervalued, open to inbound interest for non-core assets and potential full company transactions to unlock value for shareholders.

Q: Cost guidance conservatism and non-core assets?

A: Celso said the full-year cost guidance is conservative but there are opportunities to exceed it due to factors like scrap and pig iron tariffs. Non-core assets being explored for sale are various, with potential to generate billions in cash for debt reduction.