Good morning, ladies and gentlemen. My name is Kevin, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs First Quarter 2022 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 protection 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-K 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 and at the conclusion of the call, it will be archived on the website available for replay. The company will also discuss results including certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Celso Goncalves, Executive Vice President and Chief Financial Officer.

Thank you, Kevin, and thanks to everyone for joining us this morning. Let me start by summarizing the key highlights from our Q1 results and I will provide some additional context around our increased outlook for the reminder of the year. Our adjusted EBITDA of $1.5 billion in Q1 of 2022 is three times higher than the year-over-year adjusted EBITDA in Q1 of 2021, boosting our last 12 months EBITDA to $6.2 billion, which is a record for any 12-month period in our company's history. Relative to last quarter, our sequential Q1 EBITDA was essentially steady with Q4 despite the sharp drop in spot steel prices that started around September of last year and lasted into early March of this year before rebounding higher. In late Q4 and early Q1, we also saw relatively weak service center demand due to generally elevated inventory levels. Despite this unfavorable backdrop of falling HRC prices and weak service center demand, we were still able to maintain a steady quarterly EBITDA level from Q4 to Q1, primarily due to the magnitude of our fixed contract price increases that went into effect at the beginning of this calendar year 2022, ultimately more than offsetting the spot price weakness backdrop, and resulting in higher overall average selling prices for Cliffs quarter-over-quarter from Q4 to Q1. We have been foreshadowing that the strength in fixed price contract renewals would eventually materialize in our numbers and that has now been clearly demonstrated through our Q1 results. From a volume standpoint, we also achieved a 200,000 ton sequential improvement in direct volumes to the automotive industry, our best shipment quarter to this end market since the semiconductor shortage began in the first quarter of last year. This resulted in improved sales volumes to 3.6 million tons in Q1. Going forward, as we expect the automotive sector to continue to improve and the distributors and converters market to replenish inventories, we anticipate sales volume to increase further on a quarterly basis. During Q1 we also concluded negotiations on all of our remaining fixed price automotive renewals that reset on April 1 with significant further price increases executed on all 1.5 million tons of annualized volumes that matured on that date. We are already benefiting from this price increase here in Q2. Beyond that our next round of fixed price contract renewals will be negotiated this summer and re-priced on October 1, and we look forward to continuing this favorable pricing momentum on those negotiations as well. Now, adding additional context around our updated favorable outlook for the remainder of the year, we are increasing our expected average selling price by $220 per ton compared to our prior guidance in February. Our expectation is now for a full year average selling price of $1,445 per ton at the current curve compared to our previous guidance two months ago of $1,225 per ton based on the curve at that time. This improved outlook is driven by three things. One, our successful fixed contract renewals, as I've just explained; two, a higher futures curve today compared to February; and three, wider than historical spreads between hot rolled and cold rolled steel prices. On the cost side, we are better positioned than any of our competitors to mitigate pressures from the current inflationary environment, given our vertically integrated and internally sourced iron ore pellets, HBI, and scrap, as well as annual fixed price contracts for met coal. Our Q1 unit costs moved up sequentially as expected, due primarily to coal, alloys, and energy cost increases. We also took a $111 million one-time accounting charge related to some operational and financial decisions that we executed during the quarter, namely the closure of Mountain State Carbon and the idling of the Indiana Harbor #4 blast furnace, as well as the redemption of our convertible notes. Looking into Q2, we expect our unit costs to increase sequentially due to our Cleveland #5 outage and generally higher scrap and energy costs, although these will not impact us nearly as much as others in our industry that are much more exposed to high scrap prices and need to buy slabs externally. From a cash flow standpoint, our inventory build of $372 million during the first quarter was more reflective of costs than actual units, as our total tonnage of steel inventory actually declined over the past quarter. With this one-time inventory built out of the way, our Q1 free cash flow of $297 million should be the trough in quarterly free cash flow generation for the year, with much higher rates of EBITDA-to-free cash flow yield conversion in Q2, Q3, and Q4. At the current steel forward curve, we expect our total 2022 free cash flow to exceed the record that we set last year. And that is even as we become a substantial cash taxpayer this year, which we were not in 2021. Speaking of cash flow and capital allocation, we continue to clean up our capital structure and favor debt reduction over other uses of capital at this time. This year, we have already redeemed our convertible notes and our 9.875% secured notes, which we completed this week, well ahead of its 2025 maturity. With this proactive approach, our most expensive bonds are now completely gone, and our annual cash interest expense has significantly reduced. Looking ahead, we have a few more tranches of debt that we can pay down with our cash flow, prioritizing our 6.75% secured notes as our next target. In a few quarters, our debt should be so low that it will no longer even be a discussion point and I look forward to talking about other ways of returning capital to our shareholders at that time. Our LTM EBITDA of $6.2 billion already implies leverage of 0.8 times, the lowest level for Cliffs in over 12 years. As you can also see from this morning's release, we only spent $20 million in share repurchases during Q1 executed opportunistically at very attractive prices. Other than this, we used most of our remaining free cash flow generated during the quarter towards paying down debt as discussed. Going forward, we will continue to favor debt reduction over share repurchases in the near term, and buybacks will continue to be only opportunistic. In closing, because of our domestically sourced raw material supply chain, as well as our heavy weighting towards fixed price contracts, our 2022 financial outlook is very compelling, with strong margins, record levels of free cash flow and equity value creation through a massive conversion of total enterprise value to market value via debt reduction. With that, I'll turn the call over to Lourenco.

Thank you, Celso, and good morning, everyone. I will start by discussing the significant developments we are currently facing. The Russian invasion of Ukraine is a barbaric act and has resulted in a human tragedy for the civilian population of Ukraine. Russia and Ukraine have been at war since Putin's invasion of Crimea in February 2014, which occurred just months before we initiated a turnaround process at Cleveland-Cliffs. At that time, our business focused on providing raw materials to North American steelmakers who had identified the substantial influx of pig iron from Russia and Ukraine as unreliable and risky. Remarkably, despite two-thirds of all US pig iron imports coming from these regions, there was little concern or action to mitigate dependence on them. This situation led us to a decision in 2017, after stabilizing our company’s finances, to develop a significant source of virgin metallics with our Toledo direct reduction HBI plants to offer a more reliable and environmentally friendly source of materials for the US electric arc furnace market, essential for producing higher-quality flat-rolled steel. In the seven years since the Crimea invasion, we were the only company to act on the opportunity to restore metallic supply domestically. Now that we are producing steel, we have improved efficiencies by utilizing our HBI in-house, which has allowed us to reduce our blast furnace operations from eight to seven units while maintaining steel production levels after idling the Indiana Harbor #4 blast furnace. This strategy has provided us with a strong competitive edge as our production cost of HBI, at just over $200 per ton, is vastly more favorable compared to the current $1,000 per ton cost of imported pig iron. Our commitment to prime metallics didn't end with HBI; in November of last year, we acquired FPT, the top primary scrap company in the US, which has already enhanced our access to an additional 400,000 tons of prime scrap annually, increasing our market share in this area significantly. These strategic initiatives emphasize our belief in the necessity of domestically sourced high-quality iron units that yield quick returns. We recognize that iron metallics are vital for producing high-quality flat-rolled steel. At Cleveland-Cliffs, we are positioned favorably in a country where metallics are scarce. You cannot produce high-quality flat-rolled steel by merely melting scrap; metallics are essential, which is why so much pig iron is imported, primarily from Russia and Ukraine. Many of these imports are sourced from plants with poor environmental standards, producing CO2 emissions that would not meet regulations in the US. This aspect regarding scope three emissions is frequently overlooked by companies when they report emissions, but we intend to continue raising awareness among investors, Congress, and government officials about its importance. Since Russia's invasion of Ukraine on February 24, over 4 million tons of vital pig iron supply have been disrupted. Although this situation emerged late in Q1 due to pre-scheduled shipments, the loss of 4 million tons from over 6 million tons significantly hampers companies relying on imported pig iron, making Q2 particularly challenging for them. Ukrainian supply is expected to be offline for an extended period due to substantial damage to essential infrastructure. As for Russian pig iron, we anticipate production will persist, as outdated trade laws permit its import with minimal restrictions even after the revocation of its Permanent Normal Trade Relations status with the US. Despite his sanctions, tariffs on pig iron remain negligible due to historical laws, allowing production to continue. Even if American firms stop purchasing Russian pig iron now, Russia is likely to reroute shipments through allied countries. Reflecting on the ongoing invasion of Ukraine, it is clear that the impact on supply chains would be far greater if we were discussing a hypothetical invasion of Taiwan. This scenario signals a need to reconsider globalization, which we refer to as de-globalization. I believe this shift is one of the most significant changes affecting the United States and its citizens in recent decades. De-globalization impacts not only our industry but our customers as well. For instance, automotive OEMs that heavily depend on imported semiconductors might better meet production demands of 18 million cars rather than the currently limited 14 to 15 million units. We are encouraged by investments focused on on-shoring production, such as the $20 billion factory in Columbus, Ohio. Cleveland-Cliffs is primarily an automotive supplier and the largest steel supplier for the sector. Notably, Q1 was our best shipping quarter for automotive in a year, with the potential for much more in a fully utilized business environment. We believe that day will arrive, and our impressive results from the past year will be even more pronounced by then. Looking ahead, we are poised to benefit from our well-structured business model. Among the seven real producers of flat-rolled steel in the US, we are the sole company that doesn't rely on imported pig iron. Essentially, the high costs faced by our competitors in sourcing materials will force them to maintain elevated steel prices, providing us with higher margins due to our favorable cost structure. Furthermore, the ramp-up of new flat rolled mini mills will exacerbate existing issues related to sourcing prime scrap and metallics, further highlighting our competitive advantage. While I have focused on raw materials, the Russia-Ukraine conflict has also diminished the availability of finished steel globally, contributing to rising prices and making imports less attractive in the US. We frequently encounter discussions surrounding inflation, rising interest rates, and potential recession. We hope that Federal Reserve officials will focus on their roles rather than making alarmist statements in interviews. For us, the underlying demand remains strong, customer inventories are decreasing, and challenges with sourcing labor and materials are beginning to ease. Although the panic buying of 2021 has subsided, demand continues to grow, particularly as semiconductor shortages improve. In conclusion, we did not wish for the current situation in Ukraine and desire peace soon. The global community must hold Russia accountable for its brutal actions, and the steel industry worldwide, especially the American sector, can play a significant role in responding to this reprehensible act against the Ukrainian people. Our strategy emphasizes the importance of a domestic supply chain, and it is unfortunate that it took this crisis to highlight the lack of awareness on this crucial issue. We take pride in providing our customers with steel that does not involve Russian contributions. Now, I will turn it over to Kevin for questions.

Our first question today is from Lucas Pipes at B. Riley Securities. Your line is now live.

Thank you very much and good morning, everyone. Lourenco and team, great quarter. Lourenco, there’s a lot of concern, in your prepared remarks, you touched on this that 2022 will be another challenging year for automakers from the supply chain vows and kind of as the largest automotive steel supplier, how are you engaging with your customers to manage these product flows and inventory. Thank you very much.

Thank you, Lucas. As we presented in our numbers, Q1 was our strongest quarter for automotive deliveries since the onset of COVID, so we're in a better position now compared to Q4. That's a positive indicator, and we are heading in the right direction. I've also been in direct conversations with the CEOs of our major clients, with whom we are the largest suppliers. We are discussing our next steps as each of them is close to launching new products in the electric vehicle sector, which is crucial for them. We supply the low-oriented electrical steels required for their engines, and we are also developing the body and exterior components of these vehicles. We are enhancing the quality of these materials, and we appreciate their efforts. We are collaborating with them to improve their forecasting capabilities. Given the volume of tons we deliver each quarter, collaboration is essential. We value this interaction and are beginning to see improvements reflected in the shipment numbers.

That’s terrific to hear. Thank you for that detail. And Lourenco, you have been prophetic about the vulnerable supply chains of the North American steel industry. And I appreciated your detailed comments in your prepared remarks but I wondered if you could speak on the numbers for both metallics and steel imports in a little bit more detail. What amount of pig iron is still coming to the US today? What are the sources? How do you expect that to change over the course of this year? And on the finished steel side, or slab side, similar question, what are the levels of imports today? And how would you expect the impacts there on European suppliers, for example, to ricochet back to the US over the course of this year? Thank you very much.

Lucas, first of all, there is no such thing as readily available and made-to-order pig iron everywhere in the world. That’s not true. There’s an integrated competitor of ours that needs pig iron and nowadays they are importing pig iron, buying other sources from third parties. Now they are going to supply their pig iron. You take there one year to be able to produce pig iron, so there is no such thing as several parties will be ready to shine and replace Russia and Ukraine in pig iron. So let’s go to the numbers, the importation of pig iron in the United States has been above 6 million tons a year, give or take and more than four coming from Russia and Ukraine. Ukraine counted out. Of course, we’d like Ukraine to continue to be able to produce and provide for their people, but that’s not the case when you have bombarded plants. So Ukraine is out and Russia should be out. But normally Russia, of course, they’re not going to be out. They’re going to sell these things to Brazil, to India, to China, to South Africa, or Middle Eastern countries, and this pig iron will come here. So it’s up to us to not allow the Russians to do that and not to turn a blind eye to pretend that this pig iron is coming from a different country, it’s not. So we will see. I will be watching, Q2 will be interesting.

Thank you. And on the steel side?

Well, on the steel side, the biggest impact is in Europe and its slabs because the Russians' slabs are part of the picture, and Europe now is finally acknowledging the fact that they made themselves dependent on Russia with gas and with steel. There’s a lot of steel being rerolled in Western Europe that really comes from Russia. We were able to educate the administration on that thing and it was reflected in the trade agreement that we cut with Europe. But again, it’s a lot of steel that’s no longer available, so a lot of steel that needs to be replaced in Europe. So, overall, in the international trade in emerging markets for steel, this is the situation. So I believe that the pressure on imported steel into the United States will decrease based on the fact that Russia is now outlawed in Europe.

Lourenco, thank you very much and continue best of luck. Really appreciate.

Appreciate it. Thanks, Lucas.

Thank you. Our next question today is coming from Michael Glick from JP Morgan. Your line is now live.

Good morning. Just on the raw material side, do you guys have interest in pursuing incremental third-party sales of pellets since it looks like Europe’s going to need a lot of those? And then on scrap specifically, how much do you think you can grow the closed loop process with some of your larger customers on the other side?

Michael, first of the sale of pellets, we produce pellets, we have spare capacity, we are treating North Shore in Minnesota as our swing producer. We are not planning to run North Shore at this time because we feel that that would not be the right thing to do. This being said, I sell pellets to third parties. I sell pellets to two companies. I’m not committed to sell beyond what we have contracted but at this point, we still sell pellets to clients. So it’s not like if we will do, we already do that. We could be selling more, yes, that’s true. Do we have a compelling reason to do that? No. I always have a finite resource; I keep saying that. There’s no point in selling just to beef up a quarter. I run this company for the long run, and shareholders after eight years that I’m doing the same way are now understanding. So I can make another buck, yes. Do I want to make another buck? No. So that’s the one on pellets. The other question was about what, I’m sorry, I missed the other one.

We have just closed the loop on recycling scrap.

Yeah, closed loop is using scrap, prime scrap, it is extremely relevant for Cleveland-Cliffs. We believe and we are proving that every day and showing to our clients every day that we can improve the environment, we can absolutely reduce emissions, and we can use a lot less carbon-intensive raw materials if you use more bushing scrap. So for the clients that understand that the vast majority understand this right away, it’s easy for us to gain control over that brand scrap that bushing the scrap that is generated inside their facilities. And remember their biggest source of bushing scrap is automotive. We are by far the biggest supplier of automotive. So it’s not a big stretch to realize that our conversations and our negotiations with our automotive clients go through scrap. And I don’t believe that any common factory in this country would deny access to prime scrap. So far so good; we are growing our access to prime scrap. I said in my prepared remarks, when we acquired FPT, it was already the leader in prime scrap with 50% market share; now it’s 20%. So it’s good to know that my competition doesn’t care about prime scrap. I heard this week that they are decreasing the use of prime scrap in their own furnaces. So I will continue to use these arguments to continue to convince my clients to give me more and more prime scrap. So we will continue to grow our prime scrap. We will continue to grow the use of HBI in our blast furnaces, reduce scope rate, reduce emissions, and do all the right things. One thing scope three emissions will be accounted for and that day is coming and we are ready; others are not.

Understood. And then from a capital allocation perspective, it has been very clear that that is the key priority near term but could you also just remind us your thinking on building an EAF versus doing a blast furnace realignment in the future?

At this time, building an EAF is a possibility for the future, and we will evaluate the right timing for it. Currently, we are relining the Cleveland #5 blast furnace, so our processes are ongoing. We are fully committed to supplying steel to the automotive industry, not to the construction market. This is the key difference between us and our competitors. We are specifically designed to serve the automotive sector. Although the automotive market hasn't been great, it is improving, which bodes well for us. The future looks bright for Cleveland-Cliffs. Meanwhile, our competition is focused on the construction market, which has been performing exceptionally well. However, I have doubts about the near-to-midterm prospects for construction due to inflation and other factors, so I do not see an incentive to build an EAF targeting that market. I lack confidence in the EAF market being a viable option for us, as it is primarily construction-oriented. We have plenty of scrap available to produce rebar, which is relatively simple. The real challenge lies in producing automotive steel for exposed parts, and that’s what Cleveland-Cliffs specializes in, which our clients recognize.

Understood. And thanks for all the candor.

Thank you.

Thank you. Our next question is coming from Emily Chieng from Goldman Sachs. Your line is now live.

Good morning, Lourenco and Celso. And thank you for taking my question. My first one is just around the contract renegotiation process. Are you able to provide some color around the contract renewals that were reset in April? Perhaps how did they compare relative to your previous contracts that were already set late last year and earlier this year in terms of contract length and pricing, to the extent that you can provide color there? And any early indication ahead of re-contracting season over the summer, as to what themes are particularly important, as you discuss, do globalization, shortening of supply chains?

Good morning, Emily. Thanks for the question. First of all, the April contracts were a big success, we were able to achieve everything that we were planning for. And we are very thankful that our clients that were at the other side of the negotiating table understood our proposals and our good intentions. So we’re all good and we are in partnership going into not just to help them navigate their own problems with the supply chains, but also to help them go into the rescue vehicles. That’s the biggest challenge that they have. As far as the negotiations that will come in the summer, towards the ones that we have to negotiate on October 1, this is something that for us now is an ongoing thing. And we believe based on what we have been in a daily basis discussing with these clients, it will be a no-brainer, it will be a no problem type of situation. In other words, the same level of high success that we got in the April 1 contract, we believe we’re going to get into the October 1 contract. With the addition that now the story and the proposition around prime scrap has been completely understood, even more now than the competition’s telling out loud that they don’t need prime scrap. We do and we do in order to provide the closed loop will improve the environmental impact of our work together with them; they understand and things will be fine.

Understood, that’s very clear. And my second question is just around supply discipline. There’s certainly been a lot of news from you and your peers as well around being more disciplined about not putting tons into the market for the sake of putting volume out. And you also had the idling of Indiana Harbor #4 a couple months ago. Could you perhaps talk about the cost-benefit you could potentially see here and perhaps how you think about the broader suite of domestic assets being sustainably run at much higher utilization rates going forward?

There are two parts to your question. One is about supply discipline, and the other is about Indiana Harbor #4. The idling of Indiana Harbor #4 wasn’t aimed at reducing production volumes. Instead, it reflects our ability to produce the same amount of steel with one less blast furnace, thanks to increased scrap and HBI usage. This is a significant achievement in terms of reducing emissions. Pig iron contains 4.5% carbon, which produces a specific amount of CO2, while the scrap steel we use in our electric arc furnaces has only 0.3% carbon, resulting in CO2 emissions that are over ten times less. Utilizing more scrap is beneficial for emissions, allows us to conserve liquid pig iron, and enables the shutdown of one blast furnace. With the remaining blast furnaces, the higher consumption of HBI, which is pre-reduced iron, leads to reduced coke usage. Since coke is carbon and contributes to CO2 emissions, lower coke rates result in decreased CO2 emissions. The decision to shut down Indiana Harbor #4 was made to minimize environmental impact while maintaining steel production with less pig iron, which also lowers costs. Regarding supply discipline, we appreciate the efforts of others in the industry to avoid overproduction, and I commend my competitors for aligning with our approach. When you compare our current volumes to previous quarters, it’s clear we are maintaining supply discipline. While we could have sold more tonnage, it would have been at lower prices. Our focus is not on tonnage, but on profitability, cash flow, and enhancing shareholder value, which is our primary goal at Cleveland-Cliffs.

Very clear. Thanks, Lourenco.

Thanks, Emily.

Thank you. Next question is coming from Seth Rosenfeld from BNP Paribas. Your line is now live.

All right, good morning, Lourenco and Celso. Thanks for taking our questions.

Good morning, Seth.

If I had to follow up, please, with regards to supply discipline and the shipment outlook, obviously, Q1 shipment volumes are quite modest down very sharply year-over-year. By how much should we expect certain volumes potentially recover in the coming quarters? Is it reasonable to assume that by Q2, you could return to a stable year-over-year run rate with respect to more gradual rebound in shipping volumes as needed to push better discipline to support higher prices? We can start there please.

Supporting higher prices for us is better contract negotiation, which makes higher prices possible. I truly believe that, given the current situation, spot prices will fluctuate, going up or down. However, our contract prices will keep rising, which aligns with our business model. Our significant involvement in automotive and our interactions with clients outside of that sector mean we will be less exposed to these fluctuations compared to the past. Additionally, we anticipate inflation in prices due to the global shortage of pig iron, which I addressed earlier. Furthermore, the increase in electric arc furnace capacity in the United States will lead to higher demand for pig iron and scrap materials, affecting feedstock prices. This is beneficial for steel prices and not an issue for us since we have secured our iron ore supply, putting us in a favorable position.

And maybe, if I may add some numbers to what Lourenco explained, our volume increased from 3.4 million to 3.6 million in Q1. Looking ahead to Q2, we expect an additional increase of at least 100,000 to 200,000, particularly as automotive continues to recover. However, as Lourenco mentioned, we are still maintaining a disciplined approach on pricing. I just wanted to provide additional context around that 100,000 to 200,000 projection for Q2, with the potential for higher numbers in Q3 and Q4.

Thank you very much. Regarding the significant investment in inventory values and working capital in the first quarter, can you provide some insight on how we should anticipate that evolving over the year? Clearly, 2021 involved a substantial investment over the entire 12 months. Based on your current forecast and guidance, do you expect working capital to generate cash in 2022?

Celso, take that.

Sure. To start with Q1, the increase in working capital was mainly due to inventory costs rather than the number of units. As we move ahead, both receivables and payables will typically align with price trends. However, we anticipate a significant release of working capital related to inventory, which is already factored into our free cash flow guidance for the year.

Great, thank you very much.

Thank you. Our next question today is coming from Carlos De Alba from Morgan Stanley. Your line is now live.

Thank you very much. Good morning, Lourenco, Celso, and other members of the team. So the first question is, you spoke quite significantly about our auto sector but I wonder if you can give us more color on the other end markets that you also serve, particularly distribution is an important share of your volumes. What are you seeing there? What are the conversations that you’re having with them? Given the sort of destocking that they went through in Q1 that impacted volumes, is that changing? How are they reacting to the increase in prices that we have seen recently? And then a follow-up – a second question will be on your balance sheet, now clearly significant free cash flow generation this quarter and improving throughout the year. You have been buying back your debt, the most expensive debt, is there a level of net debt or net debt to EBITDA where you might pause and start to consider more cash going to other uses of cash and return to shareholders?

Let me start with the second question and then I'll address the other markets outside of automotive. We are currently at a leverage of 0.8, which is a comfortable level. We will continue to pay down debt, and this amount will keep decreasing by the end of the year. At some point, we will seriously think about reinstating a dividend, but for now, we are not implementing one because we believe paying down debt is a better use of our resources. Our objective of creating shareholder value can be effectively achieved by continuing to reduce debt, as Celso mentioned earlier. While I can't commit to reinstating a dividend at this time, we do have buyback authorization in place, which we see as a safety measure. Our priority is to pay down debt first, and once we reach a more favorable level, we will consider dividends. Regarding the analysis of other markets, OEMs outside of automotive are undergoing the same changes. We approach them similarly; we want their scrap, and we are acquiring it while working on fixed pricing like we have in the automotive sector. Progress is being made in this area. They are beginning to see the advantages of fixed pricing, freeing them from daily concerns about market fluctuations. This system benefits a broader market rather than only a few entities. We aim to create an environment where everyone can profit amidst stable high prices. Some service centers have chosen not to buy and were waiting for lower prices, but they are now realizing that prices are not decreasing. Our assertions about scrap shortages are becoming reality; the conditions for higher prices are firmly established. Consequently, these centers are returning to the market to purchase. Overall, conditions are improving in these other sectors. That's all I can share at this moment.

All right, fair enough. Thank you very much. Good color.

Thank you.

Thank you, our next question today is coming from Timna Tanners from Wolfe Research. Your line is now live.

Hey, good morning, guys.

Good morning.

Wanted to ask a little bit more about the right inventory levels and then ask about your footprint. So on inventory, just obviously prices are higher, input costs are higher, but can you remind us how much tonnage you have in inventory and how to think about what that can look like, even if we have flat prices from here, how that unwinds and how that contributes to volumes?

So, we’re not growing inventories in Q1. The value of the inventory increased, but not the tonnage of inventory. So we’ve lowered tons in Q1. We’ll continue to do that. We are no longer taking the forecast of our clients at face value. We are negotiating with them, their own forecasts and that’s has been good for us and good for them. So we are not adding tons on the ground that they are not taking. And aged inventory is moving faster because we’re pushing them to take those aged tons, and the numbers show that. So we’re not adding tons to inventory. As they continue to improve their performance, as we continue to fine-tune their forecasts with our own input on what they are taking, the tendency is to continue to reduce inventories. But one more time, we did buy increased inventories in Q1, the value of the inventory increased.

That’s helpful. But you don’t have a tonnage value you can share with us on how much is there and how that should reduce over the year?

No, that would be lower. Lower is beneficial. The trend is positive. The number of items can restrict you, but it can create a sense of achievement when people reach the number they believe they have accomplished. They haven't truly succeeded; they can always aim higher. That's why I don't include specific numbers.

Okay, understood. Fair enough. And the second question is just that since we saw an application come through for an electric arc furnace permit, I think in Middletown, I think you’ve said that that will be a long-term strategy, but just wanted a little more color around how you’re thinking about your current footprint, if you’re satisfied with it and what it would take to think about converting 20AF down the road.

I’ll give him a very objective answer. Let’s see how many of my clients will be really doing what they’re saying they are going to do in terms of electric vehicles. If they are very successful, all of them, and we need a lot more low-oriented electrical steels to supply demands for electric vehicles, that electric arc furnaces will materialize. For now, it’s just a permit. For now, it’s just the preparation for something that might happen only if clients perform as they’re saying that they’re going to perform. Remember, we are the sole producers of electrical steels in the Americas and we are seeing every single car manufacturer saying they’re going in that direction. I don’t believe that all of them will be successful. One of the things that I discuss with the CEOs that I’m talking to is to gauge how much they are real, how much they are really controlling what they’re talking about. If this thing starts to materialize, we’re going to be the first ones to jump in. Well, that’s what the EAF is about.

So the EAF is for electrical steel, or is it for the EA, is it for EVs sorry?

Mainly to increase our ability to produce more electrical steels. We are sold out right now. We already started to auction electrical steels. We are selling the electrical steels both grey-oriented and low-oriented through auctions, so there was a thing the highest price will take because I don’t have capacity for more.

And Russia is a big supplier of that too, okay. All right. Thank you.

I am sorry. Say that again.

Russia is a significant historical supplier of electrical steel.

No, they are not. They are not. The biggest supplier of that type of steel that I’m talking about is South Korea. South Korea among their friends is the biggest enemy. Yeah, they love to dump but that’s a different ballgame. But Russia, on the electrical steels, they’re not really that relevant, because they are better with the lower quality stuff.

Okay. Thanks again.

Thank you.

Thank you. Our final question today is coming from Matthew Fields from Bank of America. Your line is now live.

Hey, Lourenco. Hey, Celso. Good morning.

Good morning, Matt.

I understand you mentioned the adjustments to your guidance regarding the forward curve, new auto contracts, and the current spreads for hot rolled and cold rolled products. However, I wanted to clarify that while your guidance indicates an increase in sales price of $220 per ton compared to last quarter, the hot rolled curve has risen by over $300 per ton. I don’t mean to flatter unnecessarily, but is there a level of conservatism baked into your guidance? Or could it be that the mix of contracts is affecting your average realized price by not allowing you to take advantage of the spot market?

It’s all integrated into the overall picture based on the contracts we’ve renewed. We have clear expectations for the contracts we’re about to renew, so everything is accounted for. Ultimately, we’re not going backward, if that's your concern. I strive to be as realistic as possible about these matters. I aim to provide you with the most accurate and forward-looking view of how our business is performing. The key takeaway from this new price guidance is that the curve has shifted, and we've made a disciplined reassessment of it. Additionally, the renewed contracts are better than the previous ones, which has contributed to an increase as well. If there is a change, it will occur as necessary, but this represents our best perspective at this time. I’m not sure if Celso has anything to add; otherwise, that covers it.

Yeah, no, sure. I think the important thing to note to Matt is the lagged impact of our pricing contracts. So Q1 benefited from contracts and the pricing that was happening in Q4. And, going forward, prices suffered a little bit in Q1, and that’s going to impact the results in Q2, but five months of actuals are already set in our new full-year guide. This conservative curve that we’re using has pricing trending down a little bit too in the second half. So, even though Q2 is going to have this negative impact from lower Q1 pricing, the $220 per ton increase, the way to think about it is basically $3.5 billion in revenue in addition with very limited cost offsets. So that’s kind of the best way to think about it.

That's very helpful. My last question is about global metallics sourcing, which you've discussed extensively. Have you considered vertically integrating more on the cold side for blast furnaces? Given the current price situation, does this influence your approach to having a more domestic supply chain for coal?

Not really. We're actually moving in the opposite direction by focusing more on the use of HBI, which has decreased our reliance on natural gas. This is advantageous for the United States, as we have it while Europe, Japan, and South Korea do not. Russia has it, but that's a different situation. This gives us a unique position regarding decarbonization in the U.S. because of our access to natural gas. My priority has been on direct reduction. HBI is an excellent product. High-quality metallics are invaluable, and those lacking good HBI miss out on its benefits. There are various types of HBI, and ours has been exceptionally effective at Cleveland-Cliffs. It has helped us lower coke rates and enhance the productivity of our blast furnace while also cutting CO2 emissions. That's ideal. However, if I'm reducing coke rates, shifting to coal would be counterproductive. I believe in using natural gas as an environmentally friendly reductant, and we will attempt to use hydrogen to ensure our plant can operate with it. But ultimately, I’ll revert to natural gas since using hydrogen isn't economically feasible at this moment. Our path is toward natural gas, not coke.

Okay, fair enough. Thanks very much, and good luck for the rest of the year.

Thanks, Matt. Appreciate it.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Thank you so much for being with us today, and we look forward to speaking with you in three months. Keep up the work with us and we believe that we will continue to reward the good long shareholders of Cleveland-Cliffs. Thanks a lot. Have a great day. Bye now.

Thank you. That does conclude today’s teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.