Cleveland-Cliffs Inc. (CLF) Earnings Call Transcript & Summary

Thank you. Good afternoon, and good morning, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining today's call to discuss the transaction we announced this morning, whereby we have entered into a definitive agreement with Cleveland-Cliffs, who will acquire 100% of the shares of ArcelorMittal USA. Let me first introduce all of today's participants on the call. We have Mr. Mittal, our Chairman and CEO. We have Aditya Mittal, President and CFO; and we also have Genuíno Christino, the Head of Finance. Mr. Mittal and Aditya will make a brief presentation. The slides that they will be referring to are available on the Investor Relations section of our website. This brief presentation will then be followed by a Q&A session. [Operator Instructions] So finally, before we begin, I'd like to highlight that this call is being recorded, and also point you to the disclaimers on Page 2 of the presentation slide deck. And with that, I will hand over to Mr. Mittal.

Thank you, Daniel. Good day, everyone, and thank you for joining us on such short notice. We are pleased to present this transaction between ArcelorMittal USA and Cleveland-Cliffs. This transaction brings together 2 of the most important companies in North America. It's a combination that we strongly believe creates significant value for our shareholders. It enables ArcelorMittal to strategically reposition our North American platform, unlock value for our shareholders and strengthen our balance sheet. The Boards of both companies have unanimously approved the transaction, and we look forward to progressing to close within the fourth quarter of this year. I would like to take this opportunity to thank all the employees of ArcelorMittal USA for everything they have done to build a quality business with a reputation as a trusted quality supplier of steels for the U.S. economy. We first acquired Inland back in 1997 and then merged with ISG in 2004 to create Mittal Steel. So we have long history together, and I am pleased that we will continue to have a participation, albeit passive, in the new company. Moving to the presentation. As the slide shows, we see multiple benefits to ArcelorMittal from this transaction. First and foremost, we are strategically repositioning our North American platform to focus on key attractive segments through our high-quality and highly competitive assets, Dofasco in Canada, AM/NS Calvert in Alabama and ArcelorMittal Mexico, while retaining the support of our best-in-class research and development program and innovation centers. We are achieving this at a compelling valuation outcome for ArcelorMittal USA. This transaction unlocks the value of ArcelorMittal USA at a very attractive multiple of approximately 6x, based on a through-the-cycle EBITDA and approximately 8x EBITDA based on the last audited financials for the year ending December 2019. Our passive shareholding should benefit from the synergies created through this combination. Of course, there is a positive financial impact on ArcelorMittal through the deconsolidation of significant balance sheet liabilities at ArcelorMittal USA. And as a result of the strengthened financial position, this is an opportunity to return cash to ArcelorMittal shareholders through a share buyback, which we launched today. So with this overview, I will now hand over to Adit to go through these points in some more detail. Adit?

Thank you. Good afternoon, and good morning, everyone. For everyone who has downloaded the presentation on our website, I'm actually on Slide 4, which outlines the specific details of the transaction. Cleveland-Cliffs, as you know, will acquire 100% of the shares of ArcelorMittal USA for a combination of cash and stock at an aggregate equity value consideration of $1.4 billion. Approximately 1/3 of the consideration will be paid to us in upfront cash, and the remaining 2/3 will be in the form of equity. The equity component is a combination of common stock with a value of $0.5 billion and a preferred stock with a value of $373 million. Lastly, Cleveland-Cliffs will assume the liabilities of ArcelorMittal USA, including net liabilities of approximately $0.5 billion and pensions and OPEBs, which Cliffs values at $1.5 billion. Turning to Slide 5. The combination of these 2 highly complementary assets will create significant synergies, which will contribute to long-term value creation for our shareholders through our passive stake in the combined company. As you may have heard this morning, Cliffs' management have announced that they have identified an estimated $150 million of annual cost synergies. The key areas of synergies include the optimization of the combined footprint, raw material sourcing and supply chain efficiencies and also the integration of corporate functions. Let me move to the next slide. As you heard right in our opening remarks, the most important aspect of this transaction is the opportunity for us to strategically reposition our footprint in North America to focus on our highly competitive and high-quality assets. We have significantly invested in these assets in recent years in order to increase their production volume, quality and cost competitiveness. Today, they represent a strong footprint from which to execute our North American strategy and they position us favorably to compete in this market. Dofasco, as you know, is a world-class leading facility, while ArcelorMittal Mexico provides inviable value-add and downstream capabilities. Both of these assets have been recently modernized and are considered amongst the lowest-cost producers in the region. Calvert, which is already amongst the world's most advanced steel finishing facilities, will be further enhanced by the recently announced plan to construct an electric arc furnace to optimize its slab sourcing. I should also highlight the fact that ArcelorMittal will retain our R&D program and innovation centers to maintain our constant product and process development. This underpins our leadership position and enables us to remain ahead of the competition as a material and steel manufacturer of choice for our customers. Let me now turn to the next slide, which is Slide #7 and explain how this transaction fits with our capital allocation strategy. This deal completes our $2 billion asset portfolio optimization target, well ahead of the time line we had set ourselves. While considering the challenges posed by the COVID-19 pandemic, I believe it is a significant achievement. We receive upfront cash, but the more significant impact from this transaction is the deconsolidation of the associated liabilities from our balance sheet, which is comprising mostly of pension and OPEB liabilities. So you will see that post the conclusion of this transaction that there has been a strengthening of the group's capital structure and credit metrics. This kick starts the return of capital to shareholders. We intend to redistribute the $500 million of cash proceeds through the share buyback program. The buyback will commence as of today as for the company's share buyback mandate and will continue until the earlier of March 31, 2021, or when ArcelorMittal has fully utilized the allocated $500 million. The deconsolidation of ArcelorMittal USA will also reduce ArcelorMittal's cash needs, which is, as some of you may be aware, maintenance CapEx, cash interest, cash taxes and other cash costs by approximately $400 million. Let me now turn to the last slide of our presentation. To conclude, this transaction enables us to achieve 3 key outcomes. First and most importantly, we strategically reposition our footprint in North America to focus on our high-quality and highly competitive assets; secondly, we realize a great value for ArcelorMittal USA with significant potential upside through our passive minority shareholding in a highly synergistic combination; and lastly, we generate shareholder value through a strengthened balance sheet and an opportunity to return cash to shareholders. With that, we are happy to take your questions. Thank you.

Thanks, Aditya. Thanks, Mr. Mittal. So we will move to take the first question, please, from Carsten at Crédit Suisse.

The question from my side is, is this transaction the end of your divestment program? Or will you still look to optimize the portfolio through further divestments because you hinted earlier there could be still some stakes sold in some of your mining operations? Or do we see a new program being launched very soon?

Thank you, Carsten. This is the end of our $2 billion portfolio optimization plan that we had announced. Going forward, look, we'll always review our portfolio and see the opportunities to optimize, but there is no plan to announce any program in the near term, nor is there any target that I would think of. I think the key takeaway from this transaction is that we strengthened our balance sheet. We have improved our credit metrics. We have improved our credit profile, and it provides us with an opportunity to kick start the return of cash to shareholders.

We'll take the next question from Seth at Exane.

Congrats on completing this deal. I have, I guess, a two-part question, sorry, with regard to the buyback. First, can you please confirm whether or not the Mittal family will be participating in the buyback and selling back shares? And secondly, recognizing that we're launching the buyback today before any cash has been received and the deal is closed. What does that, I guess, tell us about your perception of cash generation on the horizon? Obviously, the $500 million would actually be net neutral versus the cash we're expecting upfront. You're speaking positively about the equity stake on a go-forward basis as well. So how should we interpret that with regards to the perception of future cash generation of the business today?

Okay. Seth, first of all thank you for your question and your wishes. So in terms of the family, the family is not participating in the buyback, which means that our shareholding -- the family shareholding will accrete in the company. I hope that's clear. In terms of the cash requirements of the business, as you heard, the cash requirements of the business is going down. And in terms of what the signals in terms of the horizon, I would just say that, look, we have confidence that this deal will close. We think it's an opportune time to begin returning cash to shareholders. And hence, we are starting with the buyback. Seth, have I answered all your questions?

Yes. That's fine.

So we'll take the next question, please, from Rochus at Kepler.

Key point I'm interested in is to what extent net working capital is transferred to Cliffs, and -- yes.

Okay, sure. In terms of the net working capital that is transferred to Cliffs, roughly the amount is $1.1 billion to $1.2 billion. This includes the inventory that we are transferring. It includes the payables, and it includes the assumption that they assume our receivable factoring program. So post that is $1.1 billion to $1.2 billion. Excluding the receivable program, it would be roughly $400 million to $500 million less.

Got it. Can you also help us to understand the nature of these other liabilities besides pension and OPEB is transferred to Cliffs?

Sure. I think you will have more disclosure when we present our balance sheet with the conclusion of this transaction. But these environmental, ARO, some leases and things like that.

We'll take the next question, please, from Jason at Bank of America.

I'm just wondering, folks, you're going to be a fairly large shareholder of Cliffs post this deal at make it about 1/4 of the market cap. So do you get any Board representation? And are you subject to lockup of the shares of Cliffs that you'll be receiving as consideration?

Sure. Thank you, Jason. So in terms of directly, we are 16% shareholder of Cleveland-Cliffs. And in case the preferred shares are paid out in -- with common equity, then our shareholding, obviously, would increase beyond that. If it's paid out in cash, then we would remain a 16% shareholder. Maybe a side point. The way the preferred works, it tracks 58 million shares. And so whatever is the value on the time of redemption of that, they either pay us 58 million shares or the equivalent cash value. In terms of the lockup, we have a 6-month lockupandthen we can sell down half of our stake. And then up to 12 months, there is no more lockup. We have a passive stake. We have no governance rights. We're not represented on the Board. At this point in time, we have not taken any decision as to our intentions vis-à-vis the stake.

We'll take the next question, please, from Luke at JPMorgan.

Just questions on the cash flow generated from those U.S. assets. Obviously, we can back calculate the EBITDA, but an indication of the cash flow associated with them over the last 12 to 18 months and then also just an indication on go-forward for Mittal group, what the ongoing sustaining CapEx needs are for the business, excluding these assets.

Sure. Thank you. So roughly, the way we think about the business is the business has $400 million of cash requirements. And this is roughly $250 million to $260 million of CapEx and $130 million to $150 million of benefit expense. When I say benefit expense, I'm referring directly to pension and OPEB liabilities. And then that would be obviously the cash requirements. And then the EBITDA numbers, I think there have been some numbers floating around on what has been the EBITDA of this business. If you look at a 5-year average, which we are calling through the cycle, it's about $550 million. So that gives you a sense of what is the free cash flow power of this business through the cycle. Clearly, '18, '19, the EBITDA level of this business was much stronger. Especially '18, which was significantly higher than the through-the-cycle average. '19 was lower than through-the-cycle average. The combination of the 2 would generate about $300 million in free cash flow. '19, lower than my average of $150 million and obviously, '18 higher than my average of $150 million. I don't know if that helps answer the question. In terms of our...

Yes, it does.

Okay. Good. Okay. Great. In terms of cash requirements for our business, our cash requirements declined as a result by $400 million. And again, it's the same breakdown, $250 million, $260 million CapEx, $130 million, $150 million of other cash costs.

So we'll move to the next question please from Christian at SocGen.

Congratulations for a good deal indeed. Just one question. What's your new integration in terms of raw materials with the businesses you retain as far as I know and coal is concerned?

So we still retain the rest of our mining assets, right? Flagship mining asset is our facility in Canada, which has 26 million tonnes of concentrate capacity, as you know, a 10 million tonnes of pelletizing capability and then obviously, with mining assets in Liberia and other parts of the world. We are just divesting the assets which are directly associated with the AM USA footprint. The impact on our mining segment is marginal. There's a small impact due to the divestment of Princeton Coal in the U.S. But other than that, the impact on the mining segment is marginal. The real impact is on our NAFTA segment.

Right. And on NAFTA, what's to retain of NAFTA? There's nothing changing on the remaining plants, whether you integrate them or not within your mining system.

Yes, that is correct. There's -- because the iron ore that was part of the AM USA system was consumed by AM USA. So AM USA was not selling iron ore to any of our other facilities. I mean, occasionally, there'd be swaps and things like that. But fundamentally, the flows were not between AM USA mines to Dofasco, as an example.

So we'll move to the next question, please, from Alain at Morgan Stanley.

So one question is on antitrust. Where do you see the biggest risks and considerations when thinking about antitrust?

So in terms of antitrust, obviously, we're both highly confident that there are no concerns on the regulatory front because, at the end of the day, this is not -- how do I describe it, efficiently, this is not the 2 largest companies in the U.S. coming together, right? This is one of the largest players in North America divesting its share and a relatively smaller player becoming larger. So if you look at the share concentration, I don't believe it fundamentally changes.

So we'll take the next question, please, from Myles at UBS.

Just thinking about the sort of retirement liabilities. Obviously, Cliffs has a lower valuation than yourselves. So I mean the 20-F valuation looks very conservative on a relative basis. Can you kind of explain what the main driver for that is? Will you revisit the valuations of your other assets? Obviously, you don't have $3 billion, $4 billion of pension and post-retirement liabilities. Are we overestimating them in our enterprise value? And then just linked to that as well, will you reconsider the $7 billion net debt target now that the broader liability of the group is lower? Should we kind of see potential for a higher threshold for net debt?

Sure. I'll talk about the net debt. And then I'll let Genuíno to talk about our balance sheet and the assumptions that underpin it. So in terms of net debt, I think fundamentally, as you see from this transaction, we are reducing a lot of liabilities from our balance sheet. The credit profile is improving. The risk profile is also improving. Profitability per tonne improves as well as an example. And we have started the return of cash to shareholders with this buyback. So the net debt target remains, but I would look at it more holistically that, overall, the liabilities have been reduced. The portfolio has been -- the portfolio optimization program has been achieved. Portfolio has been improved as well. And now we have the cash generating capability and the balance sheet capability to begin returning cash to shareholders. Genuíno?

Yes, sure, Aditya. So I can comment on our balance sheet. So I believe that Cliffs in their call this morning, they elaborate on how they have valued those liabilities. I can only comment on our books, we do not see any opportunity to reduce the size of the liabilities given that the assumptions, the key assumptions are all defined by the accounting standards. So we do not see an opportunity here to change it now going forward before the close of the transaction. But I believe you can understand by listening to how Cliffs valuate the rationale behind it.

Is there a difference between IFRS and U.S. GAAP in terms of how these liabilities are discounted?

No, no. We don't believe that there are big differences between IFRS and U.S. GAAP.

So we'll move to the next question, please, from Ephrem at Citi.

My question was on the liabilities where it's not entirely clear because I don't think Cliffs was clear on their call. They mentioned an NPV versus you took a more sort of literal mechanical interpretation. So we'll come back to that. I think kind of the question other than that was essentially on whether the Mexican and the Canadian assets were up for discussion at all as part of this transaction. Or was it just exclusively a U.S. transaction? And if so, why?

Aditya, you might be on mute. Sorry.