Stelco Holdings Inc. (OTCPK:STZHF) Q1 2022 Earnings Conference Call May 6, 2022 9:00 AM ET

Alan Kestenbaum – Executive Chairman and Chief Executive Officer

Paul Scherzer – Chief Financial Officer

David Gagliano – BMO Capital Markets

Alexander Jackson – RBC Capital Markets

Michael Doumet – Scotiabank Global Banking and Markets

Good morning and thank you for attending today's Stelco Holdings Incorporated First Quarter 2022 Earnings Call. My name is Sam and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] At this time, I'd now like to turn the call over to our host, Trevor Harris of Stelco. Trevor?

Thanks Tim. Good morning, everyone and welcome to Stelco Quarterly Earnings Conference Call. Speaking on the call today to discuss the results for the first quarter of 2022 will be Alan Kestenbaum, our Executive Chairman and Chief Executive Officer, and Paul Scherzer, our Chief Financial Officer. Yesterday, after the market closed, we issued a press release, overviewing Stelco's financial results for the first quarter of 2022.

This press release along with the company's financial statements and management's discussion and analysis have been posted on SEDAR and on our Investor Relations website at investors.Stelco.com. We have provided a link to the presentation referenced on today's call on our website as well. I'd like to inform everyone that comments made on today's call may contain forward-looking statements which involve assumptions which have inherent risks and uncertainties. Actual results may differ materially from statements made today.

So do not place undue reliance upon them. Stelco commencement disclaims any obligation to update forward-looking statements, except as required by law. With that in mind, I would ask everyone on today's call to read the legal disclaimers on page 2 of the accompanying earnings presentation, and also to refer to the risks and assumptions outlined in Stelco's public disclosures. In particular, our first-quarter 2022, management's discussion and analysis sections related to forward-looking information and risks and uncertainties, as well as our filings with Securities Commissions in Canada.

The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our MD&A provide definitions and reconciliations of the non-IFRS measures that we use today. Please note that all dollar’s figures referred to on today's call will be in Canadian dollars unless otherwise noted. Following today's prepared remarks, Alan and Paul will be taking questions. To maximize efficiency, we'd ask that all participants who would like to ask a question please limit themselves to one question and one follow-up before requeuing. With that, I'd now like to turn the call over to Alan. Alan?

Thank you, Trevor, and good morning, everyone. Following up on the most successful financial year in the history of our company was always going to be a challenge. But once again, our team delivered outstanding results for our shareholders. The first quarter of 2022 was our most profitable opening quarter of all time. Our business continued to lead our industry peers with an adjusted EBITDA margin of 44%. While the CAD 402 million of adjusted EBITDA we generated was down 40% from the previous quarter, it represents 117% improvement over the first quarter of 2021.

The total EBITDA generated by our business over the last 12 months now stands at over CAD 2.2 billion. In addition to our industry-leading margin, we were able to generate CAD 906 million in revenue and convert that into CAD 262 million in net income for the quarter, a 120% improvement over the first quarter of 2021, although down from over CAD 500 million in Q4 of last year. Our adjusted net income over the last 12 months stands at just over CAD 1.8 billion. Our exceptional financial performance has afforded us the opportunity to continue to reward our valued shareholders.

During the quarter, we surpassed the $1 billion mark with respect to total capital return to our shareholders since our IPO in 2017, more than four times what was raised in our IPO. Relative to our market cap, we continue to be the leader amongst publicly traded steel makers and downstream steel companies across North America. And alignment of our management team with our shareholder base continues to be an unprecedented strength for our company, and we are exceptionally proud to reach this milestone. Despite the fact that the first quarter began with some uncertainty and downward pressure on steel prices and softer demand than in 2021.

Since the end of the first quarter, we have seen an improvement in end-market demand, as well as restocking as the distribution level, which taken together with a significant rise in scrap prices affecting the cost structure of many of our competitors have improved prices and our anticipated shipments for Q2. We will also be marked in Q2 two more milestones with respect to our strategic capital plan that will provide us with further cost advantages over our competitors. Last month, we completed the expensive rehabilitation and upgrade the Lake Erie works, coke battery, and resume the production of coke at the facility.

Expensive 12-month projects included the installation of best-in-class process and production and control systems and will contribute to not only more efficient production of coke to support our steel making operations, but also improves Stelco's carbon footprint. Later this month, we expect to begin commissioning of our 65-Megawatt electricity co-generation facility. Talk about good timing. Together, these projects will further improve our cost structure, reduce our emissions profile, and improve the overall efficiency of our operations.

All this has been accomplished without ever wavering from our commitment to maintaining a strong and flexible balance sheet at our low to no debt philosophy and tactically flexible approached our business. The returns to our shareholders and our strategic capital plan had been funded with cash generated from operations, and without acquiring any long-term debt or issuing any stock. In fact, we ended the first quarter with almost $800 million in cash, and the balance continues to grow.

As the rest of 2022 unfolds, and markets continue to evolve, one thing remains certain, Stelco will continue to be flexible and adapt to the changing needs and dynamics of the market. We will hold true to the core principles that have guarded our success. We'll keep our balance sheet strong, pursue opportunities to improve our industry-leading cost position, and deploy our capital to the benefit of our investors. In the five-years, our team has managed this business.

We have delivered strong results at every point of the market cycle and made the necessary investments to ensure the long-term stability of our operations. That is a track record that I'm proud of. And one that I and our entire management team are focused on continuing with that, I will turn to Paul and as the he provides some additional comments regarding our financial performance.

Thanks, Alan, and good morning, everyone. As Alan noted, in the early part of the first quarter, we saw a deterioration in both pricing and volume compared to the fourth quarter of 2021, but we did experience some recovery commencing in the last month of the period. As a result, we ended the first quarter with CAD 796 million in cash, even after making a substantial tax payment for 2021 and returning CAD 215 million of capital to our shareholders this quarter through repurchasing and canceling CAD 5.1 million shares for an aggregate purchase price of CAD 193 million via substantial issuer bid or SIB, and ongoing Normal-Course Issuer Bid or NCIB, as well as our quarterly dividend.

Our ability to end the period with a healthy balance of cash after completing these transactions speaks to the robustness of our company and our commitment to maintaining a strong balance sheet. As a result of our continued success, we'll be building on our industry-leading capital returns as our board has approved the continuation of our CAD 0.30 per share dividend this quarter.

Delivering the most profitable first quarter in our company's history was a direct result of the commitment of our management team and each of our employees to the fundamentals that have resulted in our accompany having the lowest cost structure in the North American steel industry. Our efforts to continuously improve and lower our costs allowed us to overcome sales volumes that were not only other down not only quarter over-over-quarter, but from Q1 2021 as well.

We're now seeing stronger demand and stabilization of pricing after significant deterioration through the first two months of the quarter, which has helped to offset the sizable inflationary pressures that everyone is experiencing. Including our sizable cash balance, we ended the quarter with over CAD 1 billion in total liquidity, which will afford our business the flexibility to pursue additional cost reduction measures and capital allocation opportunities as they arise, and should they be deemed in the best interest of our shareholders. Our ability to capitalize on these opportunities while maintaining our strong balance sheet remains a core principle that guides our business. Thank you for taking the time to join our call.

Thank you, Alan, and Paul. That concludes our prepared remarks for today. Now I would like to turn the call back to the operator for questions and answers. Operator?

Thank you, Trevor. We'll now begin the Q&A session. [Operator Instructions] Our first question comes from the line of David Gagliano of BMO. David?

Hi. Thanks for -- excuse me. Thanks for taking my questions. I just have a couple of quick ones. First of all, on the near-term on the 2Q guide, the 10% increase plus 10% or more increase in volumes quarter-over-quarter, can you characterize how that's broken down between, in your view, restocking into service centers and real-end market demand? And then related to that, has there been any change in the pace of the demand in recent weeks? Was it -- was that very much a front-end loaded uptick in -- early in the second quarter -- in the first quarter, I mean? Or the second quarter. Whatever quarter we're in.

With respect to the first part of the question in terms of the split between distribution and end-user, it really was consistent and across the board. We had seen some people mass-buy for like four months and then actually went back all the way into the end of the last quarter. So, across the board, we saw restocking both at the service center level and at the end market. And I'd say probably more skewed towards the end market guys because those guys are on the front lines of the increased demand and had the greatest need. And in terms of the recent performance, I have seen some publications report a slowdown, and we have not seen that. The demand continues to stay strong, the buyers are there, they have needs, and it's -- business is continuing at a very, very good pace right now.

Okay. That's helpful. Thank you. And then just following up on Paul's commentary regarding capital allocation opportunities, it looks like there's still going to be some cash left over here after assuming the NCIB, it's completely done, I was wondering if you can prioritize and drill down a little bit further on those capital allocation opportunities that you're talking about?

Yes. I mean, we continue to look both for opportunities to acquire stock. I'll share buybacks. That's probably on a long-term, most significant the most important part of our capital allocation strategy. And we try and be timely with that, but we've done a really good job over the years and doing that and will continue to do that. So that's priority number one, that's up to say that dividends are not also going to be a priority. Should we be unsuccessful in doing enough share buybacks to move the needle? Certainly, improvements in increases in dividends as possible.

Okay. And any other in the past that there was also mentioned of inorganic growth opportunities, that kind of thing is that where does that rank on orders?

Yes. So, on the inorganic growth opportunities, this part of our regular business for working at the, on the battery recycling opportunities still looks extremely interesting. A lot of positive developments on that side, on the inorganic side, you know, our stock. We're still trading at a very, very low multiple. When you look at our trailing 12 months and our people like to project forward, but just looking at the way we're performing right now, when you take our cash into account, we're trading at a little bit over 1/3. So very, very difficult on the inorganic side of things that should do anything significant.

On the organic side, our investments are relatively small. Not needle moving. So, we'll continue down that path. The inorganic side today and what we can, it would be dilutive for us to go buy something that has higher costs when there's a low-cost producer, you don't want to buy things at higher costs. Well that kind of makes that, this call meant, of course, the multiple makes it very difficult for us.

So I think for us we're going to continue to focus on what we're doing, making money, generating a lot of cash, and continue to shrink and share count opportunistically as best as we can, and I think that's what investors like myself want to see, which is improved share price because l think one of the things that we really need to look at is why the stock trades at the multiples that it does. And as long as it does, we're going to take advantage of that and use that as an opportunity to shrink the share count as we did this quarter.

Great. That's helpful. Very last question from me. Just remind us again. I know you've given this number in the past, I just don't remember what it was. What's the expected cost save once the Cogen facility is up and running?

The number we put out before was CAD 18 million. It's going to be more based on recent developments in the energy electricity space and other factors. So, we should be well north of CAD 20 million annual save on the electricity. And that gap's going to continue to grow. I mentioned in my remarks the timing, an incredible timing. Clearly, we didn't anticipate things that are going on in the world impacting energy prices. But this is going to end up being a really phenomenal situation for us, where we're essentially locked in on low-cost electricity and perpetuity at this point. So, it'd be at least CAD 20 million and probably more.

Okay, great. That's helpful. Thanks again.

Thank you, David. Our next question is from Seth Rosenfeld of BNP. Seth?

Hi. Good afternoon. Thanks for taking our questions today. If I could ask one, please, on price realizations. Given the recent volatility of the course of Q1 both in spot prices and lead times, can you give a bit more color with what we should expect for realized prices in Q2? What scale of increase would be achievable? Also, with that in mind, and some of the -- certain sales by peers have come in at very low prices during Q1, during the trough. Will that be a drag on your ASP s into Q2? I'll start there, please.

Basically, I think we're going to expect higher pricing for Q2 on average. There is obviously a drag as you're pointing out. But what's interesting is because the volumes were really slow at the end of Q1, we didn't sell all that much at low prices. We had a pretty wide-open book as things started to improve. Fortunately for us, despite the drag and despite the number and the typical lead times that you have, whatever it was, four to five weeks at that time. Most of the Q2 is going to be at much better prices than what we're being realized at the end of Q1.

Okay. Thank you very much. And we'll be looking at your cost base and thanks for the color on the Cogen facility. But can you give us a bit more of a rundown with regards to inflationary pressures written see across the business right now, what drivers, which we expected Q-over-Q. And then coke battery, would that not backup and running? Could you get to remind us the savings we should expect?

There on the coke battery, I think we've mentioned before somewhere around CAD 6 TO CAD 8 a ton savings and over -- over the course of the operations. So that's on track. I had to say this coke battery. Probably a fastest done in record. I want to speak to our Chief Operating Officer; fugit has been in this business for over 30 years. Really proud about the record time at this place in together with the technology that's in there, which reduces the carbon footprint, incorporates parts of our Artificial Intelligence program that we have. It's really cool and always done.

It was done on budget, took a little longer, but on budget and really delivering the results that we wanted so in terms of the cost inflation. So that largely comes from coal and natural gas and electricity. So those are the main ones and alloys. What we're seeing now is the following Natural gas. When you have some exposure electricity as we just mentioned with the cogen coming on, we're going to be able to mitigate some of that good part of that and then as we go forward, what we're seeing already as significant decline in coal prices starting to emerge.

We did an amazing job with coal. We bought coal a couple of years ago and enjoyed some pretty good prices. We also need to combine some coal which we did, and we have to pay the price as being. We're not what we did a really good job. We have a logistical advantage. We buy well below the quoted seaborne prices and seeing those prices go down pretty hard right now. And we're not ready to come in and by just yet, but we'll pick off some stray lots as we can.

So, we're very -- we're seeing good things there. On the alloys side. I mean, that thing is -- there has been inflation there and we've not seen yet a break in those prices yet. Kind of carriers its own dynamic. But we don't use that much alloy in the grand scheme of things. So, we certainly have seen inflation where we're anticipating as we get into the second half of the year with what's going on around the world, continued drop in a lot of prices and a lot of this stuff. And then taking advantage of the Cogen facility.

That's great. Thank you very much.

Thank you. Our next question comes from the line of Michael Glic of JP Morgan. Michael?

Yeah. I guess I'll just ask a standard question on pig iron. Obviously major topic with the effective end of Black Sea pig iron into North America. Just how do you view the pig iron capture in this environment? And then maybe any view on the iron ore option as well.

Yes. Pig iron has been really good. We -- there was a period of time that pig iron went -- actually went higher than the steel price. Our highest price that we sold at was over CAD 1200 per tonne of pig iron. And we did some -- a little bit of that in Q2, we got a bunch of that coming in -- sorry. A little bit in Q1, we've got a bunch of that coming in during Q2. Since then, prices have moderated, they're lower. They're below CAD 1,000 right now. I think the world, as always happens in commodity industries, finds ways to adjust, and we're part of that adjustment.

We are supplying mills and happy to do it. Of course, now the flat roll business has gotten better than it was at the end of Q1, and so we're gearing more towards the flat-rolled regular product mix. So, we use that as a phenomenal balance. When we build that caster, our view of it was we hope it was the best CapEx project that we never have to use, meaning, always a great offset when we're -- we have excess material per sale rather than discounted material in the market. The better solution is to go and pour it into pig iron and sell that.

Well, we certainly didn't anticipate what was going to happen in the world, and instead, we went and started to sell pig iron in here when prices start to go up, and of course, ship prices then started to rebound very, very sharply. And so, we're doing we're doing a Rule pig as possible right now, but we will be shipping a record amount of pig iron in Q2. We think it's a great market. We've established new customers, including some of our competitors, who are happy to do business with. And it's been, it's been great.

And so, I think that's a nice bright spot in the validation of, again, our tactical flexibility model, were driven by profit, were driven by cash-generation. And when the profits for making click our and exceed that are making steel, we're not embarrass to say where we're going to be pig are in sellers and that's where we did must-own to all parts of the market, including foundries, steel mills, even traders that call us with us. It's price. So that's been a really good bright spots that accompany are real validation of the pig are in strategy that we developed and very timely and will continue to be a player in that business.

Didn't maybe on the growth side, we see the Canadian Federal Government and the provinces step-up to fund certain projects, namely the DRI project at ASCO in Hamilton. Do you see the source of opportunities to access federal or provincial funding for some of the call it high-risk, high-reward type opportunities that you have?

Yes. They've been very vocal about wanting to decarbonize the sector. They've have been extremely supportive to industry, and so the answer is yes.

Thank you, Michael. Our next question is from the line of Alexander Jackson of RBC. Alexander.

Yes. Thanks guys. I was just curious on your sales breakdown. I noticed sales into the U.S. on a revenue basis was up in Q1 and have been trending up last year. I don't know if there's anything behind that in terms of different customers that you guys are trying to do business with.

Well, a couple of things. Again, we're always driven by price and profit, so wherever the best prices are, that's where we sell. And by the way, we're looking actually at increasing or developing our business opportunities in Europe right now because we have the dock, the prices are higher there, and their supply chain issues on the energy front is another opportunity there. And so, we'll go everywhere with our product. We're very, very good at identifying market. So, what you're seeing there is just opportunistic pricing.

The other thing is we have initiated a plan with our sales force without getting into too much detail and we're keeping track now on a quarter-by-quarter basis of new customers. Were always sold out. But for us having more customers as something that's an advantage to us because it gives us flexibility instead of create a little bit of tension and of course, we have our main customers that are there month in and month out, have supported us in good times and bad times, and those are our priorities, those customers, but having more customers is also a good thing for obvious reasons, developing new markets, increasing tension on the customer side.

And so, this one quarter we developed 20 new accounts. We have a big focus now on developing new customers. And so, some of what you're seeing is the initiative taken by a director of sales. I always call him one of the most aggressive guys in the industry, and maybe challenge them with getting -- with trying to expand the customer base and had a lot of success with that. And that's some of what you're saying.

Got it. That's helpful. And then it was a small number, but I notice some write-downs on construction in progress in some demolition costs. I was just more or less curious what that was related to.

Sorry. Do you mind repeating the question?

Yeah. No problem, Paul. I just noticed in the quarter you guys had under other costs, some write-down of construction and progress and some demolition cost. It's a small amount, but I was just curious what it was related to.

Yeah. Alex, as we get through, we're always looking at various projects and some end up advancing, some we don't end up advancing. So, there's a little bit of that mixed in there where we had some stand on a few things we were pursuing. There's also a little bit more mixed in there with just the ongoing work we're doing in terms of site cleanup and whatnot.

Then in particular, in terms of the site cleanup that Paul is referring to is the demolition of the old buildings. And it's actually been a windfall for us because the scrap prices have gone up and it's really been a tremendous windfall for us. Those are very steel-intensive buildings and this land is becoming beautiful. It's -- so if you go out there today, you'll still see some of the main buildings, but a lot of the larger ones have gone and it's just a beautiful piece of land on the waterfront and it's pretty amazing to see.

Thanks, guys. And maybe on that I'll just ask one more on the land there's an article I think in the Hamilton spectator about your land and the potential sale that was progressing. I was wondering if there's anything you comment on that or when we might hear an update on potential land sale.

I mean, these things tend to leak in the press. I mean, we really don't want to comment to make on that right now.

Understood. It’s all for me. Thanks, guys.

Thanks, Alexandra. Next question is from Michael Doumet of Scotiabank. Michael.

Hey, good morning, guys. First question is on volumes, you obviously had a big year in 2021.You capitalized on higher prices. It looks like you're looking for a bounce back in production shipment in Q2. Is that Q2 level affair go-forward production number to thinking about progressive a year or are you thinking maybe getting closer back to 2021 levels.

Well, I think you should think about us shipments, steel shipments of about 2.8 million tons a year. So, I think you should assume that that's a number going forward that's pretty much steady-state number.

Got it. Okay. And then just a follow-up to all the coke oven questions. I was just wondering if I remember this correctly about with the rehab complete, does that mean you're getting production, either potentially sell and if that's the case, just wondering on the point.

Yes. We have capacity to sell and at some level looking and we had stopped that for a while at the pretty profitable business right now. So yes, it's another area for us to gain EBITDA.

Alan, can you remind us on the Quantum or just how to think about that?

I mean, it's opportunistic. We could sell up to 250,000 to 300,000 some of the year. To us, it's an arbitrage and we buy coal. If it's profitable by coal converted and sell it, we do it if not. We don't. And right now, the market is favorable, and we have that opportunity.

Understood. Thanks very much guys.

Thank you, Michael. At this time, I'd like to hand the call back over to Alan for any closing remarks.

Thank you everyone for joining the call today and looking forward to speaking to you guys next quarter and keeping you updated as things develop. And thank you very much, everyone. Thank you.

That concludes the Stelco Holdings Incorporated first quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.