Stelco Holdings Inc

TSX:STLC

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Veronica, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call regarding Stelco's Second Quarter Results for 2020. [Operator Instructions]Mr. Harris, you may begin your conference.

[Trevor Harris, Vice President of Corporate Affairs]

Thank you, operator. Good morning, everyone, and welcome to Stelco's Second Quarter 2020 Earnings Conference Call. Speaking on the call today 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 second quarter of 2020. 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 management disclaims any obligation to update forward-looking statements, except as required by law.With that in mind, I would like to 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, the second quarter management's discussion and analysis sections relating 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 also note that all dollar figures referred to in today's call will be in Canadian dollars, unless otherwise noted. Following today's prepared remarks, Alan and Paul will be taking questions. [Operator Instructions]With that, I would now like to turn the call over to Alan.

[Alan Kestenbaum, CEO & Executive Chairman]

Thank you, Trevor, and good morning, everyone. Thank you, everyone, for taking time today to join the call and discuss Stelco's successful second quarter results. Over the past quarter, our business has not been immune from the challenges that have been brought on by the pandemic and the resulting economic downturn. Despite the pandemic and steel prices that are well below the 5-year average, we were able to generate adjusted EBITDA of $34 million in the second quarter, an increase of 70% over the first quarter and 6% above Q2 2019 when there was no pandemic. Our company's ability to deliver these results is largely attributable to our low-cost structure and wide-ranging product mix, combined with our commitment to tactical flexibility. These factors allow us to target high-margin opportunities at any point in the market cycle and continue to deliver positive results for our stakeholders.We started the year with 3 very ambitious goals. We aim to capitalize on our investment into state of the art galvanizing, batch anneal and temper capabilities that target higher value-added customers such as auto customers. We wanted to secure a long-term arrangement for our critical raw material supply, and we look to execute on the next phase of our strategic capital plan and modernize our most critical assets, with the goal of Stelco becoming the lowest cost flat-rolled steel producer in North America with a full suite of product capabilities. Over the first half of 2020, we have taken several steps towards achieving all of these goals. During the first half of the year, we continued to expand our reach into the fully processed cold-rolled market and delivered increased volumes of high-quality products to several of our most valued customers while growing our customer base.Despite softening demand in the second quarter, resulting from the global pandemic, we were able to ship 271,000 tons of value-added cold-rolled and coated products during the first half, an increase of almost 74% over the first half of 2019. We are excited about the opportunity that this growth represents for our business and look forward to continuing growing market share in these markets.With respect to our raw material supply, we announced last quarter that during the depth of the pandemic, we were able to secure a long-term agreement with U.S. Steel, to acquire high quality iron ore pellets from the Minntac mine at attractive prices for the next 8 years. At the same time, we entered into an option to acquire 25% of Minntac at any point over the next 7 years, an option that we see as having great value as it allows us to secure a permanent, high-quality, cost-effective supply of iron ore pellets from what we believe is the largest and lowest cost mine in the United States.Earlier this quarter, we also announced that we have entered into an agreement with DTE Energy Services to develop, construct and operate a 65-megawatt cogeneration facility at Lake Erie Works. Once commissioned, this facility will consume byproduct fuels from our blast furnace and coke battery, reducing our greenhouse gas footprint and significantly lowering our overall electricity costs.And on July 17, we commenced our previously announced blast furnace upgrade and reline project that will deliver key technology improvements at the Lake Erie Works. We believe making it the only real smart blast furnace in North America. Upon completion of this projected 75-day project, Stelco will emerge with what we believe to be the most modern and efficient blast furnace in North America. In the fourth quarter, we anticipate beginning to realize the benefit from an increase in hot metal production capacity of approximately 300,000 tons annually as well as quality improvements and cost reductions resulting from improved efficiency at the furnace. While this project represents a significant commitment of time and capital, it is key to the long-term growth and success of our company.Collectively, these achievements will result in Stelco emerging as an even lower cost and higher quality producer than it is today. We believe this will position us to be the lowest cost fuel making facility in North America and set the stage for the next-generation of growth for our business. Almost all of our key end markets recently have rebounded strongly.Once again, we expect to be sold out this quarter, albeit at about half of our normal shipping level due to the blast furnace upgrade project. We expect to complete this project by the end of this quarter, positioning us for substantial growth in the fourth quarter compared to historical levels.I should also note that we have achieved all of this to date without experiencing any significant operational impacts resulting from the COVID-19 pandemic. By working together with experts and with the cooperation of our workforce, we have effectively protected the health and safety of our workers, their families and the community at large, while maintaining our operations and continuing to service our valued customers.We also signed on to the BlackNorth Initiative, which seeks to actively pursue social justice through hiring and business practices. These are things that we are very, very proud of. Going forward, I'm excited about the opportunities that lie ahead. Upon completion of our blast furnace upgrade project, we will have completed our strategic objectives for 2020, and we'll have fully prepared to capitalize on market opportunities as the economic recovery continues across North America.To date, since our ownership began in mid-2017, that's a mere less than 3 years ago, we have returned over $330 million to shareholders in dividends and buybacks and we have invested over $600 million back into the business to improve our assets significantly. We have done all of this in a unique fashion to utilizing earned cash flow without incurring any dilutive debt issuances or equity issuances, which is something we are very proud of. This accomplishment is a clear demonstration of what happens when you invest in a company with a management team that has approximately 20% of the shares outstanding, working tirelessly along you our -- alongside you, our investors.Our management team will also remain sharply focused on the core principles that have guided Stelco's success to date. We will stay disciplined and keep our balance sheet strong, utilizing our tactical flexibility model to focus on maximizing our cash flow and profitability. We will continue to explore opportunities to strategically grow our company in a manner that generates shareholder value. At the same time, we are focusing on reducing costs across our business in a manner that is responsible and sustainable and continue to focus on returning capital and long-term shareholder growth to our shareholders.Once again, thank you all for taking time to join our call today. I would now like to turn things over to our CFO, Paul Scherzer; to share some information specific to our financial results.

[Paul D. Scherzer, Chief Financial Officer]

Thank you, Alan, and good morning, everyone. While Alan did refer to this in his remarks, I think it is important to note that the market headwinds we saw in the first quarter of this year certainly continued through the second quarter. Average pricing remained largely in line with the first quarter, although we did see a slight drop of about 1% in our average realized price during the period. It's important to note that pricing does remain significantly below, over $200 per ton below, the peak pricing we saw in 2018.From a volume perspective, we were impacted by the challenges associated with the COVID-19 pandemic, but we were very pleased to be able to work with our loyal and valued customers to navigate these challenges. We shipped 576,000 tons of steel during the second quarter, which was actually up 6% over the second quarter of 2019, which is pretty remarkable given how the world has changed since this time last year. We are very pleased to be able to continue growing our penetration in the value-added cold-rolled and coated markets during the quarter, with shipments of those products up 44% to 124,000 net tons versus the comparable period last year.Our resulting revenue of $411 million is down only 4% from last year's second quarter, primarily due to the 7% drop in price. However, due to stronger shipments and a substantial improvement in our cost of goods sold, we were able to produce operating income of $16 million and adjusted net income of $10 million for the quarter. Our adjusted EBITDA of $34 million or $59 per net ton was an improvement over last year's quarter in absolute terms and consistent on a per-ton basis.While these are positive results, there remains substantial room for improvement once our Lake Erie Works blast furnace returns to operation by the end of this quarter following the 75-day upgrade project. The expected increased production capacity, which combined with an anticipated economic recovery, should allow us to increase our shipments in Q4, driving higher revenue, margins and EBITDA as we enter the new year.At the end of the second quarter, our liquidity position remained strong. We ended the period with $168 million of cash on hand and $105 million of availability under our existing asset-based credit facility. As was noted at the end of the first quarter, we do anticipate some reduction in our cash holdings as we complete the capital-intensive blast furnace upgrade and reline project. We do, however, see ample opportunity to replenish our cash holdings upon completion of this project when we begin to see the benefits from the expected capacity increase that should translate into higher revenue for the company.As Alan noted, we are entering the final phase of our capital investment strategy and our overall financial position remains strong. We have resumed work on the installation of a pig iron casting facility that had previously been suspended. We are undertaking this project due to what we see as a strong market for iron units and our expectation of additional hot metal capacity through the blast furnace project. We anticipate this new facility will be up and running prior to year-end.Throughout the past 3 years, Stelco has remained disciplined in its fiscal approach and intensely focused on delivering returns to our shareholders. Our management team is confident that our approach will continue to deliver these same strong results as our business moves into the next phase of growth. Our business is resilient and has been built on a strong foundation that will support our future success even in the face of the current pandemic and other global economic pressures. Our low-cost structure will only be improved following the completion of our blast furnace project and our management team's commitment to our tactical flexibility model will afford Stelco an even greater opportunity to succeed at every point in the market cycle.I share Alan's enthusiasm for the future of our business. We will continue to be responsible financial stewards and manage our operations to ensure Stelco can generate value and achieve the best possible outcome for our shareholders.

[Alan Kestenbaum, CEO & Executive Chairman]

Okay. Well, we thank everyone for -- yes. Sorry, Trevor.

[Trevor Harris, Vice President of Corporate Affairs]

Thank you, Paul and Alan. Alan, I'll turn it back to you for closing comments.

[Alan Kestenbaum, CEO & Executive Chairman]

Okay. We thank everyone for joining the call today. And we hope everybody remains safe and we look forward to speaking to you again next quarter. Have a good day.

[Operator]

Thank you very much. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you, and have a good day.