Stelco Holdings Inc

TSX:STLC

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the conference call regarding Stelco's fourth quarter results for 2019. [Operator Instructions] Thank you. Mr. Trevor Harris, you may begin your conference.

[Trevor Harris, Vice President of Corporate Affairs]

Good morning, everyone. And welcome to Stelco's fourth quarter earnings call. Speaking on the call today will be David Cheney, our Chief Executive Officer; and Roy Collins, Interim Chief Financial Officer. Yesterday, after the market closed, we issued a press release overviewing Stelco's financial results for the fourth quarter 2019. 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 the 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'd 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 fourth quarter Management's Discussion and Analysis sections relating to forward-looking information and risks and uncertainties as well as our filings with the security commissions in Canada. The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our annual MD&A provide definitions and reconciliations of the non-IFRS measures that we use today. Please also note that all dollar figures referenced in today's call will be in Canadian dollars, unless noted otherwise. Following today's prepared remarks, David and Roy will take questions. [Operator Instructions] With that, I would now like to turn the call over to David.

[David Cheney]

Thank you, Trevor, and good morning, everyone. I think it's important to set the stage for today's discussion by framing the market dynamics faced by the industry and by Stelco over the past quarter. We faced a continuation of the headwinds we experienced in Q3, highlighted by continued price depression with average selling prices dipping to $659 per net ton, a decrease of $29 per net ton from Q3 2019 and down $321 per net ton from the pricing peak in Q3 2018. Despite this decline in pricing, Stelco maintained our focus on the tactical flexibility model that is at the core of our business strategy, and we further excelled by delivering shipments that met our expectations for the quarter and in fact, drove us to exceed second half shipments from 2018 in the second half of 2019. A huge part of our success can be attributed to the value realized from our investments in the production of fully processed cold-rolled sheet through our new state of the art batch anneal and temper facility. These investments allowed us to diversify our product offerings and increased shipments of cold-rolled and coated steel products by 66% in the second half of 2019 over the first half of the year. We achieved annual run rate sales of approximately 600,000 tons per year for these products during the quarter, which is an increase of 50% of the shipments of cold-rolled and coated products in both 2017 and 2018. As a company, we are exceptionally proud of this achievement and look forward to growing our market share in the quarters and years ahead. We remain committed to exploring all options to grow shareholder value through both organic growth and accretive M&A opportunities. In the previous quarter, we spoke about our pending capital investment in pig iron casting, an investment that will allow Stelco to further diversify our product mix and become a primary supplier of pig iron to the growing North American EAF industry and maximize production from our Lake Erie blast furnace following the reline that we previously noted was scheduled for Q2 of 2020. Today, I am pleased to report that in response to strong market demand and materially improved pricing in the near term since December, we are electing to commence the reline and commissioning of our new pig caster in the second half of the year. As a result, we expect to commence shipments of pig iron during the fourth quarter of this year, we anticipate that the blast furnace reline will increase production of hot metal by approximately 300,000 tons and will allow us to reduce costs and increase production efficiency. In conjunction with our continued cost reduction initiative, we expect that these projects will enable Stelco to demonstrate our full potential starting Q4 of this year. Regarding our cost reduction initiatives, last quarter, we noted that we had realized approximately half of the $50 million run rate cost savings that we had targeted for the end of Q2 2020. Today, I am pleased to announce that we continue to be ahead of schedule with these cost-saving efforts, and we expect to achieve and possibly exceed the high end of our target. We will continue to pursue additional opportunities to improve our cost structure and look forward to reporting on our continued success in the future quarters. Over the past 2.5 years, we have built a platform for success that has consistently returned value to our shareholders. In that regard, for the ninth consecutive quarter, our Board has approved a regular dividend of $0.10 per share. We are exceptionally proud that we've been able to manage our business in a manner that has allowed us to continually deliver these returns to our shareholders. Looking at the upcoming quarter, we see improved pricing over what we experienced in the fourth quarter of 2019. Demand remains quite solid, and we expect to ship approximately 650,000 tons in the quarter. We believe Stelco is poised for tremendous growth and success in 2020 and beyond. We are expanding our customer base and providing the highest quality steel products in North America. We are investing in our assets, expanding our product offerings and growing volume. We will continue to explore all options to reduce operating costs, maximize profitability and improve our cash flow. And as always, we will maintain our strong balance sheet. Finally, I would like to note that this is my last earnings call on behalf of Stelco. It has been an honor and a privilege to work with the dedicated men and women who have been responsible for the success we have realized over the past 2.5 years. As I depart, I would like to remind everyone that I remain a large shareholder of Stelco, and I am confident that Stelco will remain a leading force in the North American steel industry for the years to come. Now I will turn the call over to Roy to share some specific financial information.

[Roy S. Collins, Interim Chief Financial Officer]

Thanks, David. I would like to take a minute to briefly highlight some of our top line results for Q4. Despite the headwinds that David has previously highlighted, our business performed well and delivered results in line with our expectations we set out last quarter. In the fourth quarter, our revenue declined by 33% from the fourth quarter in 2018. This decline largely resulted from a 28% decline in average selling prices over the same period and lower nonsteel sales of $13 million. The average selling price of our steel products decreased from $917 per ton in Q4 2018 to $659 per ton in Q4 2019, due largely to decreases in market prices for flat steel products. We, however, were able to meet our volume expectations for the second half of 2019 by shipping 633,000 net tons of product during the fourth quarter for a total of 1,287,000 net tons for the second half of 2019. As a result, the company realized operating loss of $6 million for the quarter and a net loss of $24 million. For the year, the company achieved operating income of $50 million. Our adjusted net income decreased $136 million year-over-year from $123 million in Q4 2018 to an adjusted net loss of $13 million in Q4 2019. Our adjusted EBITDA totaled $10 million for the quarter, which reflects the decrease in revenue from lower market average price of steel and decrease in shipping volumes realized as well as lower nonsteel sales during the period. Full year, our company returned net income of $42 million and adjusted EBITDA of $141 million. For the year, finance cost decreased by $187 million or 87% from $215 million in 2018, primarily due to the $170 million year-over-year remeasurement impact of our employee benefit commitment obligation, mainly in connection with the amended OPEB funding agreement during the second quarter of 2018, and $27 million related to the favorable year-over-year impact of our foreign exchange translations on our U.S.-denominated working capital. We believe in maintaining a strong balance sheet with sufficient liquidity and financial flexibility to support our operational and strategic investments. We ended the quarter with total available liquidity of $405 million, which includes $257 million in cash and $148 million in available borrowing base under our ABL facility. Overall, we remain confident that our continued strategic investments in our business, coupled with strong financial discipline and highly competitive cost structure, will continue to drive value and positive results for our shareholders in 2020. As David noted earlier, we will continue to pursue opportunities to further improve our balance sheet in order to return value to our shareholders. Trevor?

[Trevor Harris, Vice President of Corporate Affairs]

Thank you, Roy and David. That concludes our prepared remarks for today, and I'd now like to turn the call back over to the operator for questions and answers.

[Operator]

[Operator Instructions] Your first question comes from David Gagliano, BMO.

[David Francis Gagliano, Co]

I had a few that I wanted to drill down a bit more. First of all, on the product mix. In the fourth quarter, we obviously saw a big jump in cold-rolled versus 3Q. At the same time, there was a decent drop-off in the coated volumes versus 3Q. So looking ahead, I'm just wondering what we should expect for coated volumes. Should we expect that to get back up to that 80,000 to 90,000 quarterly run rate? Should we expect cold-rolled to hold around that 100,000 to 110,000 tons? And also, on a somewhat related note, the other shipments in the fourth quarter, how much of those were slabs? And what should we expect for the other shipments bucket moving forward?

[David Cheney]

Dave, look, I think as we've talked about, I think, since our IPO, we've talked about this tactical flexibility business model. As you think about volumes of value-added, we're quite pleased to be at that run rate of 600,000. And we think that's a level that we can continue going forward, if not grow. The specific allocation amongst those products is really going to be market dependent. And it's going to be tied to pricing, profitability, demand. So I think as you think about our business going forward, that 600,000 is a good baseline, the allocation across the different value-added products could move around quarter-to-quarter. As it pertains to the other shipments. We did ship some slabs last year. In keeping with our philosophy, if we can ship a product that generates a higher profit per ton, we'll do it. I -- given the fact that we've seen steel prices recover quite nicely since the bottom of last year, we're not expecting to ship a great deal of slab this year, but that can obviously change. So it's a dynamic approach, and it's predicated on driving and realizing the highest per ton profit for our products.

[David Francis Gagliano, Co]

Okay. Just -- okay. So -- but just in -- like, just for example, in the first quarter, obviously, lead times where we are now. My guess is there's a pretty good sense as to the mix for at least the first quarter, just so we can kind of calibrate our models and be reasonably accurate on realized price estimates, that kind of thing. Can you give us a bit of a sense as to what the mix should be relative to the fourth quarter for at least cold-rolled and coated, that split? Is it going to be comparable? Or is it going to change a little bit versus the fourth quarter? And if so, what's the change?

[David Cheney]

David, at this point, we're not giving any further guidance other than the 650,000 tons with a baseload of about 600,000 value-add over the course of the year. But beyond that, we're not sharing any additional specifics at this time.

[David Francis Gagliano, Co]

Okay. And then just switching gears on the land. I noticed there was no commentary or at least, I didn't hear any on the land. Can you give us an update on the land and efforts to monetize the land divisions?

[David Cheney]

Certainly. The progress around our land is advancing quite well. We continue to fill vacant buildings. The demand for -- or the occupancy rate for industrial office space and the GTHA is close to 99%. So we're getting very strong demand for our vacant buildings. The key to unlocking the value of the land is the process called severance, which allows us to break our land into multiple pieces. That process has been conditionally approved by the town of -- or the City of Hamilton. And we expect to share more details around our progress in the coming months, but things are moving along quite well with the severance being a critical win over the last couple of months.

[David Francis Gagliano, Co]

Okay. And then just the last question for me. On the cost savings initiative. Last quarter, I think the number was $28 million of the $45 million to $75 million had been achieved as of last quarter, I think that's right. What is that number now? The $28 million, where is that figure now at this point?

[David Cheney]

So Dave, we had originally given guidance of $25 million to $50 million of sustainable cost reductions. At the time of the call, we announced an early retirement program that had the potential to realize up to $20 million. What I can say is on the $25 million to $50 million, I remain confident that we will hit that target and possibly exceed it by the end of Q2. On the -- for the retirement program, the process has -- is underway. It's ongoing. We're not up to that maximum or that target amount of $20 million, but we're making good progress. And over the course of the year, we'll continue to focus on optimizing the efficiency of our business.

[Operator]

Your next question comes from Ian Zaffino, Oppenheimer.

[Mark Zhang, Associate]

This is Mark on for Ian. Just a bit of follow-up on the mix question. I guess like in terms of the, I guess, all value-added products, what sort of end markets are you seeing the additional sort of value-added volumes going towards? Is it predominantly auto? Or is there something else in there?

[David Cheney]

Look, we're -- our focus, again, on the value-add is to have the greatest depth and breadth of products to serve as many end markets as possible. We have seen a nice uptick in our direct contract auto business. We are seeing a nice uptick in our indirect auto business through service centers. And then what we're also seeing a significant increase is our ability to provide value-add to the construction industry, that's both on coated and the fully processed products.

[Mark Zhang, Associate]

Okay, great. That's very helpful. And then just switching gears. On the cost saves. Can you share where you're seeing, I guess, areas of outperformance that could push you over the $50 million high watermark?

[David Cheney]

Look, this is -- we're seeing the outperformance across the business. Taking out $50 million of cost in what we view as permanent cost savings, requires a lot of effort from the entire organization. Whether that's being more judicious and careful of how we monitor our contractor programs, managing our yield on the material handling side, being better and more efficient in how we're moving our inputs like coke and iron ore. So to tell you the truth, it's an effort of the entire organization on many initiatives, whether it's around yield, whether it's around efficiency, material handling, on the procurement side, on the contractor side, it's across the board. So it's an all-out effort from the organization. And people are outperforming across virtually every initiative.

[Operator]

Your next question comes from Matthew Korn, Goldman Sachs.

[Matthew James Korn, Senior Metals and Mining Analyst]

Well done again on the upgraded product mix, that's been a long time coming. I want to dig in just a little bit more on the timing changes for the furnace reline and the pig iron caster. Just trying to understand, your view is that conditions expected for the second quarter have improved enough to make it less attractive to take downtime during that period. Was there any effect from whether it's availability of equipment or ability to build up slab, inventories or any other constraints and execution that was a factor there?

[David Cheney]

No, none whatsoever. Look, guys, it's really quite simple. We were ready to have this reline begin on April 1. We had the contractors, materials, we were ready to go. But the simple fact is in this industry, you need to make good when the conditions are strong. When we highlighted a Q2 reline in mid-November, we had lead times of approximately 6 weeks and prices were at what we thought were cyclical loads. Today, we have lead times well in excess of 8 weeks. Prices are up materially. So we see very strong demand, very good pricing. And frankly, we think it would be foolish to take ourselves down during what is a -- what we think of a pretty robust time in the industry.

[Matthew James Korn, Senior Metals and Mining Analyst]

Got it. I appreciate that clarity. The other question for me. Your iron supplier. They've been restructuring the portfolio, they've implied greater focus on iron sales going forward. Have you had any early discussions on what that might mean upon expiration of your existing supply contract? Do you expect to have any other supply options available to you as you add pig iron sales into your mix?

[David Cheney]

The only thing I want to comment on our supply relationship is that we've had an outstanding relationship with our supplier since emerging from CCAA, they produce a fantastic quality pellet, they're always on time, and we look forward to continuing that relationship in the future.

[Matthew James Korn, Senior Metals and Mining Analyst]

Got it. And just last, can you remind us CapEx plans, expectations for this year? What your total spend be about this year, how much on the coke, the reline, the pig iron equipment, et cetera?

[David Cheney]

It's a great question. I was expecting you to ask that. The reality is we are in the process of finalizing a couple of agreements around all of our major projects, and we will be in a position in the coming weeks to give tighter clarity around the CapEx spend.

[Operator]

Your next question comes from Seth Rosenfeld, Exane BNP.

[Seth R. Rosenfeld, Research Analyst]

A question with regards to carbon taxes in Canada. In your release you commented on some potential for increased cost starting in the third quarter 2020, the Greenhouse Gas Pollution Pricing Act. Can you give us a little bit of color with regards to how some of the provincial policies will interact with national-level policy within Canada, what scale of cost inflation [ do you think you have ] modeling over the next 1 to 2 years? And perhaps what efforts are now underway to reduce your carbon emissions?

[David Cheney]

Look, at this time, I'd love to provide some comments, but I really can't. The fact is that there isn't a program today in place for the province of Ontario. The province is working on a program, and once they have something in place, I'll be able to comment.

[Seth R. Rosenfeld, Research Analyst]

Okay. To follow up, given the guidance that you were going to see cost inflation starting in Q3, in my understanding, it seems unlikely that Ontario will have a policy in place by that time. Can you give us any sense at least on the near-term cost pressures, perhaps?

[David Cheney]

Honestly, I really can't. You're asking me to opine on policy that doesn't exist in Ontario and is still under development on the federal level. So any comment today could be out of date quite quickly. So as those policies evolve and become more clear from both the federal and provincial level, we will comment. But right now, it's just simply premature.

[Seth R. Rosenfeld, Research Analyst]

Okay. Sorry, just one last follow-up on -- or a separate question. Given the blast furnace reline, obviously, no change when this will be on an annual basis to staging. But any updated views with regards to full year '20 volume assumptions to what extent would that blast furnace reline affect the seasonality of your shipments quarter by quarter?

[David Cheney]

We're not providing any guidance beyond Q1 at this stage.

[Operator]

We do have a follow-up question from David Gagliano, BMO.

[David Francis Gagliano, Co]

I don't mean to pester too much, but I did want to follow up, at least on the CapEx question. I think last quarter, we were able to get to a range on the call of somewhere around $180 million or something like that. It is -- that's not really a range, obviously, but let's say, $150 million to $200 million. Is that still a reasonable range, or is that a reasonable range for 2020 CapEx that kind of ZIP code?

[David Cheney]

David, it's not an unreasonable range. We are -- we have a couple of major projects, which we've identified. We have some additional discretionary projects that we're evaluating. So as a starting point, that's not an unreasonable range. But as I said, there'll be some more specific clarity in the weeks to come. But that's a good starting point.

[David Francis Gagliano, Co]

Okay. Okay. And then the other question, as you work towards the reline, is there more visibility on the plans there with regards to whether it's filling the pipeline with merchant slabs, whether it's building a slab inventory or cutting finished steel production?

[David Cheney]

Our focus has and will remain to be -- serve our customers. We have a number of options at our disposal, which includes, as you said, building a strategic slab inventory. We can buy merchant coil which we've done. We can buy slab for processing, which we have done. And all 3 options are available to us and will be continue to be explored. But at the end of the day, Dave, I think the important point is we remain committed to serving our customers, and we have a lot of options in addition to our own production to be able to fill their needs during that 60- to 75-day outage.

[David Francis Gagliano, Co]

Okay. And just one last question, I guess, you mentioned in the next several weeks, we should be getting an update on the CapEx. Will there be kind of a separate press release or something? Or is it -- it's kind of intra-quarter? I'm not exactly sure why it would be coming intra-quarter. So I'm just wondering if you can give a little more visibility on that timing.

[David Cheney]

When we have more to say, we'll say it.

[Operator]

There are no further questions at this time. Please proceed.

[David Cheney]

Great. Well, thank you very much, everyone. And have a wonderful day.

[Operator]

Ladies and gentlemen, this concludes our webcast for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.