Stelco Holdings Inc

TSX:STLC

Earnings Call Transcript 2022-Q4

[Operator]

Hello, and welcome to the Stelco Holdings Inc. Fourth Quarter 2022 Earnings Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions]

I'll now hand over to your host, Trevor Harris, to begin. Trevor, please go ahead.

[Trevor Harris, Vice President Corporate Affairs]

Good morning, everyone, and welcome to Stelco's year-end earnings conference call. Speaking on the call today to discuss our fourth quarter and full year results for 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 fourth quarter and full year 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 management 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, the 2022 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 referenced 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 ask that all participants who would like to ask a question, please limit themselves to one question and one follow-up before re-queuing.

With that, I would now like to turn the call over to Alan.

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Thank you, Trevor, and good morning, everyone. Once again, Stelco's team delivered excellent results in 2022, and we again led the industry in adjusted EBITDA margin at 34%, while making 2022 the second-best year in Stelco's history. While inflationary pressures impacted our costs as we move through 2022, Stelco was able to mitigate some of those pressures with the low-cost operating structure that we have created through our strategic capital investments and relentless focus on reducing costs.

Since the end of Q4 of 2022, the business is now once again on the upswing with the reversal of all of the factors that impacted us last quarter, namely a reduction in the cost of key inputs, and increase in steel prices, which as reported by CRU, have increased by more than 37% since reaching a low point in early December, further increases announced across our industry just last week, a lengthening of lead times and increased demand, all at a time where inventory levels at key customers are lower than normal. All of this should result in increasingly stronger results in the coming months and quarters.

As for capital allocation, we have ensured that our shareholders participated in the outstanding financial success of 2022 by returning unprecedented value to them. Specifically, over the course of the year, we returned $781 million to shareholders through the repurchase and retirement of 29% of the common shares that were outstanding at the start of last year. Together with share purchases in prior years, this represents a total reduction of 38% of the shares outstanding since our IPO.

Additionally, Stelco paid cash dividends to shareholders in 2022 at an aggregate or in excess of 10% of our share price at the beginning of the year. The total returns this past year were more than $1 billion, bringing the total capital return to our valued shareholders to more than $1.8 billion since our IPO in 2017, which is almost 8x what we raised in our IPO. When viewed as a percentage of market capitalization, this level of return to shareholders is unprecedented in our industry over that time frame. And we are just continuing with this.

As part of our ongoing commitment to deploying our capital in the best interest of our shareholders, we have launched a normal course issuer bid that will allow Stelco to purchase 3.3 million common shares or approximately 6% of the Company's shares currently outstanding. As we have said many times, our senior management team thinks and acts like shareholders because as a group, we are, and this close alignment with the interest of our public shareholders ensures we will continue to identify opportunities to deploy capital in a manner that maximizes returns.

2022 also saw our business complete our five-year strategic capital investment plan that was initiated immediately upon taking control of the business in 2017. The final components of that strategy included the commissioning of our electricity cogeneration facility and the completion of the rehabilitation and upgrade of our Lake Erie Works coke battery.

Collectively, the $900 million we have invested to date has allowed Stelco to increase production of steel, enhance efficiencies throughout our processes and lower our cost structure, while also making reductions to our carbon footprint. These investments were all completed while holding true to our philosophy of avoiding financial leverage. We have built a strong business that was able to complete these investments only with cash generated from our operations while continuing to deliver industry-leading capital returns to our shareholders.

As we look to the future opportunities to deploy our capital, we'll remain focused on preserving our strong balance sheet and ensuring that future investments in our operations provide exceptional returns and do not compromise the financial health of our business. Paul?

[Paul Scherzer, Chief Financial Officer]

Thanks, Alan, and good morning, everyone. While a number of market challenges did impact our results for the fourth quarter, we were able to generate adjusted EBITDA of $82 million and complete another successful year for our business in 2022. Overall, we were able to build upon the record success we had in 2021 and finished the fiscal year with almost $1.2 billion of adjusted EBITDA, which translated into an adjusted EBITDA margin of 34%. Perhaps more importantly, we continue to demonstrate our ability to utilize our tactical flexibility model to drive revenue through to the bottom line and close to 70% of our adjusted EBITDA into adjusted net income in 2022.

These accomplishments were in the face of the market headwinds we outlined in our guidance for Q3 and Q4 of 2022. Our average selling price was down 14% year-over-year, but was most impacted by a 34% decline from Q2 through Q4. This combined with the reduced lead times and the impact of inflation on many of our input costs resulted in a 42% decline in adjusted EBITDA year-over-year. However, our overall shipping volume remained strong at more than 2.6 million net tons, and we anticipate that shipping volumes for the first quarter of 2023 will be in line with those of the previous quarter.

We started to see some stabilization of selling prices in the latter part of Q4 and that upward pricing trend has continued into the early part of 2023, which is a strong positive signal for our business.

As Alan noted, we also completed the final pieces of our $900 million strategic capital investment plan and returned over $1 billion in capital to shareholders in 2022. We accomplished this while ending the fiscal year with more than $1 billion in total liquidity, including $809 million of cash.

The continued ability of our business to generate cash and preserve a strong balance sheet affords us the financial flexibility to pursue growth opportunities should they arise and continue to deploy our capital in a manner that benefits our shareholders, including through the NCIB announced yesterday. As we have done in the past, we will use the NCIB opportunistically to take advantage of circumstances where we view the share price to be significantly below its intrinsic value.

Continuing to build on our record capital returns, I'm also pleased to note that we will be maintaining our regular quarterly dividend of $0.42 per share for this quarter after increasing it by 40% in the fourth quarter of 2022.

Overall, 2022 demonstrated that the fundamentals of our business are strong. When faced with adversity in the market, we were able to continue to generate cash and deliver substantial returns to our shareholders while continuing to invest the necessary capital to ensure our business is prepared to compete in the future.

We have set in place a foundation that will allow Stelco to grow and take full advantage of opportunities that arise without sacrificing the strength of our balance sheet or compromising our ability to leverage our low-cost structure and deliver sterling results to our shareholders.

Thank you for taking the time today to join our call.

[Trevor Harris, Vice President Corporate Affairs]

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

[Operator]

[Operator Instructions] Our first question for today comes from David Gagliano from BMO Capital Markets.

[David Gagliano, BMO Capital Markets]

I'll give it to one and one follow-up. So both are about the near-term outlook. We've heard from all the other companies that have reported, steel producers reported because of lags in timing on pricing that Q1 pricing will likely be down a little bit quarter-over-quarter. Can you give us a little color around your expectations for Q1 pricing and costs? I know the volume guidance was already provided.

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Well, look, yes, a little bit of a lag, but we started to see this upturn in -- coming in late January, early February. And because we are largely a spot seller, didn't really expose ourselves to long-term contracts at the low point in the market. We should be starting to see a lot of this coming through like at the end of -- towards the end of the first quarter and very strongly into second quarter. We actually, at this point, have sold down about half of our second quarter book and all of our first quarter book, which is really good. I went back over the last few years. And even in the very robust 2021 year, we were not this far ahead in terms of our sales.

So I think what we're seeing now is a bit of nervousness and inventory replenishment on the part of the customers, and it's definitely driving momentum. And you've seen this in similar announcements from other people in the industry. So I think, you'll start to see some impact in Q1. And definitely, in Q2, you should start seeing a significant impact to the change in market conditions that started to appear at the end of January.

[David Gagliano, BMO Capital Markets]

Okay. That's helpful. And then my follow-up is a follow-up to the prior one if you could talk a little bit about cost trends quarter-over-quarter in the first quarter? And then the other part of it is as we get into 2Q 2023, if I look back at Q3 2022, underlying pricing dynamics were similar if you lag it a little bit, a decent amount, if you lag it about six weeks pricing, if you use hot-rolled coil as a proxy, was similar to what we're seeing now and Stelco generated $245 million of EBITDA. So as we think about puts and takes in Q2 2023, is there any reason in your view that we shouldn't see a $200 million plus quarter in the second quarter?

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

I've not actually gone back and done that math. So it's probably -- it's an interesting thing to look at. So I'll get -- I'll definitely do that after this call, David. But I think the answer is, yes, we should start expecting to see those types of quarters again. And hopefully, more as the time moves on.

There's a lot of momentum right now. You asked about cost. Last year, we got hit really hard on natural gas costs. Nobody expected a war. And this year, natural gas prices are substantially down from where they were. So right there is a significant cost savings.

We managed to escape a lot of the very significant increases in coal. A lot of that coal was diverted to energy usage because of the energy shortages in Europe. We managed to get past most of that, not all of it. We did get hit a little bit at the very high range of the coal cost, but the coal cost is definitely higher than they were two or three years ago.

So -- in any event, some of the high costs that you saw at the end of last year will start to dissipate as we move through this year and get into some of the cheaper coal that we've purchased. And then as you know, our iron ore costs are relatively flat, and so that's in great shape. We've got tremendous operational improvement. So I think as we start moving into the second quarter, you're going to start seeing benefits from -- first and foremost, from the pricing environment and also the impact of some of the lower coke costs and certainly the natural gas prices, which is a big help right now.

[Operator]

Our next question for today comes from David Ocampo from Cormark Securities.

[David Ocampo, Cormark Securities]

Alan, I guess when I look at the financial statements, you and the team have spent around $45 million on capital projects with support from the Strategic Innovation Fund. And I believe some of that CapEx was spent on R&D and helping reduce your environmental footprint. I know it's pretty early days here, but maybe you can tease or provide additional color on what those projects look like.

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Which projects?

[David Ocampo, Cormark Securities]

Stuff on reducing environmental footprint.

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Yes, we have made some progress on that. We have multiple different approaches to reduction of our carbon footprint. We've not disclosed details of what our plan is. What has come out in public is the SIF funding that the government has proposed to offer to steel companies like us. So that was an announcement that the government made.

Since that time, we have received a proposal from SIF for funding towards our projects. So we've done some work on proving out our concept in terms of what we're going to do and are now lining up the financing for that.

So definitely, very, very exciting times for us in that area. We hope to be leaders as the lowest carbon footprint plant perhaps in the world is what our goals are. And we're on our way doing a lot of the work in terms of the engineering, in terms of proving out our concept and also raising the financing. So definitely, a lot of excitement ahead for us in that area now.

[David Ocampo, Cormark Securities]

No, that's helpful. And we'll definitely keep an eye out for that. And then maybe as a follow-up for Paul. How should we be thinking about CapEx for the year? I know you guys did close to $200 million in '22.

[Paul Scherzer, Chief Financial Officer]

Yes. Thanks, David. This year, I mean, our CapEx will certainly be lower than last year. As you know, we've gotten through all of the major capital projects. We maintain, as we've talked about, really rigorous return requirements for looking at new projects.

And so we're going to be much closer to kind of our maintenance mode, possibly with some small things here and there, but nowhere near that $200 million.

[Operator]

[Operator Instructions] Our next question comes from Timna Tanners from Wolfe Research.

[Timna Tanners, Wolfe Research]

I really wanted to just probe more on the automotive opportunities for you, in particular, talking about exposed automotive in light of some aggressive price increases recently and some consternation from customers. So can you just remind us what are your opportunities for exposed in your automotive plans and opportunities going forward?

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Sure. Well, look, as we talked about in the past, we operate our business a little bit differently than others in the sense that we operate using a policy called tactical flexibility. Tactical flexibility is how we move product around through our various abilities to sell. And that includes shipping pig iron up to the most sophisticated materials that go into automotive exposed products that you're mentioning.

This particular year, that could change. We have automotive business that we've always had, including exposed. We also sell a lot to oil and gas. We sell a lot to construction, and we sell a lot to what we call appliances. So we move our sales mix around.

And the end of last year was very, very heavily involved in oil and gas, servicing oil and gas industry, also the tubing industry for nonresidential construction, which remains very, very strong as well as automotive.

We don't really participate that much in annual contracts on the automotive business for reasons that have to do with our own perspective on maximizing profitability. You may hear different views from other people and some companies certainly have a larger piece of that business than us. We participate in that business, but we drive ourselves to what gives us the highest return and where our operating advantages come from. And that's how we run our business.

So in terms of specific question on automotive exposed products, while we participate in that, are there other steel producers that do have a larger share in that, we probably can answer that question better for you about what's going on in the market. We certainly have heard from some of our competitors from public statements about very robust pricing in that area, and that's fantastic for us because the more that those producers make and enjoy those profits, the larger amounts of other markets that we participate in become available to us also at better prices.

So I think all in all, what you're seeing here across the industry is significantly higher pricing flowing through, very active price announcements. Steel futures are going up, and that's all indicative of a pretty healthy environment here. And I think the thing that we see the most is that some of the other industries that we are more active in, like pipe and tube and things like that, we're picking up more business there because of the improvements in the automotive space that a number of our competitors are participating, yes.

[Operator]

We currently have no further questions for today. So that concludes the conference call. Thank you for joining. You may now disconnect your lines.

[Alan Kestenbaum, Executive Chairman and Chief Executive Officer]

Thank you very much, everyone, for joining, and stay tuned. Good time to be in the steel business and look forward to seeing you and speaking to you guys again in a few months. Thank you. Take care. Bye-bye.