Q2 2023 Stelco Holdings Inc Earnings Call

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Hello, and welcome to today's Telco Holdings, Inc. Second quarter 2023 earnings call. My name is Bailey and it'll be Youll motivates us to today's call all lines will be muted during the presentation portion with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad.

I would now like to possible.

Harris, Vice President of corporate debt that Trevor. Please go ahead.

Good morning, everyone and welcome to <unk> quarterly earnings Conference call speaking on the call today to discuss our 2023 second quarter results will be Alan Kestenbaum, Our executive Chairman and Chief Executive Officer, and Paul <unk>, Our Chief Financial Officer, Yes.

Yesterday after the market close we issued a press release overdoing stuck with financial results for the second quarter of 2023. 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 <unk> Dot Com, we have provided a link to the presentation referenced in today's call on our web site.

Well.

I would 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 would ask everybody on today's call to read the legal disclaimers on page two of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in <unk> public disclosures in particular, the second quarter 2023, managements discussion and analysis.

<unk> 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 <unk> performance measures and review of non IR for <unk>.

Our <unk> measures of our MD&A provide definitions and reconciliations of the non <unk> measures that we use today.

Also note that all dollar figures referred to on today's call will be in Canadian dollars unless otherwise noted following todays prepared remarks, Alan and Paul will be taking questions to maximize efficiency. We would 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.

Thank you Trevor.

And good morning, everyone.

The second quarter of 2023 showed substantial improvement over the first quarter of this year and so a stelco once again, leading the north American steel industry with a 26% adjusted EBITDA margin in.

$215 million of adjusted EBITDA that we reported for the quarter, representing 231% increase over the previous quarter.

Across the board our financial metrics for the quarter showed great improvement as the business continued to experience relief from certain inflationary pressures that have impacted our costs for the last several quarters. We also experienced positive shifts in the market with improved pricing and a return to more historically normalized lead times.

Those together with continued resilience in the broader economy allowed us to take advantage of our industry, leading low cost position and effectively deploy our tactical flexibility flexibility business model to deliver stronger results in the second quarter. As a result, we remain in a position to continue to deploy our capital in the best interests.

Of our shareholders with whom our management team remains closely aligned accordingly.

Our once again paying a cash dividend of 40 <unk> per share with this dividend Stelco will have returned $1 $9 billion in capital to our shareholders over the past five and a half years when taken as a percentage of market capitalization. This level of returns to our shareholders and the entire north American industry over that time period.

It also represents a return of more than eight times the equity capital raised in our IPO.

I am very pleased with the efforts of our entire team that led to our success this quarter in the coming months.

I am optimistic that we will realize continued cost reductions as we expect to sell out of that production in the third quarter and take advantage of opportunities in the market. I also look forward to further demonstrating our along within our commitment to our valued shareholders by continuing to evaluate means to deploy our capital in an accretive manner.

Having said that we do remain cautious about the broader economy sector headwinds, including upcoming auto labor negotiations and shrinking lead times across our entire industry as.

As we head into the fourth quarter. Thank you for your time. This morning, I'll now ask <unk> shows that the detail some of our financial results.

Thanks, Alan and good morning, everyone.

I am pleased to report that we had a successful second quarter that delivered significant improvement across all of our major financial metrics. Thanks in part to a 27% increase to our average selling price over the first quarter, we were able to grow our revenue to $841 million. This quarter on its own that would be an excellent accomplishment. However, we take great pride in our ability to drive them.

Dollars through to the bottom line by taking advantage of our low cost position.

We were able to leverage the inherent strength of our business and convert that revenue into a $123 million of adjusted net income which represents over a 1% improvement over the previous quarter as Alan noted, we once again led the north American industry with adjusted EBITDA margin of 26% and we also saw a 250% improvement in adjusted <unk>.

<unk> per net ton over the first quarter, reaching $329. These results are further evidence of the power of our tactical flexibility model.

It should be noted that this success was achieved in spite of a 6% reduction in shipments through the quarter looking forward, we anticipate our shipping volume for Q3 will be approximately 675000 net tons.

Overall, our financial performance allowed the business to generate cash from operations and we once again ended the period with total liquidity in excess of $1 billion <unk>.

Including $784 million of cash by continuing to drive our revenues through to the bottom line, we have positioned our business to be able to capitalize on market conditions and continue to allocate capital in the best interest of our shareholders, including the 42 dividend per share will be payable this quarter.

It is gratifying to see the business, we have built respond to the changing dynamics in the market and to capitalize on the opportunities that were presented last quarter. We have invested heavily in our assets to modernize our facilities in order to reduce costs and maximize the efficiency of our operations. These investments and the commitment of our employees have allowed us to demonstrate our ability to navigate challenging periods.

And emerge to deliver industry, leading results and margins.

Going forward, we will not deter from the principles that led to our continued success, we will maintain a strong balance sheet exercise an unwavering focus on our costs and ensure that we deploy our capital in a manner that is in the best interest of our shareholders.

Constant is our commitment to these principles will continue to deliver successful outcomes for our business.

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

Thank you Ellen and Paul and that concludes our prepared remarks for today I would now like to turn the call back over to the operator for Q&A operator.

Thanks, Keith if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to leave that question. Please press star followed by Keith again to ask a question. Please press star followed by one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question I am pleased to ensure that you have on mute.

Luckily.

Our first question today comes from the line of <unk> from BMO capital markets. Please go ahead, Kathy or your line is now open.

Hi, Thank you for taking my questions.

On the cost can you talk a little bit more about how much you think cost could decline in third quarter and then looking to 'twenty four what are some of the puts and takes on the cost side, we should be thinking about.

Yes, hi, catch as Paul Good morning, and thank you for the question regarding costs.

So we were we were still up in this past quarter and really as we look at it.

The continued coal, which as you know cycles through our business, it's a fairly long cycle as the coal lands gets converted to coke finds its way into steel. So we were up again.

On our coke costs this past quarter it looks like we've now hit.

Right around what should be our maximum co cost given the way the operations are running on coke, making and given our KOL by which this year was a little bit better than last year. So.

That shouldnt be going up anymore, but that was the primary driver for the increase in cost.

Also based on having a few fewer tonnes that we shipped we saw a little bit less absorption on that so.

I'd say, that's the biggest driver one other one on materials just to point out we had a little bit more galvanized in the mix. This quarter. So our zinc cost was up a bit overall.

Going forward, we should see costs.

Really kind of get level on coke, so probably moving down a bit overall, we're definitely as prices have come down we're in a lower scrap price environment.

So we'll see some benefit from that.

And maybe can you just remind us on the <unk>.

Met coal side.

Are you already contracting for next year.

Yes, we don't we don't.

You don't give out that kind of information when we contract.

We recognize that coal is the commodity generally speaking it's falling right now.

Has been falling.

We expect to continue to see it fall.

Along with some.

Continued demand slow down.

But we don't disclose how and when we enter into the market.

Okay. Thank you I'll hop back into the queue.

Thank you. Thank you.

The next question today comes from the line of Bill Peterson from Jpmorgan. Please go ahead Bill Your line is now open.

Hi, This is Ben on for Bill. Thank you for taking my question. This morning.

I wanted to ask about shipments and utilization, which came in a bit later than expected could you provide some color on what contributed to that quarter over quarter decline and what gives you conviction in hitting the 675000 tonnes next quarter.

So.

You know we we.

Sell out every quarter, which explains our conviction.

We did experience in the second quarter a decline in shipments as you noted and you can see it in the buildup of our inventory and thats because of customer pushback on not taking deliveries when when they contracted to take it.

And a lot of that was pushed into into July .

When.

When when it was more convenient for the buyers to take their shipments.

So our shipments I think are reflective of what's been going on in the broader economy, which is.

Alluded to in my remarks, there is some.

Year.

What happens if the auto industry goes out on strike.

We're definitely trying to.

Monitor their own inventories and are cautious about it and subsequently.

They pushed back shipments and our shipments declined.

When you look at the results that we had.

We're lower than forecast you can see that inventory show up in.

In.

The lack of shipments show up in our inventory and you can also see that if you took those shipments and made them.

Hit our forecast so at the end of the quarter some shipments deferred.

Deferred some of the shipments.

Now going to your other question about conviction in the third quarter.

Where can we have conviction in the sense in the sense that we have sold out the material.

I would add a note of caution is we very likely we could see.

In this current quarter third quarter repeat of what's in the second quarter with borrowers remain cautious, especially since you know who knows what's going to happen with the with the auto industry strikes.

Potential strikes labor labor issues, there and if that happened.

You know us and everybody else would experience.

A drop in customer offtake from the contracts so that.

While we have conviction from the sensitive we have contracted value volume.

Its not atypical to see that not be hit.

Because customers less minutes aside that the first shipments into the following quarter and we're seeing that already now we saw an uptick in July some people, who didnt take their June shipments were very likely could see that in September as well depending on what goes on in the broader market.

Great. Thank you for that color and then if he can have a quick follow up sticking to the theme of working capital build are you seemingly expecting then more of a reversal into the next quarter and then could you remind us how youre thinking about capital allocation in the back half of the year, given minimal capex needs and the sound cash balance.

In other words could we assume some buyback similar to what we saw in the back half of last year.

So winter.

With respect to.

The working capital build up yes, it's correct that worked its way down in July but as I said, we don't it remains to be seen what's going to happen in September so while we did see a working capital draw down in.

In July we.

Hope that continues through the end of the quarter as anticipated, but it's the same thing repeats itself with there's reluctance from our customers we could see it stay stay steady at at the same level as last quarter with respect to.

Capital allocation as I mentioned, we're going into a a cautious period now.

And we're going to be very very careful in how we spend our money. That's that's one thing we like having large cash balances it gives us opportunities for all kinds of capital allocation.

Decisions.

And positions us well to do that.

Great. Thank you so much and best of luck.

Thank you.

Thank you.

The next question today comes from David Campbell from Kumar <unk> Securities. Please go ahead, David Your line is now open.

Thanks, I just had two quick questions.

First one on your cash balance.

How are you thinking about your excess cash I think in the past you've quoted 300 $400 million, that's what you'd like to keep on the balance sheet.

But just given the uncertain times, especially with potential auto strength does that number gravitate higher or are you still comfortable with that $300 million to $400 million range.

Yeah.

We're still comfortable with that.

With the right sized company, we're able to sell out our volume and really the most prolific market you may recall during.

During the depths of Covid Q2 of 2020, we were the only mill running full out at that time, So we're pretty confident about being able to continue to move.

Move the material.

As I've mentioned on the prior question, we do have some timing things that occur, but we're not at a point, where we would change our view on.

On on cash balances, having said that we've been extremely disciplined.

Went to spend the cash.

As you recall last year, we had a magnificent year on capital.

On capital allocation and returns to shareholders.

And we've got a long view on that and we'll continue.

Continue to conduct.

Conduct ourselves similarly on doing.

The best thing that we can which is whether it's dividend share buyback potential.

Potential M&A activity, if any appears well we will continue to monitor all of that as we decide what the level is but all things being equal that three to 400 million still gives us the comfort because we also have.

Plenty of liquidity on our Undrawn undrawn credit facilities.

Okay, and then second one here if I take a look at the cash flow statement. It does look like there is.

Pretty sizable employee benefit commitment that went out and it doesn't look like commitments for the year or another 78 million to go.

Paul can you tell us the timing on that and if that relates primarily to the free cash flow sweep from 'twenty two.

Yes, it's two elements David So we've got the regular most I guess three outlets. We've got the regular scheduled payments throughout the year and then we have the cash flow.

Sweet, but the excess cash flow payments based on last year's success.

That is the biggest component of that and then we also if youll recall, we had a long delayed payment related to 'twenty, one tax savings benefits.

And that was related to some administrative matters.

Just took some time to pace of that half of that went out in the quarter half of that is going out this quarter, so of that remaining $78 million.

Most of that is going to go this quarter.

The benefit of where we are and all of that is remember we have a maximum pension payment over time of $400 million.

By the time, we get to the end of this year, it's going to be a very limited amount to go.

And if we make any excess cash flow payment next year that will be done by the middle of next year.

In a worst case, it's early in 2025.

Okay. So if I look at kind.

Kind of your payments due by 'twenty six 'twenty seven time period it looks like.

$72 million for those two years is that kind of ballpark, where you guys think the.

<unk> payments one lineup.

So we're at that point.

It should be lower at that point.

Okay got it thanks guys.

Yes.

Thank you. The next question today comes from the line of.

James Mccargo from RBC capital markets. Please go ahead James you line is now open.

Hey, good morning, and thanks for taking my question.

So just wanted to ask a question on the inorganic opportunities that you had highlighted on the last call.

I know you had mentioned youre going to be cautious in the current environment, you have about $400 million of.

Cash available, but would you be comfortable borrowing in the current environment potentially re raising equity in.

In the current environment, if the right opportunity were to prevent yourself.

No I don't think we'd be raising equity or issuing debt.

And.

On some of those inorganic opportunities.

Potentially a need or you know any.

Any opportunity potentially from <unk>.

Yes, yes, all furnaces, whether or not that would be.

Through inorganic.

<unk> are potentially buying.

Another competitor.

As we've seen a few of your a few of your U S peers do.

Look.

<unk> perspective, the Eas.

Business is not is not part of our strategy at the moment. We've discussed this in several occasions we.

Continue to be concerned about raw material supply others have different views. That's my particular view.

So.

Uh huh.

Not planning on moving in that direction.

But.

Yeah.

There's plenty of interest for investors to choose what strategy. They like our strategy does not involve moving towards Eas.

Having said that we're opportunistic buyers, where we're commodity people if things become available and they're cheap and they make sense. We're.

We're not religious Liam posed to anything.

Whether it's D E F or otherwise, but we would need to see.

Really really excellent value in our company and accretion and most of that has to do with purchase price less a lot less to do with strategy. So.

Never rule it out.

But right now.

Wouldn't be the direction, we'd likely going.

And then I wanted to see if you had any thoughts on some of the.

Ongoing negotiations between the U S and the EU under the carbon tax structure.

I'm not sure if they're going to meet that October .

Deadline that they had previously set.

Any thoughts on there and any potential impact on your business, one way or another.

We're not in those discussions so I don't have any insight on that.

Okay and lastly, one of your competitors was talking about kind of some of the initiatives.

Around hydrogen and as a way to potentially reduce them.

Two emissions from some of its furnaces, that's something that your teams in discussion.

With or something you're keeping an eye on.

Yeah, absolutely we've got a whole host of de carbonization initiatives that are being worked on right now.

Hydrogen is one of them.

We've got a whole suite of things that we're working on to to help.

<unk> the carbon footprint of our of our facility.

Super exciting area for us that remains undrawn.

On the working phase.

We've got excellent cooperation from.

All kinds of providers financial providers technology providers, but the hydrogen definitely.

Is one of the areas that we're looking at.

Awesome I appreciate you, taking the time and I'll turn the line over thank you.

Thank you.

Thank you.

Next question today comes from the line of cut feedback from Credit Suisse. Please go ahead. Your line is now open.

Yeah, Hey, good morning, Alan and Paul I was wondering if you could give us an update.

What kind of capital spending expectations for the rest of this year and next year.

And if you have any updated views on that.

Battery recycling plant that I know you guys are.

Planning.

Yes.

So on capital I think you can look for us to be kind of flat.

For the rest of this year and next year a lot of that is driven by our expectations for.

Business performance, which we think was going to be.

Kind of consistent with how things are this year. So we're going to be very mindful of our capex spend.

I think that puts us in the vicinity of about $150 million.

For next year.

And about half of that remaining for this year.

And we also as I mentioned to the previous caller, we're very very focused now on our decarbonization efforts.

Which.

Which is something that it's hard to pinpoint because there's.

A lot of avail.

Availability of alternative financing for that and so how.

How we spend and where we get the sources of funding may or may not be in our cabinets budget, depending on what the sources are.

But anyway I think you can look for the balance of this year to remain as projected about 100 and the balance of whatever we havent spent a 150 for this year and also.

The same for for next year, what was the second question yet.

Just an update on the batteries battery recycling batteries.

Lithium cars yet.

Yeah. So.

Where that stands that's been delayed.

The reason why its been delayed is that the technology provider that we apartment with while they are excellent and have.

Tremendous tremendous work they haven't.

Like like frankly, all of the battery recycling companies that are out there today are.

Are still working to get.

The right specifications on the output provider to provide to the device.

How much of the anode makers and so we're sitting in a wait and see position right now and not spending money waiting for the C V.

The company actually produce the quality that's needed at the analyst those tests are ongoing they're expensive and the anode makers themselves and not really certain what they need. So there is a ongoing dialogue of making things match I have to say that just met with these folks. The other day I think they're at or ahead of any of their of their competitors.

I'm glad that we're doing this quietly so they have the tomsic all resources and put it into development as you remember there's two parts to this.

The black NASS creation, that's easy.

We can do that anyone can do that but the question is what do you do with black Knight and Thats converting it to a hydro metallurgical process.

Into our finished goods, whether it's lithium cobalt nickel and.

And those products themselves as where theres still a lot of dialogue back and forth and download makers as to hitting the exact specifications. So our perspective, there's no reason to build the black mirror side.

Stopped processing something unless we can actually recycle it into the full final product and that that development is ongoing the pilot plant in Germany continues to operate works with big Big Counterparties to achieve those results and what those results are achieved.

We are we expect to break ground now just to give you kind of a sense of timing we should have been there already.

On the initial schedule or not and so it remains difficult for me to project like win but we're pretty comfortable end of life batteries aren't really going to start coming out in any kind of large numbers for another three or four years.

So we still have plenty of time to do this but it is unclear because from a technology perspective like virtually every one of its competitors, they're not quite there yet in the living a product a pure enough that go into an animal Baker.

Great. Thank you very much.

Okay.

Thank you.

There are no additional questions waiting at this time, so I'd like to pass the conference over to Alan Kestenbaum for any closing remarks.

Thank you everyone very much for your attention today, and we will get back to work and continue to really try and drill down on lower costs as we move into this environment.

So we think might be ahead of us and we look forward to speak to you next quarter.

Thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect your lines.

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