Q3 2023 Stelco Holdings Inc Earnings Call

Hello, and welcome to just Okay Holdings, Inc. Third quarter 2023 earnings call. My name is Terry and it'll be the conference operator today, there will be an opportunity to ask questions and you can do this by pressing star followed by one when you kind of think he patch I would now like to hand over to Trevor Harris to begin. Please go ahead.

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

Yesterday after the market close we issued a press release overview of <unk> financial results for the third 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 on today's call on our web.

Might as 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.

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 two of the accompanying earnings presentation and also refer to the risks and assumptions outlined in stock goes public disclosures in particular, the third quarter 2023, managements discussion and analysis sections relating to forward looking information and risks and uncertainties as well as our filings with the Securities Commission.

In Canada, the appendix of our presentation and the non <unk> performance measures and review of non <unk> measures of our MD&A provide definitions and reconciliations of the non <unk> measures that we use today.

Please 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.

Yeah.

Thank you Trevor and good morning, everyone.

We were able to generate strong results and deliver $153 million of adjusted EBITDA, which is approximately 20% margin during the third quarter of 2023, despite a price environment that deteriorated for most of the period.

Our industry, leading low cost structure, which we have worked tirelessly to construct has enabled stelco to once again achieved the highest steel EBITDA margin in the entire North American reporting steel industry this quarter.

Generation generating significant cash even in a softer environment and in turn has provided us the opportunity to provide industry, leading returns to our shareholders.

Shareholders. This achievement is quite remarkable and that not only have we achieved this industry, leading EBITDA margin in this quarter.

But we have done so in 10 out of the last 12 quarters. It's 10 out of the last 12 quarters dating back to 2020.

When we completed our blast furnace upgrade project.

Following on the success of our third quarter. In addition to our ordinary dividend of 40 <unk> per share <unk>, we will be providing our valued shareholders with a special dividend of $3 per share, bringing the total capital return to shareholders.

Two more than $2 billion since on <unk> since our IPO in 2017, while investing over $1 billion back into the operations of our company. This is a track record that we are exceptionally proud of and one that is unmatched by any of our reporting peers in North America, when taken as a percentage of market cap.

<unk>.

Over the past six years, we have continued to demonstrate that our management team is closely aligned with our shareholders something that continues to be a unique strength of our company. Our senior management team. Thanks and act like shareholders because as a group we are shareholders, we identify and evaluate opportunities to deploy cash.

<unk> in a manner that maximizes returns through the utilization of our tactical flexibility model and taking the necessary steps to maintain and where possible approve improve upon our already low cost position.

In the past few weeks, we have begun to experience a significant upward trajectory in steel prices combined with stable market demand and at the same time have secured inputs.

At favorable pricing in a timely way, which should reduce our costs from 2023 levels over the coming months, we will realize the impact of these positive pricing and demand trends and lower costs to improved results beginning in 2024 in order to ensure we maximize the.

Unity that the market offers we will remain vigilant on costs and work to find further efficiencies in our operations to take full and continue our strong track record.

Generating cash.

And for your time this morning, I'll now ask Paul assures that the detail some of our financial results Paul.

Thanks, Alan and good morning, everyone.

As Alan noted at the outset in his remarks, the third quarter provided relatively weaker pricing than anticipated, which can be seen in the decline in our average selling price of 11% over the second quarter. This drop in average selling price was the primary contributor to the 8% decrease in revenue that we saw quarter over quarter, but was partially offset by a modest increase in shipments.

Resulting from steady demand from our major market segments. Despite the challenging pricing environment, the business was able to generate $153 million in.

And adjusted EBITDA in the third quarter due to our ability to control our costs and drive revenue through to the bottom line.

This result, once again demonstrates our ability to deploy both our tactical flexibility business model and our low cost structure to drive revenue through to the bottom line and generate returns at every point of the market cycle.

We continue to generate cash from our operations and ended the quarter with over $1 billion of liquidity, including $841 million in cash this strong financial position combined with the overall strength of our business has positioned us to be able to reward our loyal shareholders with a $3 per share special dividend. In addition to our ordinary dividend.

<unk> 42 per share these returns of excess capital to our shareholders are in keeping with our philosophy of our business as always we will continue to monitor the market as we look to make decisions regarding the deployment of capital at the appropriate time.

Looking ahead to Q4, we expect our shipping volume will be approximately 600000 to 625000 net tons and adjusted EBITDA will be lower than this quarter, but with increasing prices and expanding lead times were anticipated anticipating a rebound in results in the first quarter of 2024.

When our business is faced with market challenges such as weaker pricing is fulfilling to see both our employees and our business response, our overall commitment to managing our cost and maximizing the efficiency of our operations as management led but as delivered by each and every employee across the business. It is their execution of our business strategy of tactical flexibility that allows us to take full advantage of.

Our industry, leading cost structure and deliver positive returns to all of our stakeholders over the coming months, we will continue to leverage our strengths and take advantage of the improved pricing environment and market dynamics that are developing over the past number of weeks to deliver improved results in the first quarter of 2024.

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

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

Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now to remove yourself from the queue is staff with a biopsy and then preparing to speak. Please ensure that your line is now muted lately.

The first question on the line comes from Kasha Chen from BMO capital markets. Your line is open. Please go ahead.

Bob.

Hi, good morning catcher.

<unk> the question so.

So for Q4.

<unk> kind of interesting we think most of the costs are going to be relatively stable the one cost debt.

Really is where we will see some volatility is on the scrap side and Thats as you know a developing story because that changes on a monthly basis.

With <unk> moving up as sharply as it has which is great but with lead times, we won't start to benefit from really until the first quarter, we expect to see some scrap price movements that we could see costs going up slightly due to that in the fourth quarter.

The other thing Youll notice with our guidance of 600 to 625000 tons, which is a bit lower than what we usually guide to.

We'll probably have slightly higher fixed cost in terms of <unk>.

<unk> initiatives, so I would expect a modest increase in the fourth quarter.

Okay. Thank you Paul and just as a follow up.

Given the potential M&A activity in the U S. Can you just remind us how you're thinking about inorganic growth.

Alright, yes, I'll take that question.

Look we were always watching.

Watching our balance sheet.

He is making sure that we have all tools available to us whether it's special dividends like we did today share buybacks M&A activity and we'll continue to keep our balance sheet.

Really flexible to two to work on anything.

This particular case.

With the dividend modest amount of cash relative to our total liquidity.

With the strong strong steel environment coming upon us early next year.

It will be quickly replenish them so.

We made the decision to do the dividend.

And it keeps us flexible like we always like to be for all opportunities that come around.

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

Thank you as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now.

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

Yes, hi, good morning, and thanks for taking our questions.

I'd like to turn a step back and kind of get your views on the current state of the steel market.

Talking about the customer inventory levels on that point are you seeing meaningful restocking by customers. After presumably they are drawing down quite a bit in and around the UAW strike and then you talked about extending lead times.

Current lead times look like and how does your fourth quarter order book, how is that shaping out and perhaps even into the first quarter.

Yeah.

Yes, sure. So we are definitely seeing.

Restocking.

Having the auto industry teetering on the on the verge of closure constantly threatened strikes across the industry. It means that people like to keep wider inventories with those situations now resolved.

And backlogs in the auto sector existing.

Together with price improvement people tend to restock pretty quickly and that's why you start to see sharp pricing rebounds, like Youre seeing right now so.

Usually we see this a little bit later, we don't combined with the construction season.

In in the spring at this time, it's coming earlier I think it caught some people by surprise, we were low on inventory and therefore, there's a rush to buy right now and to your question about lead times, which is always a great indicator to us.

So we're sold out for Q4.

And we are.

Well on our way to selling out Q1.

Not so much in the March period, but January and February are getting filled up pretty rapidly.

I have to tell you I looked at my.

At My records that I keep going back to 2021 I don't have the.

The data right before hand, but we have never been this far out during on November 9th this far out on our order book as we are right now at this time of the year.

It's not to say, we haven't had longer lead times in prior periods, we have but typically in the fourth quarter things tend to drop off and get.

Get a bit depressed.

Fourth quarter, I think driven by the resolution of the auto industry strikes us is different so the order book is strong.

I think the good news bad news here is that when you look at Q4 pricing realized Q4 pricing.

We're not getting.

Getting the current whatever I don't know what the list price increases were quoted up to a thousand bucks or something.

We're not getting that but we are.

In Q1.

In late late December well get it definitely getting starting to see better prices. So.

It's I think it's very indicative of a very very healthy market and we're going to continue to ride. This is.

As long as it goes.

And the other thing that I'll point out Thats interesting, which was a bit of a surprise to me as the construction sector, which normally is weak. This time of the year winter people slow down and building in certain you had expected.

In the form of higher from higher interest rates and.

Actually it's very very busy on the construction side, which is a surprise so.

These factors are definitely contributing contributing to very positive.

Pricing and demand environment right now.

That's a lot of great color if.

We can talk about capital allocation. So first on Capex are you are you still targeting $150 million Canadian this year, I guess that would imply a meaningful step down in the current quarter and Directionally, how should we start thinking about 'twenty four and then I'll just ask the other one on this on the strategy of the special dividend.

I understand you talked about the shareholder returns over a period of time, but I guess, how should we think about the preference amongst your shareholders going forward I mean do they prefer this type of massive method or perhaps just raising the typical dividend on a sustainable basis or.

Why not buybacks, especially if we consider where the share prices have trended up until recently.

So yeah I'll take both points here first of all on the Capex, Yes, we are trending towards that 150, <unk> not finalized our budget for next year, yet, but it will be in a similar range all the big Capex is behind us and so we're running pretty solid on the capex. So we're not expecting any big surprises.

There in terms of capital allocation as I mentioned first and foremost, we try and keep our balance sheet.

Flexible and we're not biased one way or another whether it's special dividends or share buybacks.

We try and do the best for the share price.

In this particular time for reasons I can't get into we're not able to execute on any share buybacks and so we opted for the special dividend.

Okay.

Yes, thanks for that additional color I'll hop back in the queue.

We currently have no further questions I will hand back to Mr. Alan Kestenbaum for closing remarks.

Well.

I think based on this conference call you can see not only are we the most efficient.

Steel producer in North America were also the most efficient conference callers in North America I think.

17 minutes as a record so that's how we do it.

We welcome you all here and as usual Paul will be in touch with the with all the analysts and we look forward to the ports and any further questions and you guys know where to reach us have a very good day everyone. Thank you.

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

[music].

Where to reach us have a very good day.