Q4 2023 Stelco Holdings Inc Earnings Call

February 22, 2024

If you would like to ask a question. Please press star followed by one of your telephone keypad.

I will now hand over to your host Trevor Harris, Vice President Corporate Affairs to begin Trevor. Please go ahead.

Good morning, everyone and welcome to <unk> quarterly earnings Conference call speaking on the call today to discuss our 2023 fourth quarter and full year 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 fourth quarter and full year of 2023. This press release, along with the company's financial statements and management's discussion and analysis have been posted on SEDAR, plus 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.

Web site 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 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 <unk> public disclosures in particular, the 2023 managements discussion and analysis sections relating to forward looking information.

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

Please also note that all dollar figures referred 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 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 al.

Thank you Trevor and good morning, everyone.

At 2023 proved to be another year, where stelco once again demonstrated its ability.

Due to its lowest cost position on the cost curve to operate successfully even in the presence of challenging market conditions.

Accordingly, our business continued to excel and we were able to deliver upon our long standing commitment to our shareholders you will recall that with the payment of the special dividend that we announced following the third quarter of 2023, we surpassed $2 billion of capital return.

To our shareholders since 2017, consisting of approximately $1 2 billion in share repurchases and $900 million in dividends, both of which lead the industry as a percentage of market capitalization. We are extremely proud of this track record of generating cash and returning capital to our valued shareholders and remain.

Dedicated stewards of shareholders' capital today, we are building further on that track record with the announcement of our normal course issuer bid that will allow the company to purchase up to three three.

Million common shares representing more than 6% of the shares outstanding and an almost 20% increase to our ordinary dividend to <unk> 50 per share per quarter. This is our first increase of our ordinary dividend since bumping to <unk> 42 per share following Q3 2022.

And comes on the heels of US having paid two special dividends in the interim.

As I have said many times, we are a company led by shareholders and we will continue to make decisions regarding the deployment of capital in the best interest of the company and its shareholders. While at the same time, ensuring the fundamentals of our business remains strong and we remain we remain.

Poised for growth, while our fourth quarter results were down over the previous quarter. We do expect to see improved margins in Q1 and Q2 as we begin to realize the higher market pricing that was contracted starting in the fourth quarter of 2023. This combined with the anticipated stronger market demand.

We'll give still call the opportunity to capitalize on the fundamental strength, we have built into our business and provides us with optimism that we will be in position to continue generate cash and deliver strong results as well as capital returns to our shareholders.

In addition.

We have been actively evaluating opportunities to grow our company all while staying staying highly disciplined on value and knowing when to say no. We will remain active but only where valuations are attractive and synergies are significant overall I am excited about our accomplishments and the opportunities that lie ahead for our.

Business, we are entering 2024 on a foundation of strong fundamentals and have every reason to be optimistic about the future of our business and what that will mean for all of our valued partners from our employees to our customers and our shareholders. Thank you for your time. This morning, I'll now ask Paul shares.

To detail some of our financial results.

Thanks, Alan and good morning, everyone.

Overall, we are pleased with the ability of our business to respond to both the challenges we face.

2023 fiscal year end to the opportunities presented to us by the market.

Loud us to generate positive margins, while our results in the fourth quarter were down over the third quarter. This was largely attributable to a 13% decline in average selling prices quarter over quarter and a scheduled maintenance outage that did have a negative impact on our shipments during the period.

While these factors led to a decline in adjusted EBITDA to $51 million and adjusted net income of $9 million in the fourth quarter. The business was able to generate $484 million and adjusted EBITDA for the fiscal year.

Of course, we maintained our focus on delivering returns for our shareholders as Alan has noted and paid $258 million in dividends throughout 2023, we remain conservative in our approach to liquidity and as such ended the year with $645 million of cash and no borrowings under our revolving credit.

<unk>.

We intend to continue fulfilling the commitment we have always made to our shareholders and we will keep their interests at the core of our business throughout 2020 for our continued success will be based on management's unrelenting focus on our core principles from 2017, we have never wavered from our commitment to maintaining a clean balance sheet driving down our operating costs and remaining tack.

<unk> flexible at all points in the market cycle in order to take full advantage of any opportunity presented by the market through.

Through the collective efforts of our entire team of 2400 people will use these strengths to drive results and revenue through to the bottom line.

As we enter the first quarter of the new fiscal year, we see opportunity in the market and anticipate a return to shipping volume approximately 625000.

Two 675000 net tons as well as an improvement in adjusted EBITDA due to the realization of more favorable pricing that we booked through much of the fourth quarter.

The strong fundamentals that guide our business, giving us confidence in our ability to deliver results and create value for our shareholders. We're continuing to demonstrate our confidence through another increase their ordinary dividend by almost 20% and proposing to purchase up to approximately $3 3 million common shares under our normal course issuer bid to.

Launch next week with the pending payments are declared ordinary dividend, we will have surpassed $2 $1 billion in capital return to our shareholders since our IPO in 2017.

This is a track record we are extremely proud of and one we will continue to build upon.

Overall, we are pleased with what we were able to accomplish throughout 2023 and anticipate a continuation of our successful track record of delivering positive results and solid returns for all of our stakeholders.

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

Thank you Ellen and Paul that concludes our prepared remarks for today I would now let's turn the call back over to the operator for questions and answers operator.

Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad, Andrew we'd like term means your question. Please press star followed by Kate.

On the pad to ask your question. Please ensure your line is on mute.

And our first question, John Kim of BMO capital markets.

Please go ahead your line is a panel.

Hi, Thank you for taking my questions.

First on the first quarter volume guide implies sequential increase.

Look on a year over year basis, it's lower can you talk a bit about what's driving your expectations for volume to be lower on a year over year basis.

Catch are you are you comparing that to what our projection was a year ago into actual shipments were a year ago.

Sorry actual shipments.

Right.

Well look.

We try to be conservative in our estimates and put out the guidance Conservative we clearly.

Hope to exceed that but.

I wouldn't necessarily compare the guidance that we give compared to.

The.

The actual shipments we always strive for better.

Okay, and Alan you mentioned in your prepared remarks that.

Margins are expected to improve in first and second quarter is it fair to assume that you're already selling into the second quarter at the current prices.

Yes, we are.

Business has been going very well since we got into that trough in the fourth quarter.

Business has been going very well.

We're well into the second quarter at this point completely sold out for Q1, well into the second quarter. So business looking business is looking good.

Can you provide any more color on how much volume you're.

You have already sold for second quarter.

Yeah, I don't think we're going to do that.

Because obviously competitive reasons so.

But where we're ahead of pace from where we were a year ago.

Perfect. Thank you.

Thank you and the next question.

Jenny of Stifel. Please go ahead your line is open.

Good morning, everyone.

I was just curious Alan if you could maybe talk a little bit about as youre thinking about evaluating M&A opportunities.

I guess, whether you'd like to vertically integrate the business from an iron ore perspective, or maybe some other raw material input.

Or at another producing asset or maybe how you're thinking about managing those opportunities.

No.

A good question and the answer is we really look at both.

Because both of them are.

Integral to our to our business and whether that means.

Going upstream and and not only having all iron ore for our own operations of course, we have iron ore from our or our relationship with <unk>.

With <unk>, but if we see an opportunity to increase that.

Gives us two opportunities one to go and sell up of iron ore in the free market that also gives us opportunities to expand our footprint by owning more.

Iron.

Iron ore assets. So so the answer is really both both of it as a separate business line opportunity as well as something that could feed a future future growth when it comes to other areas of the footprint to a to go after we do.

Kind of what I implied in the market and also what historically, we've done which is to look for things that are.

There are.

Synergistic with us that we can extract synergies.

And that comes.

Coming along with that gives us some limitations in terms of geography, and things like that because you won't be able to get some benefits from operating in concert with additional facilities. We were very active last year on <unk>.

We'll have opportunities we didn't.

It didn't get there.

But for US we are value investors and strategic investors always focused on free cash flow generation. That's the main main driver for us.

No.

Maybe to elaborate on that that exclude things like major projects and things like that that can consume cash for many years and result in building something that may or may not be the right strategic fit by the time it's.

Built but does include things that become attractively priced cash flow generative highly synergistic.

To our business.

Yes.

That does lead into my second question, as we think about producing assets and whether it be specialty products product Cif.

And the like.

At this point would you consider yourself somewhat agnostic as long as it delivers the requisite IRR and there is I guess certainty over what the capital cost is.

Yeah.

So the answer is really both both as a separate business line opportunity as well as something that could feed a future future growth when it comes to other areas of the footprint to go after we do.

I'd say some recent developments in the market have.

My answer to your question a year ago would have been yeah, all financial IRR, that's kind of the way have been brought up trained look for value opportunities and try and extract the values I do think when you look at the <unk>.

Kind of what I implied in the market and also what historically, we've done which is to look for things that are there.

<unk> sale.

Nippon purchase of U S steel, whether that happens or not.

There are.

Synergistic with us that we can extract synergies.

Nearly there were some assets in that.

And that comes.

<unk> that.

Our attractively valued.

I'm studying that and trying to learn what we can learn from that.

Acquisition and how it was valued as to what we might be able to do here at stelco too.

We'll have opportunities we didn't.

It didn't get there.

Improve.

But for US we are value investors and strategic investors always focused on free cash flow generation. That's the main main driver for us.

Let's say the appetite for shareholders to come in and find value or if you look at our shares the way they've been trading.

We are we are sitting at a multiple of.

No.

Somewhat over three times, and we sit here and look at that and like Okay. Well. This transaction just got done it I don't know eight or nine times and its a huge gap for a company thats in the same business and by the way for a company like <unk> that has outperformed that particular target from an EBITDA multiple quarter after quarter after quarter after quarter.

Built but does include things that become attractively priced cash flow generative highly synergistic.

To our business.

So you know I look at it for myself and Im saying well what can I learn from that and those are things that we're studying so you don't have been kind of brought up in like IRR cash flow and that's certainly does matter for capital returns shareholder returns and everything else, but when we do an IRR calculation.

Yeah.

That does lead into my second question, as we think about producing assets and whether it be specialty product products.

And the like.

At this point would you consider yourself somewhat agnostic as long as it delivers the requisite IRR and there is I guess certainty over what the capital cost is.

We also have to look at things like total value creation.

I'd say some recent developments in the market have.

Would include.

A <unk>.

Have my answer to your question a year ago would have been yeah, all financial IRR that that's kind of the way have been brought up train look for value opportunities and try and extract the values I do think when you look at the.

Terminal value potentially at some point in the future and I think we've learned from this transaction is that.

What we do while it's I think very attractive lowest cost producer highest margins.

The Netherlands sale.

Nippon purchase of U S steel, whether that happens or not.

Nine out of the west or 10 out of the last 13 quarters in the industry.

Clearly there were some assets in that.

The fact that we generate cash all of the fact that we've given such a massive amount of capital back to shareholders.

Package that are attractively valued.

And I'm studying that and trying to learn what we can learn from that.

You have to consider things like terminal value and therefore, I'm studying with interest some of the things that.

Acquisition and how it was valued as to what we might be able to do here at stelco too.

U S steel has done very very well.

Improve.

And I give them a tremendous amount of credit.

Let's say the appetite for shareholders to come in and find value or if you look at our shares the way they've been trading.

There were some decisions that were questioned whether it was the buyout of the river whether it was.

We are.

You know any of the decisions that were taken that might've been criticized.

We are sitting at a multiple of.

Somewhat over three times, and we sit here and look at that and like Okay. Well. This transaction just got done it I don't know eight or nine times and that's a huge gap for a company thats in the same business and by the way for a company like <unk> that has outperformed that particular target from an EBITDA multiple quarter after quarter after quarter after quarter.

Clearly when the thing went out to get looked at there was a significant amount of interest and tremendous amount of value placed.

Placed on downstream business and the other activities that we're doing so.

Here, while we're very confident that our business approach the management at <unk> is highly entrepreneurial very very humble and we look and try and study from what others have done successfully and so that will in the future.

So you know I look at it more from myself and I'm, saying, well what can I learn from that and that's the those are things that we are studying so you don't have been kind of brought up in like IRR cash flow and that's certainly does matter for capital returns shareholder returns and everything else, but when we do an IRR calculation.

Starting already yesterday.

Figuratively, starting the day after the deal was announced.

Given us time to reflect on what we might be able to do better to improve on the.

We also have to look at things like total value creation.

Multiple that we trade out compared compared to the.

Would include.

A very attractive price that was paid for U S steel.

A <unk>.

Terminal value potentially at some point in the future and I think we've learned from this transaction is that.

No. That's it that's a great answer so thanks very much for that I will turn the call back over.

Yeah.

What we do while it's I think very attractive lowest cost producer highest margins.

Thank you. The next question goes to Bill Peterson of Jpmorgan. Please go ahead. Your line is open.

Nine out of the west or 10 out of the last 13 quarters in the industry.

Yes, hi, good morning, Thanks for taking my questions and Oh, and we agree with your assessment on that.

The fact that we generate cash all of the fact that we've given such a massive amount of capital back to shareholders I.

She'd be higher multiple and obviously shareholder returns free cash flow generation should be valued more but to my question.

I do have to consider things like terminal value and therefore, I'm studying with interest some of the things that.

You've discussed growing value added output in addition to high strength steel Corrado.

That U S steel has done very very well and I give them a tremendous amount of credit.

I guess, how should we think about targeted product or contract mix moving forward.

There were some decisions that were questioned whether it was the buyout of the river whether it was.

And I guess can we expect any of this or any of these projects to happen prior to M&A or do you try to purchases via M&A.

Any of the decisions that were taken that might've been criticized.

Yeah No I appreciate the question because it enables me to clarify that particular issue that you raised on value added now we have the facilities here at Stelco I'm sitting here right now in Hamilton and we have the facilities to make all of these grades.

Clearly when the thing went out to get looked at there was a significant amount of interest and tremendous amount of value placed.

Placed on downstream business and the other activities that we're doing so well.

Here, while we're very confident that our business approach the management at Stelco is highly entrepreneurial very very humble and we look and try and study from what others have done successfully and so that will in the future.

Including auto grades high strength steels that we can make we have the ability to go and do all of that so this is a multi pronged approach we don't control M&A, we can't force somebody to sell to US certainly not at the way we like to buy.

Starting already yesterday.

So in addition to that it's looking at our own operations and see how we can optimize our operations here too.

Figuratively, starting the day after the deal was announced.

<unk> given us a time to reflect on what we might be able to do better to improve on the.

Try and penetrate markets provided the market the margins are better so to distinguish what I'm trying to say here were not driven by awards and accolades from.

Multiple that we trade out compared compared to the very.

Attractive price that was paid for U S steel.

No. That's it that's a great answer so thanks very much for that I will turn the call back over.

Big Auto manufacturers, that's somewhat drives us here, we need to we get driven hereby by profitability and I think there is more profitability and.

Yeah.

Keith question go to Bill Peterson of J P. Morgan.

In our downstream operations that were currently doing so we've initiated a review it's already underway.

Go ahead your line is open.

Yeah, Hi, good morning, Thanks for taking my questions and Oh, and we agree with your assessment on that.

And.

So stay tuned we're not ready to report anything yet, but we do we do have the facilities right here to do it.

Should be higher multiple and obviously shareholder return free cash flow generation should be valued more but to my question.

It's a question of how we Orient our business, we're blessed with the lowest cost in the industry at the at the Hot strip mill and we've been.

You've discussed growing value added output in addition to high strength steel Corrado.

I guess, how should we think about targeted product or contract mix moving forward.

Very focused on driving cash flow to.

And I guess can we expect any of this or any of these projects could happen prior to M&A or do you try to approach this via M&A.

To that part of the business, but as I mentioned before and to the question that came in before you know when you run a business its cash flow.

Yes.

Yeah No I appreciate the question because it enables me to clarify that particular issue that you raised on value added no. We have the facilities here at <unk>.

The additional cash flow by getting the full value of the value added products, but also understanding that when you think of things like terminal value.

At some point.

<unk> you want to be in those businesses, because they are valued higher and thats part of the DCF that we run when we try and value of this business. So it's both a organic opportunity and inorganic opportunity as we look at those markets and I don't want to be.

They'll go I'm sitting here right now at Hamilton, and we have the facilities to make all of these grades.

Including auto grades high strength steels that we can make we have the ability to go and do all that so this is a multi pronged approach we don't control M&A, we can't force somebody to sell to US certainly not at the way we like to buy.

Misquoted and someone saying to me Oh, you guys are popping into a brand new industry, we are studying.

So in addition to that it's looking at our own operations and see how we can optimize our operations here to try and penetrate markets provided the market. The margins are better so to distinguish what I'm trying to say here.

Studying evaluation stage right now and these are just our thoughts.

And stay tuned maybe in the next quarter, we will have.

A bit more.

Meat to put on the bone for you guys to give you more specific direction.

We're not driven by awards and accolades from.

I appreciate that and maybe taking a step back if we look at the market environment.

Big Auto manufacturers, that's somewhat drives us here, we need to we get driven here by by profitability and I think theres more profitability.

<unk> prices are now 200, plus dollars per ton below the recent peak.

I wanted to get your views on the current state of the steel market in North American steel market as you see it including I guess.

In our downstream operations that were currently doing so we've initiated.

Imports from outside of North America, as well as maybe <unk>.

A review it's already underway.

Disciplined and you may be seeing or maybe lack of discipline, maybe from north American competitors, and maybe along with that if you can touch on how customer inventory levels are looking currently.

And.

So stay tuned we're not ready to report anything yet, but we do we do have the facilities right here to do it.

A question of how we Orient our business, we are blessed with the lowest cost in the industry at the at the Hot strip mill and.

Yes, so what we've seen here in the last couple of years. If we go back the last three years. So we had a boom year end 'twenty one.

We've been very focused on driving cash flow.

And then when you looked at 22% and 23, they they kind of look like each other that you had one or two very very spiky quarters, and then and then lower prices. So I'll say two things.

To that part of the business, but as I mentioned before and to the question that came in before when you run a business its cash flow.

Presumably additional cash flow by getting the full value of the value added products, but also understanding that when you think of things like terminal value.

One.

The lows are considerably higher than they used to be and that has been driven by our original thesis, which was in August I've talked about for years and it's turned out to have played out well.

At some point.

<unk> you want to be in those businesses, because they are valued higher and thats part of the DCF that we run when we try and value of this business. So it's both a organic opportunity.

That this is going to be a scrap driven scrap price driven business. If you look at the correlation between scrap prices and HRC prices going back or really 20 years when the market was 70%.

Inorganic opportunity as we look at those markets and I don't want to be.

Misquoted and someone saying to me.

Integrated and 30% Eas Youll see that its very very tight the only time it very tight in terms of consistency, it's about $250 a ton or so over $300 a ton over over scrap.

Plopping into a brand new industry, we are studying.

Studying evaluation stage right now and these are just our thoughts.

And stay tuned maybe in the next quarter, we will have.

And the only time that has changes to the upside where all of a sudden you get steel shortages in the price of fuel.

A bit more.

Meat to put on the bone for you guys to give you more specific direction.

Pops up and that hasn't happened that often it's happened in 27 it happened in 'twenty.

I appreciate that and maybe taking a step back if we look at the market environment.

18, and it happened in 2021, but the lows are higher and this plays right into our strategy because we do not see.

<unk> prices are now 200, plus dollars per ton below the recent peak.

Wanted to get your views on the current state of the steel market in North American steel market as you see it including I guess.

A sustained.

Steel price.

For when I say sustained even for more than a month.

Imports from outside of North America, as well as maybe <unk>.

Below a certain level based on where scrap is and so that is one thing that we look at in terms of pricing. So that's on the low on the low the troughs of the market, which is really good for <unk> because as we've demonstrated we generate cash.

Discipline, you may be seeing or maybe lack of discipline, maybe from north American competitors, and maybe along with that if you could touch on how customer inventory levels are looking currently.

Yes, so what we've seen here in the last couple of years. If we go back the last three years. So we had the boom year in 'twenty one.

Quarter, no matter what the environment.

And we get all the torque to the upside in our business.

And then when you looked at 22% and 23, they they kind of look like each other that you had one or two very very spiky quarters, and then and then lower prices sorry, I'll say two things.

Now when it comes to pricing you asked me what I view the market what I've seen over the last two years, which are a bit more normal years.

It's as you get these rapid spikes followed by rapid fault. The spikes are probably overstated in the falls are overstated and what's driving that is very very definitively customer behavior. So the typical customer has a choice you can import from overseas. That's about a six month lead time, that's not very attractive.

One.

The lows are considerably higher than they used to be and that has been driven by our original thesis, which was this I've talked about for years and it's turned out to have played out well.

That this is going to be a scrap driven scrap price driven business. If you look at the correlation between scrap prices and HRC prices going back already 20 years, when the market was 70%.

Our active it's very risky, especially in a volatile pricing environment like you've characterized and so typically what these borrowers will do.

Integrated and 30% Eas Youll see that its very very tight the only time it very tight in terms of consistency, it's about $250 a ton or so over $300 a ton over over scrap.

They'll wait and and what has happened now over the last two years as they wait to.

To the last minute and then they start buying altogether I don't want to say in concert and obviously not in concert, but it looks like from our perspective almost is like Holy Holy Moses We Gotta go in get.

And the only time that has changes to the upside where all of a sudden you get steel shortages in the price of fuel.

We gotta get our warehouses filled.

Filled with with material because they haven't been operating on a fairly lean on a fairly lean inventory basis. So that's what's been happening. So if we go back to last year that happen. If we go back to this year you own December prices were falling nobody bought inventories drop all over North America, and then all of a sudden one comes rushing into by chasing the market and the price shot up.

Pops up and that hasn't happened that often it's happened and $20 seven as happened in 'twenty.

18, and it happened in 2021, but the lows are higher and this plays right into our strategy because we do not see a.

Its sustained.

Steel price.

For when I say sustained even for more than a month.

And now we're going to.

The same wishes. He has indicated prices have fallen are largely to do and we predicted this and we're very very active in our sales.

Largely from the beginning of February and once again inventories are going down now when you look at the base line economic activity is very good.

Quarter, no matter what the environment.

And we get all the torque to the upside in our business.

Building is strong.

Now when it comes to pricing you've asked me my view of the market what I've seen over the last two years, which are a bit more normal years.

Oil and gas is strong auto has been relatively stable.

So all of them and market to their imports are going to start dropping because prices are falling as it always does and my prediction is.

As we as is not only based on what we've already sold for the second quarter. My prediction is normally springtime, which is concurrent with homebuilding and general construction and all the other sectors in the economy that I've just mentioned our key markets I think those are going to bounce back yet again in the bars will come in rushing in all.

Our active it's very risky, especially in a volatile pricing environment like you've characterized and so typically what these borrowers will do.

It wants and start bidding up the price I do think that this year, we're going to see another spike.

They'll wait and and what has happened now over the last two years as they wait to.

How long that lasts.

To the last minute and then they start buying all together I don't want to say in concert and obviously not in concert, but it looks like from our perspective, almost wholly Holy Moses We Gotta go in get.

If history recent history is any gauge the last some period of time and we will continue to see this activity and really driven by buyer buyer behavior. So that's our that's our our view on the market stable economic environment in our key markets.

We gotta get our warehouses filled.

Filled with material because they haven't been operating on a fairly lean on a fairly lean inventory basis. So that's what's been happening. So if we go back to last year that happen. If we go back to this year you're on December prices were falling nobody bought inventories drop all over North America, and then all of a sudden everyone comes rushing into by chasing the market and the price shot up.

Buyers disappearing for a period of time concerned about overpaying, followed by Russia buyer buyer activity coming in which I think we are.

We're on the verge of seeing right now.

Yeah.

Alan Thanks for sharing your insights.

And now we're going to.

The same wishes. He has indicated prices have fallen are largely to do and we predicted this and we're very very active in our sales.

Thank you. The next question David Ocampo Comox Securities. David. Please go ahead. Your line is open.

Thanks, So just a follow up question here regarding the margin profile for Q1 and Q2, obviously, we're going to go.

Largely from the beginning of February and once again inventories are going down now when you look at the base line economic activity is very good.

Get some good pricing in that that causes the margin profile would go up but if I take a look at your cost per ton. This quarter. It was pretty good, especially against the backdrop against lower shipments and operating leverage just curious how we should be thinking about the cost profile as we head into 2024.

Building is strong.

Oil and gas is strong auto has been relatively stable.

So all of them and market to their imports are going to start dropping because prices are falling as it always does and my prediction is.

So we're going to see costs.

For as the year progresses.

Main driver for that.

And there's a number of things that drive our cost generally but the main the main driver for that will be coal.

Coal is something that we monitor we didn't get it right last year.

Because we had to commit to coal coal purchases during the height of the.

All at once and start bidding up the price I do think that this year, we're going to see another spike.

I don't want to see the highest awards still going on in Russia, and Ukraine, but when things were being reoriented.

How long that lasts.

On the energy side, a lot of the coal.

That was normally go into met was going towards steam coal and so that drove up prices and we we didn't expect the war and and that caught a little short and we have to go in.

Buyers disappearing for a period of time concerned about overpaying, followed by Russia bar come buyer activity coming in which I think we are.

By buying more expensive coal that coal is.

Is offer a floor now probably still showing its way in some of our coke that we will use in the next month or so.

We're on the verge of seeing right now.

And then we start getting into the new coal inventories that we bought.

Alan Thanks, Charlie insights.

Really really well last summer when coal prices trough.

Thank you the next question David campaigns.

And we will start getting the benefit of that in terms of lower cost as we move through the year.

Mark Securities David. Please go ahead your line is open.

Okay. That's perfect and then just a very quick one lots of discussion on growth both organic and inorganic does that keep you guys with a more conservative balance sheet, where youre not really pulling the levers on your in CIB as much as we can.

Thanks, So just a follow up question here regarding the margin profile for Q1 and Q2, obviously, we're going to.

Get some good pricing in that that causes the margin profile would go up but if I take a look at your cost per ton. This quarter. It was pretty good, especially against the backdrop against Lora shipments and operating leverage just curious how we should be thinking about the cost profile as we head into 2024.

I know the answer would be is modest.

Three 3 million shares.

We've been paying every year.

So we're going to see costs.

This last two years the special dividend the ordinary dividend, we have the NCI D. The <unk> last year.

For as the year progresses.

Main driver for that.

We were unable.

And there's a number of things that drive our cost generally but the main the main driver for that will be coal.

Unable to trade in our own stock for most of last year. The main reason why it wasn't.

<unk> done very much last year.

Coal is something that we monitor we didn't get it right last year.

But we don't have those shackles right now and even even with all these <unk>.

Because we had to commit to coal coal purchases during the height of the.

Capital return ideas and initiatives.

<unk>.

I don't want to say the eye towards still going on in Russia, and Ukraine, but when things were being reoriented.

I don't see why we can't.

While we can't do that one of the things I've learned in the M&A activity. We did pursue last year is incredible access to cheap capital we have.

On the energy side, a lot of the coal.

That was normally go into met was going towards steam coal and so that drove up prices and we we didn't expect the war and in back caught a little short and we have to go in.

It's pretty remarkable.

Not getting too specific.

I was able to we were able to raise.

By buying more expensive coal that coal is.

What we didn't raise it but we could have raised well over $4 billion of debt and nearly $3 billion of equity in an incredibly incredibly short period of time, So I think one of the things I.

Is offer a floor now probably still showing its way in some of our coke that we will use in the next month or so.

And then we start getting into the new coal inventories that we bought.

Werent from that endeavor was how attractive.

Really really well last summer when coal prices troughs.

Our businesses two two or two sure.

Shareholders lenders their confidence in our track record.

And it will start getting the benefit of that in terms of lower cost as we move through the year.

Their knowledge that we're not reckless and that we know how to extract synergies. So I do not think that.

Okay. That's perfect and then just a very quick one lots of discussion on growth both organic and inorganic does that keep you guys with a more conservative balance sheet, where we're not really pulling the levers on your in CIB as much as we can.

From two levels, one we're going to continue to generate cash <unk>.

You see already were with that.

Giving you a direct prediction of.

Our cash.

I know the answer would be is modest.

For the end of this quarter.

We expect that.

Three 3 million shares.

Well before the middle of this year, we will have higher cash levels than we had before we executed on the on the special dividend last year, so our confidence in our ability to replenish the cash quickly drives our also our confidence on continuing our.

We've been paying every year.

The last two years of special dividend the ordinary dividend, we have the NCI D. The MTI day last year.

We were unable.

Our.

Unable to trade in our own stock for most of last year. The main reason why it wasn't.

Our return to shareholder profile and hence the.

<unk> done very much last year.

Activation of the NCI and the increased in the in the quarterly dividend.

But we don't have those shackles right now and even even with all these.

That's perfect. Thanks, so much Alan.

Capital return ideas and initiatives.

<unk>.

Thank you. The next question goes to Jamie Macdonald.

I don't see why we can't.

While we can't do that one of the things I've learned in the M&A activity. We did pursue last year is incredible access to cheap capital we have.

BC capital markets. James. Please go ahead your line is open.

Thanks Robert.

There was announcement recently that Canada will require all steel imports into the country to report where the raw steel with first produced or disclose the country of a melt and pour I mean, you also mentioned the foreign steel in your MD&A you quantified the impact of foreign steel impact have on steel pricing.

It's pretty remarkable.

Not getting too specific.

I was able to we were able to raise.

What we didn't raise it but we could have raised well over $4 billion of debt and nearly $3 billion of equity in an incredibly incredibly short period of time, So I think one of the things.

So we can potentially size the.

Werent from that endeavor was how attractive.

Impact of it if the issue there ever addressed.

Our businesses two two or two sure.

So first of all of this is a major win for the steel industry. This melted and poured standard.

Shareholders lenders their confidence in our track record there.

And a lot of it is driven back to the to the agreements that were made as part of that.

Their knowledge that we're not reckless and that we know how to extract synergies. So I do not think that.

The U S MCA.

A few years ago and the related auto.

From two levels, one we're going to continue to generate cash you see already were.

Parts that required.

For auto parts producers to identify the origin of the skill.

Giving you a direct prediction of.

Our cash for.

For the end of this quarter.

To make sure that everything that goes into a north American builds vehicle in order to qualify for certain credits is is melted and poured in North America and in the U S has adapted that.

And we expect that.

And we've been pushing on Canada, when I say, we'd not just stelco, but we as the steel.

Our or return to shareholder profile and hence the <unk>.

Steel Association.

<unk> of the NCI and the increased in the in the quarterly dividend.

Pushing to get them to do that because a it's part of the U S. U S MCA obligation and be really really good when it comes to <unk>.

That's perfect. Thanks, so much Alan.

Reducing imports because it's inconvenient for.

Thank you the next question.

Mike Gallo.

Our customers too.

BC capital market James. Please go ahead your line is open.

Have to worry about where their imports are coming it's much easier to run their business, saying, okay, well a whole bunch of my customers require north American ports deal. So why should I start keeping separate section and it's in my inventory so.

Thanks for having me on.

There was announcement recently that Canada will require all still important to the country to report where the raw steel with first produced or disclose the country of a melt and pour I mean, you also mentioned the foreign steel in your MD&A any we have quantified the impact foreign steel impact have on steel pricing.

I I.

I believe we're going to have a very very significant benefit from this I can tell you that.

The customers in the U S already changing their behavior due to melted and poured requirements and the fact that Canada stood up and got this done is going to help both of our Canadian and U S business and.

So we can potentially size the <unk>.

Part of it if the issue there ever addressed.

So first of all this is a major win for the steel industry. This melted and poured standard.

And I think.

Significantly reduce the appetite for customers just for some some relatively small financial benefit that they may get from.

And a lot of it is driven back to the TD agreements that were made as part of the.

U S MCA.

A few years ago and the related auto.

Imports.

As compared to the risks and the risks ours are as follows both of which have been identified in this call. When you identify I don't want a prior caller identified the one that you identified.

Parts that required.

For auto parts producers to identify the origin of the steel.

To make sure that everything that goes into a north American builds vehicle in order to qualify for certain credits is is melted and poured in North America and in the U S has adapted that.

Relates to inventory management and the other one is price with the volatility in the industry with the prices going up and then down the way they have been going you need to manage that volatility and the last thing buyers like to do is take the risk on a six month lead time.

And we've been pushing on Canada, when I say, we'd not just stelco, but we as the steel.

Taking a guess of what the price might be at the time of that delivery. So.

Steel Association.

Pushing to get them to do that because a it's part of the U S. U S MCA obligation and be really really good when it comes to <unk>.

I think this is a major major accomplishment for the steel industry. Thank you very much in Canada. Thank you for bringing it up and I just got the news a couple of days ago myself. So I guess, good news travels fast, but that didn't happen by accident. It was a tremendous amount of.

Reducing imports because it's inconvenient for.

Our customers too.

Work done by the CSP.

That's a Canadian steel producers association together with the with the government to get them to recognize not only the prior commitments at the government made but the necessity for for the steel industry.

I I.

To be able to operate without the threat of these imports that might disrupt their business.

I believe we're going to have a very very significant benefit from this I can tell you that.

The customers in the U S already changing their behavior due to melted and poured requirements and the fact that Canada stood up and got this done it's going to help both of our Canadian and U S business.

I appreciate that color.

Just a follow up on the cash flow statement. So can you provide some color on <unk>.

Working capital investment this year given some.

And I think.

Some of those new core contract Capex and any potential payments related to the employee obligation over and above the 40 million that was disclosed in the MD&A.

Significantly reduce the appetite for customers just for some some relatively small financial benefit that they may get from.

Imports.

Yes, so couple.

As compared to the risks and the risks ours are as follows both of which have been identified in this call. When you identified in one of the prior caller identified but one that you identified.

Couple of things in terms of Capex I should be thinking similar to last year somewhere between 1% to $1 50 type range for Capex.

I can't on the spot and of poor Ken I'll turn it to him afterwards answer the networking capital.

Change I don't think it's going to be massive but.

And relative terms, but.

Take the risk on a six month lead time and.

It's.

The impact to our to our financial statements based on how we're set up.

Taking a guess of what the price might be at the top of that the delivery. So.

At this point should be should be quite positive.

In terms of networking capital James.

Because of the IMA and the way that works, we don't end up with that much of a hit on that so.

We're frankly, a huge benefit as prices as prices come down.

Work done by the CSP.

What you see in receivables as you know tends to be really just price related since we're shipping relatively close to the same amount.

Monthly basis with respect to the employee benefits that 40 is what it's going to be there is no bonus payments or no meaningful bonus payments, there's a tiny one based on some of the tax savings.

To be able to operate without the threat of these imports that might disrupt their business.

But really nothing special going on this year. So I wouldn't look for any extraordinary cash payments in 2020, I also want to clarify something because I noted in one of the analysts reports there is a blatant errors when you talk about pensions.

I appreciate that color.

Just a follow up on the cash flow statement. So can you provide some color on you know.

Working capital investment this year given some.

So when when we bought this company in 2017 due to prior actions of prior owners. This tension was mismanaged. We agreed when we bought this to pay $400 million.

Some of those new core contract, our capex and any potential payments related to the employee obligations over and above the $40 million that was disclosed in the MD&A.

Towards the pension and then the pension becomes a defined contribution plan that is no longer a defined benefit plan. So all we had was an obligation of $400 million, we had until 2034 to pay that off.

Yes, so couple.

Couple of things in terms of Capex I should be thinking similar to last year somewhere between 1% to $1 50 type range for Capex.

I can't on the spot and of poor Ken alternative him afterwards answer the networking capital.

It's going to be paid off this year.

And then be gone.

So the obligations that we have.

Change I don't think it's going to be massive but.

Going forward or more related to <unk>, which is more of a health care and and and.

And relative terms, but.

Uh huh.

It's.

And other types of 401 type contribution.

The impact to our to our financial statements based on how we set up.

Employee bargained related contribution so pensions will be in terms of pension obligation. We think about it in the old line industrial companies will be will be completely gone off of our balance sheet no obligations. So we don't have exposure to.

At this point should be should be quite positive.

In terms of networking capital James.

Because of the <unk> in the way that works, we don't end up with that much of a hit on that so.

We're frankly, a huge benefit as prices as prices come down what.

Change in actuarial calculations interest rates stock market changes none of that so one of the beauties of stelco is a.

Do you see in receivables as you know tends to be really just price related since we're shipping relatively close to the same amount.

A really really clean balance sheet and this is something that we're very proud of we had as I said until 2034, but because as Paul mentioned and also embedded in your question is are there going to be any larger payments those payments stop probably later this year.

Monthly basis with respect to the employee benefits that 40 is what it's going to be there is no bonus payments or no meaningful bonus payments, there's a tiny one based on some of the tax savings.

But really nothing special going on this year. So I wouldn't look for any extraordinary cash payments in 2020, I also want to clarify something because I noted in one of the analyst reports there is is it.

And that's it.

And what we're left with us.

The regular.

Bleeding to era, when you talk about pensions.

Regular no different in salary actually.

So when when we bought this company in 2017 due to prior actions of prior owners. There's tension was mismanaged. We agreed when we bought this to pay $400 million.

Thank you very much I'll turn the line over.

Thank you. The next question does he joined Tomorrow.

John Tumazos Independent research John. Please go ahead your line is open.

Yeah.

Thank you congratulations on all your progress.

Please excuse me asking my questions is in America.

And then be gone.

Is the vitality of the Canadian steel end market.

So the obligations that we have going forward or more related to <unk>, which is more of a health care.

Different than the U S.

And.

And other types of 401 type contribution.

Are your customers in Canada.

Enjoying stronger volumes, we're gaining business.

Because the 25% U S tariffs maybe decline some.

Some manufacturers to assemble products.

Canada as well as many other wonderful benefits.

Change in actuarial calculations interest rates stock market changes none of that so one of the beauties is telco is a.

Yes so.

Canadian and American and U S.

Economies are very very.

A really really clean balance sheet and this is something that we're very proud of we have as I said until 2034, but because as Paul mentioned and also embedded in your question is are there going to be any larger payments those payments stop.

Integrated on many many levels.

In terms of manufacturing supply chains.

It's been an enormous amount of growth in you mentioned auto parts, but other parts as well in Canada because of the attraction of operating in Canada for me.

Probably later this year.

And that's it and then what we're left with is.

Cost perspective.

The regular.

And access to the full supply chain all over North America, including noted state. So we don't really see any big variances between.

Regular no different in salary actually.

Thank you very much I'll turn the line over.

What we see in the Canadian markets in the U S markets.

Thank you. The next question does he joined it tomorrow.

They're very similar they operate really in concert.

John Tumazos Independent research John. Please go ahead your line is open.

With each other because of the integration of the supply chain and so I think the data that you see the economic drivers.

Congratulations on all your progress.

Supply and demand type.

Please excuse me asking my questions is in America.

Type factors that youre seeing in the United States.

Is the vitality of the Canadian steel end market.

Our very similar here in Canada.

Yeah.

Thank you if I could follow up.

Different than the U S.

I'm a little confused in my own studies because.

And.

Are your customers in Canada.

U S third and fourth quarter GDP, there was very favorable.

Enjoying stronger volumes, we're gaining business.

But in the last few weeks in America, the crude steel quite it's been down almost 5% from a year ago.

Because the 25% U S tariffs maybe decline some.

Some manufacturers to assemble products.

And in the last quarter.

Canada as well as many other wonderful benefits.

The fabricated products for Nucor and steel dynamics are.

A big negative comparisons and Theres no inventory for choice. So it's like a good barometer correct.

Yes so.

Our Canadian and American and U S.

Economies are very very.

Construction conditions it feels like the strong U S dollar.

Integrated on many many levels.

And higher interest rates are causing some damage here.

In terms of manufacturing supply chains.

Do you have any interpretation and how the U S. GDP do so good Steve.

There's been an enormous amount of growth in you mentioned auto parts, but other parts as well in Canada because of the attraction of operating in Canada from a.

Steel volumes are a little slow.

Well I mean.

It depends on the part of steel.

Cost perspective.

You're referring to we're not seeing any drop off in demand, resulting in either Canadian or U S. G D. A.

And access to the full supply chain all over North America, including noted state. So we don't really see any big variances between.

In either of those markets as Youre pointing out GDP is strong.

What we see in the Canadian markets in the U S markets.

And and there was you would think some interruption based on interest rates going up but I think what we've seen economically in both countries is that.

They're very similar they operate really in concert.

With each other because of the integration of the supply chain and so I think the data that you see are the economic drivers.

It's really not had an impact.

Supply and demand type.

At the time that I grew up.

Type factors that youre seeing in the United States.

5% interest rates were the norm and that's where we are right now and actually when you look at some surprising data and I'm not surprised by this you're probably not surprised by this either.

Our very similar here in Canada.

Yeah.

Thank you if I could follow up.

I'm a little confused in my own studies because.

5% is actually pretty cool because you know.

People that aren't working and that have savings get to earn income on there.

U S third and fourth quarter GDP, either was very favorable.

They're on their money and they have disposable income to go in and spend and and 5% interest rates for a mortgage like it's okay and I think we're seeing that in the market. So we're not seeing any of that impact our steel business and accordingly, the GDP doesn't seem to be impacted either.

But in the last few weeks in America. The crudes you are quite it's been down almost 5% from a year ago.

And in the last quarter.

The fabricated products for Nucor and steel dynamics are.

A big negative comparisons and Theres no inventory for choice. So it's like a good barometer correct.

Thank you we have no further questions I'll now hand back to Alan <unk>.

Construction conditions it feels like the strong U S dollar.

<unk> come out.

Okay.

And higher interest rates are causing damage here.

Thank you all again.

For for participating in today's call.

Do you have any interpretation, how the U S. GDP do this so good Steve.

<unk>.

At the end of the last call someone complained to me that it was only 17 minutes and this one less than 45 minutes. So we'll try and get it right next time. Thank you very much for your time and and your patience and look forward to any further follow up questions.

Steel volumes are a little slow.

Well I mean.

It depends on the part of steel.

You're referring to we're not seeing any drop off in demand, resulting in either Canadian or U S. G D. A.

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

In either of those markets as Youre pointing out GDP is strong.

And and it was you would think some interruption based on interest rates going up but I think what we've seen economically in both countries is that.

It's really not had an impact.

You know at the time that I grew up.

5% interest rates were the norm and that's where we are right now and actually when you look at some surprising data and I'm not surprised by this you're probably not surprised by this either.

5% is actually pretty cool because you know people that aren't working and that have savings get to earn income on there.

On their on their money and they have disposable income to go in and spend and and 5% interest rates for a mortgage like it's okay and I think we're seeing that in the market. So we're not seeing any of that impact our steel business and accordingly, the GDP doesn't seem to be impacted.

Either.

We have no further questions I'll now hand back to Alan.

You can come out.

Yeah.

Thank you all again for participating in today's call.

And.

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

Yeah.

[music].

Okay.

[music].

Q4 2023 Stelco Holdings Inc Earnings Call

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