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spk06: Good morning and thank you for attending today's Stelco Holdings Incorporated first quarter 2022 earnings call. My name is Sam and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star followed by one on your cell phone keypad. This time, I'd now like to turn the call over to our host, Trevor Harris of Stelco. Trevor.
spk04: Thanks, Tim. Good morning, everyone, and welcome to Stelco's quarterly earnings conference call. Speaking on the call today to discuss the results for the first quarter of 2022 will be Alan Kestenbaum, our Executive Chairman and Chief Executive Officer, and Paul Scherzer, our Chief Financial Officer. Yesterday, after the market closed, we issued a press release overviewing Stelco's financial results for the first quarter of 2022. This press release, along with the company's financial statements and management's discussion and analysis, have been posted on CDAR and on our investor relations website at investors.stelco.com. We have provided a link to the presentation referenced on today's call on our website as well. I'd like to inform everyone that comments made on today's call may contain forward-looking statements, which involve assumptions which have inherent risks and uncertainties. Actual results may differ materially from statements made today, so do not place undue reliance upon them. Stelco management disclaims any obligation to update forward-looking statements except as required by law. With that in mind, I would ask everyone on today's call to read the legal disclaimers on page 2 of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in Stelco's public disclosures. In particular, the first quarter 2022 management's discussion and analysis sections relating to forward-looking information and risks and uncertainties, as well as our filings with securities commissions in Canada. The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our MD&A provide definitions and reconciliations of the non-IFRS measures that we use today. Please 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'd ask that all participants who would like to ask a question please limit themselves to one question and one follow-up before recueing. With that, I'd now like to turn the call over to Alan.
spk05: Alan? Thank you, Trevor, and good morning, everyone. Following up on the most successful financial year in the history of our company was always going to be a challenge. But once again, our team delivered outstanding results for our shareholders. The first quarter of 2022 was our most profitable opening quarter of all time. Our business continues to lead our industry peers with an adjusted EBITDA margin of 44%. While the $402 million of adjusted EBITDA we generated was down 40% in the previous quarter, it represents 117% improvement over the first quarter of 2021. The total EBITDA generated by our business over the last 12 months now stands at over $2.2 billion. In addition to our industry-leading margin, we were able to generate $906 million in revenue and convert that into $262 million in net income for the quarter, a 120% improvement over the first quarter of 2021, although down from over $500 million in Q4 of last year. Our adjusted net income over the last 12 months stands at just over $1.8 billion. Our exceptional financial performance has afforded us the opportunity to continue to reward our valued shareholders. During the quarter, we surpassed the $1 billion mark with respect to total capital return to our shareholders since our IPO in 2017, more than four times what was raised in our IPO. Relative to our market cap, we continue to be the leader amongst publicly traded steelmakers and downstream steel companies across North America. The alignment of our management team with our shareholder base continues to be an unprecedented strength for our company, and we are exceptionally proud to have reached this milestone. Despite the fact that the first quarter began with some uncertainty and downward pressure on steel prices and softer demand than in 2021, Since the end of the first quarter, we have seen an improvement in end market demand as well as restocking at the distribution level, which taken together with a significant rise in scrap prices affecting the cost structure of many of our competitors have improved prices and our anticipated shipments for Q2. We will also mark in Q2 two more milestones with respect to our strategic capital plan that will provide us with further cost advantages over our competitors. Last month, we completed the extensive rehabilitation and upgrade of the Lake Erie Works coke battery and resumed the production of coke at the facility. The extensive 12-month project included the installation of best-in-class process and production control systems and will contribute to not only more efficient production of coke to support our steelmaking operations, but also will improve SELCO's carbon footprint. Later this month, we expect to begin commissioning of our 65 megawatt electricity cogeneration facility. Talk about good timing. Together, these projects will further improve our cost structure, reduce our emissions profile, and improve the overall efficiency of our operations. All of this has been accomplished without ever wavering from our commitment to maintaining a strong and flexible balance sheet and our low to no debt philosophy and tactically flexible approach to our business. The returns to our shareholders and our strategic capital plan have been funded with cash generated from operations and without acquiring any long-term debt or issuing any stock. In fact, we ended the first quarter with almost $800 million in cash and the balance continues to grow. As the rest of 2022 unfolds and markets continue to evolve, one thing remains certain. Stelco will continue to be flexible and adapt to the changing needs and dynamics of the market. We will hold true to the core principles that have guarded our success. We will keep our balance sheet strong, pursue opportunities to improve our industry leading course position, and deploy our capital to the benefit of our investors. In the five years our team has managed this business, we have delivered strong results at every point of the market cycle and made the necessary investments to ensure the long-term stability of our operations. That is a track record that I am proud of and one that I and our entire management team are focused on continuing. With that, I will turn to Paul and ask that he provide some additional comments regarding our financial performance.
spk00: Thanks, Alan, and good morning, everyone. As Alan noted, in the early part of the first quarter, we saw deterioration in both pricing and volume compared to the fourth quarter of 2021, but we did experience some recovery commencing in the last month of the period. As a result, we ended the first quarter with $796 million in cash, even after making a substantial tax payment for 2021 and returning $215 million of capital to our shareholders this quarter through purchasing and canceling 5.1 million shares for an aggregate purchase price of $193 million for your Substantial Issuer Bid, or SIV, and Ongoing Normal Course Issuer Bid, or NCIB, as well as our quarterly dividend. Our ability to end the period with a healthy balance of cash after completing these transactions speaks to the robustness of our company and our commitment to maintaining a strong balance sheet. As a result of our continued success, we'll be building on our industry-leading capital returns as our board has approved the continuation of our $0.30 per share dividend this quarter. Delivering the most profitable first quarter in our company's history was a direct result of the commitment of our management team and each of our employees to the fundamentals that have resulted in our company having the lowest cost structure in the North American steel industry. Our efforts to continuously improve and lower our costs allowed us to overcome sales volumes that were down not only quarter over quarter, but from Q1 2021 as well. We are now seeing stronger demand and stabilization of pricing after significant deterioration through the first two months of the quarter, which has helped to offset the sizable inflationary pressures that everyone is experiencing. Including our sizable cash balance, we ended the quarter with over $1 billion in total liquidity, which will afford our business the flexibility to pursue additional cost reduction measures and capital allocation opportunities as they arise and should they be deemed in the best interest of our shareholders. Our ability to capitalize on these opportunities while maintaining our strong balance sheet remains a core principle that guides our business. Thank you for taking the time to join our call.
spk04: Thank you, Alan and Paul. That concludes our prepared remarks for today. Now I would like to turn the call back to the operator for questions and answers. Operator?
spk06: Thank you, Trevor. We now begin the Q&A session. If you'd like to ask a question, please press star 1 on your telephone keypad. And if you'd like to remove that question, please press star followed by 2. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of David Gagliano of BMO. David?
spk09: Hi, thanks for taking my questions. I just have a couple of quick ones. First of all, on the near term on the 2Q guide, the 10% increase plus, 10% or more increase in volumes quarter over quarter, can you characterize... you know, how that's broken down between, in your view, you know, restocking at the service centers and real end market demand. And then related to that, has there been any change in the pace of the demand in recent, you know, weeks? Was it, was that a, you know, very much a front end loaded uptick in earlier in, in, in the second quarter, in the first quarter, I mean, or second quarter, whatever quarter we're in.
spk05: Yeah. So, Yeah, with respect to the first part of the question in terms of the split between distribution and end user, it really was consistent and across the board. We had seen some people not buy for like four months, and it actually went back all the way into the end of the last quarter. So across the board, we saw restocking both at the service center level and at the end market. And I'd say probably more skewed towards the end market guys because those guys are on the front lines of the increased demand and had the greatest need. And in terms of the recent performance, I have seen some publications report a slowdown. We have not seen that. The demand continues to stay strong.
spk09: The buyers are there they have needs and you know, it's businesses continuing at a very very good pace right now Okay, that's helpful thank you and then just following up on Paul's commentary regarding You know capital allocation opportunities It looks like there's still going to be some cash left over here after you know, assuming the NCIB is completely done and I was wondering if you could prioritize and drill down a little bit further on those, you know, those capital allocation opportunities that you're talking about.
spk05: Yeah, I mean, you know, we continue to look both for opportunities to acquire stock, share buyback. That's probably on the long term the most significant and most important part of our capital allocation strategy. And we try and be timely with that. We think we've done a really good job over the years in doing that, and we'll continue to do that. So that's priority number one. That's not to say that dividends are not also going to be a priority. You know, should we be unsuccessful in doing enough share buybacks to move the needle, certainly improvements and increases in dividends is possible.
spk09: Okay, any other, I mean, in the past there was also mention of inorganic growth opportunities, that kind of thing. Where does that rank on the list?
spk05: Yeah, so on the inorganic growth opportunities, it's part of our regular business. We're working on the battery recycling opportunities. It still looks extremely interesting, a lot of positive developments on that side. On the inorganic side, you know, our stock, you know, we're still trading it at a very, very low multiple. You know, when you look at our trailing 12 months and how people like to project forward, but just looking at the way we're performing right now, you know, when you take our cash into account, you know, we're trading it, you know, a little bit over one time. So very, very difficult on the, on the, on the inorganic side of things to actually do anything of significant on the organic side, you know, our, our, our our investments are relatively small not needle moving so uh you know we'll continue down that path you know the inorganic side uh today i mean we can't you know would be diluted for us to go buy something that has higher costs when you're the low cost producer you don't want to buy things at higher costs well that's you know that that kind of makes that difficult and then of course the multiple um you know makes it very very difficult for us so i think for us We're going to continue to focus on what we're doing, making money, generating a lot of cash, and continue to shrink the share count opportunistically as best as we can. And I think that's what investors like myself want to see, which is improved share price. Because I think one of the things that we really need to look at is why the stock trades at the multiples that it does. And, you know, as long as it does, we're going to take advantage of that and use that as an opportunity to shrink the share count, as we did this quarter.
spk09: Great. That's helpful. Very last question for me. Just to remind us again, I know you've given this number in the past. I just don't remember what it was. What's the expected cost saved once the co-gen facility is up and running?
spk05: You know, the number we put out before was $18 million. It's going to be more based on recent developments in the energy electricity space and other factors. So, you know, we should be, you know, well north of $20 million annual save on the electricity. And that gap's going to continue to grow. I mean, I mentioned in my remarks the timing, the incredible timing. Clearly, we didn't anticipate... things that are going on in the world impacting energy prices. But this is going to end up being a really phenomenal situation for us where we're essentially locked in on low-cost electricity and perpetuity at this point. So it would be at least 20 and probably more.
spk09: Okay, great. That's helpful. Thanks again.
spk05: Thank you.
spk06: Thank you, David. Our next question is from Seth Rosenfeld of BNP. Seth?
spk03: Good afternoon. Thanks for taking our questions today. If I can ask one, please, on price realizations. Given recent volatility throughout the course of Q1, both in spot prices and lead times, I think it is a bit more color with what we should expect for realized prices in Q2. What scale of increase would be achievable? Also with that in mind, I understand that certain sales by peers have come in at very low prices during Q1, during the trough. Will that be a drag on your AFPs into Q2? We'll start there, please.
spk05: So basically, I think we're going to expect higher pricing for Q2 on average. There is obviously a drag, as you're pointing out. But what's interesting is because the volumes were really slow at the end of Q1, We didn't sell all that much at the low prices. So we had a pretty wide open book as things started to improve. So fortunately for us, despite the drag and despite the number and the typical lead times that you have, whatever it was, four or five weeks at that time, you know, most of the Q2 is going to be at much better prices than what we're being realized at the end of Q1.
spk03: Okay. Thank you very much. And when we look at your cost base, thanks to the color on the Cogent facility, but can you give us a bit more of a rundown with regards to inflationary pressures across the business right now? What drivers should we expect, queue over queue? And then to the Coke battery, with that now back up and running, can you again remind us of the savings we should expect?
spk05: On the Coke battery, I think we've mentioned before, for somewhere around $6 to $8 a ton savings over the course of the operation. So that's on track. I have to say this Coke battery was probably the fastest done in record. I want to speak to our chief operating officer, Sujit, who's been in this business for... for over 30 years. He's really, really proud about the record time that this took place in, together with the technology that's in there, which reduces the carbon footprint, incorporates parts of our artificial intelligence program that we have. It's really, really cool. And it was done on budget. It took a little longer, but on budget and really delivering the results that we wanted. You know, in terms of the cost inflation, so that largely comes from coal and natural gas and electricity. So, you know, those are the main ones. And alloys. What we're seeing now is the following. Natural gas, and we have some exposure. Electricity, as we just mentioned, with the cogen coming on, we're going to be able to mitigate some of that, a good part of that. And then... know as we go forward what we're seeing already is a significant decline in coal prices uh starting to emerge we did an amazing job with coal uh we we bought coal a couple years ago and uh enjoyed some pretty good prices we also needed to buy some coal which we did and we had to pay the price uh uh as things went up but we did a really good job we have a um we have logistical advantages We buy well below the quoted seaborne prices and seeing those prices go down pretty hard right now. And we're not ready to come in and buy just yet, but we'll pick off some stray lots as we can. You know, I mean, so we're seeing good things there. You know, on the alloy side, I mean, that thing is, there has been inflation there. We've not seen yet a break in those prices yet. kind of carries its own dynamic, but we don't use that much alloy in the grand scheme of things. So we certainly have seen inflation. We're anticipating as we get into the second half of the year with what's going on around the world, continued drop in a lot of the prices and a lot of this stuff, and then taking advantage of the co-gen facility.
spk03: That's great. Thank you very much.
spk06: Thank you. Our next question comes from the line of Michael Glick of JP Morgan. Michael.
spk10: Yeah, I guess I'll just ask the standard question on, on pig iron, obviously major topic with, you know, the, the effective end of black sea pig iron into North America. Just, just how do you view the pig iron caster in this environment? And then, you know, maybe any view on the iron ore option as well.
spk05: Yeah, so pig iron has been really good. There was a period of time that pig iron actually went higher than the steel price. Our highest price that we sold at was over $1,200 per ton of pig iron. And we did a little bit of that in Q2. We got a bunch of that coming in in Q1. We got a bunch of that coming in during Q2. Since then, prices have moderated. They're lower. They're below $1,000 right now. I think the world, as always happens in commodity industries, finds ways to adjust, and we're part of that adjustment. We are supplying mills and happy to do it. Of course, now the flat-rolled business has gotten better than it was at the end of Q1, and so we're gearing more towards the flat-rolled regular product mix. So we use that as a phenomenal balance. When we built that caster, our view of it was we hope it was the best CapEx project that we never have to use, meaning always a great offset. When we have excess material to sell rather than discounts and material in the market, the better solution is to go and pour it into pig iron and sell that. Well, we certainly didn't anticipate what was going to happen in the world, and instead we went and started to sell pig iron here when – you know, when prices started to go up. And, of course, cheap prices then started to rebound very, very sharply. And so, you know, we're doing as little pig as possible right now. But we will be shipping a record amount of pig iron in Q2. We think it's a great market. We've established new customers, including some of our competitors, who we're happy to do business with. And, you know, it's been great. And so I think that's a nice bright spot and a validation of, again, our tactical flexibility model. We're driven by profit. We're driven by cash generation. And when the profits for making pig iron exceed that of making steel, we're not embarrassed to say, well, we're going to be pig iron sellers. And that's what we did. We're selling to all parts of the market, including foundries, steel mills, even traders, they call us. To us, it's price. And so... And that's been a really good bright spot for the company and a real validation of the pig iron strategy that we developed and very, very timely. And, you know, we'll continue to be a player in that business.
spk10: And then, you know, maybe on the growth side, you know, we've seen the Canadian federal government and the provinces step up to fund certain projects, you know, namely the you know, DRI, EAF project at the Fosco in Hamilton. I mean, do you see any sorts of opportunities to access federal or provincial funding for some of the, you know, call it high-risk, high-reward type opportunities that you have?
spk05: Yes. They've been very vocal about wanting to decarbonize the sector. They've been extremely supportive to industry. And so the answer is yes. Great. Thank you.
spk06: Welcome. Thank you, Michael. Our next question is from the line of Alexander Jackson of RBC. Alexander?
spk07: Yeah, thanks, guys. I was just curious on your sales breakdown. I noticed sales into the U.S. on a revenue basis was up in Q1 and had been trending up last year. I was wondering if there's anything behind that in terms of different customers that you guys are trying to do business with.
spk05: Well, a couple things. Again, we're always driven by price and profit. So wherever the best prices are, that's where we sell. And by the way, we're looking actually at increasing or developing our business opportunities in Europe right now because we have the dock, the prices are higher there, and there are supply issues, there are supply chain issues on the energy front and other opportunities that are there. And so You know, we'll go everywhere with our product. We're very, very good at identifying markets. So, you know, what you see in there is just opportunistic pricing. The other thing is we have initiated a plan with our sales force without getting into too much detail. And we're keeping track now on a quarter by quarter basis of new customers. You know, we're always sold out. But for us, having more customers is something that's an advantage to us because it gives us flexibility instead of, you know, instead, you know, it creates a little bit of tension. And of course we have our main customers that are there, you know, month in and month out have supported us in good times and bad times. And those are our, those are our priorities, those customers. But having more customers is also a good thing for obvious reasons, developing new markets and creating tension on the customer side. And so, You know, this one quarter, we developed 20 new accounts. You know, we have a big focus now on developing new customers. And so some of what you're seeing is the initiative taken by our director of sales. I always call him one of the most aggressive guys in the industry. And we challenged him with trying to expand the customer base and had a lot of success with that. And that's some of what you're seeing.
spk07: Got it. That's helpful. And then it was a small number, but I noticed some write-downs on construction and progress and some demolition costs. I was just more or less curious what that was related to.
spk00: Sorry, do you mind repeating the question?
spk07: Yeah, no problem, Paul. I just noticed in the quarter you guys had, under other costs, some write-down of construction and progress and some demolition costs. It's a small number, but I was just curious what it was related to.
spk00: Yeah, Alex, as we go through, we're always looking at various projects. And, you know, some we end up advancing, some we don't end up advancing. So there's a little bit of that mixed in there where we had some spend on a few things we were pursuing. There's also a little bit more mixed in there with just the ongoing work we're doing in terms of site cleanup and whatnot.
spk08: Got it.
spk05: In particular, in terms of the site cleanup, what Paul is referring to is the demolition of the old buildings. It's actually been a windfall for us because the scrap prices have gone up. It's really been a tremendous windfall for us. Those are very steel-intensive buildings. you know, this land is becoming beautiful. If you go out there today, you'll still see some of the main buildings, but a lot of the larger ones are gone. And, you know, it's just a beautiful piece of land on the waterfront, and it's pretty amazing to see.
spk07: Thanks, guys. And maybe on that, I'll just ask one more. On the land, there was an article, I think, in the Hamilton Spectator about your land and a potential sale that was progressing. I was wondering if there's Anything you could comment on that or when we might hear an update on a potential land sale?
spk05: Yeah, I mean, these things, you know, tend to leak in the press. I mean, we really don't have any comment to make on that right now.
spk06: Understood. That's all for me. Thanks, guys.
spk03: Thank you.
spk06: Thanks, Alexander. Next question is from Michael Dumais of Scotiabank. Michael?
spk01: Hey, good morning, guys. First question is on volumes. you know, you obviously had a big year in 2021 as you capitalized on higher, uh, prices. It looks like you're looking for a bounce back in production and shipment in Q2. Is that Q2 level a fair go forward production number to think about for the rest of the year? Or are you thinking of maybe getting closer back to 2021 levels?
spk05: Well, I mean, we're, we're, uh, I think you should think about us as a shipment, steel shipment of about 2.8 million tons a year. So, um, you know, I think you should assume that that's the number going forward. That's pretty much our steady state number.
spk01: Got it. Okay. And then just to follow up to all the co-covid questions, I was just wondering if I remember this correctly, but, um, you know, with the rehab complete, does that mean you'll get a production, um, that you could potentially sell? And if that's the case, just wondering on the point.
spk05: Yeah. Yes. We will have, uh, We have capacity to sell, and that's something that we're looking at. We had stopped that for a while. It's a pretty profitable business right now. So, yes, it's another area for us to gain EBITDA.
spk01: Alan, can you remind us on the quantum or just how to think about that?
spk05: I mean, it's opportunistic. So, I mean, we could sell up to 250,000, 300,000 tons a year. um you know to us it's it's an arbitrage and we buy coal uh if it's profitable buy coal convert it and sell it we do it if not we don't and um you know right now the market is favorable and we have that opportunity understood thanks very much guys piggy michael at this time i'd like to hand the call back over to alan for any closing remarks Thank you, everyone, for joining the call today, and looking forward to speaking to you guys next quarter and keeping you updated as things develop. And thank you very much, everyone. Thank you.
spk06: That concludes the Stelco Holdings Incorporated first quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.
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