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spk00: Welcome to the Stelco Holdings Inc. Second Quarter 2022 Earnings Call. My name is Ruby and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press start, followed by one on your telephone keypad. I will now hand over to Mr. Trevor Havis, Vice President of Corporate Affairs at Stelco to begin.
spk01: Thank you, Operator. Good morning, everyone, and welcome to Stelco's Quarterly Earnings Conference Calls. Speaking on the call today to discuss our results for the second quarter of 2022 will be Alan Kastenbaum, our Executive Chairman and Chief Executive Officer, and Paul Schurzer, our Chief Financial Officer. Yesterday, after the market closed, we issued a press release overviewing Stelco's financial results for the second 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've 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 these statements made today, so do not place undue reliance upon them. SELCO 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 to refer to the risks and assumptions outlined in Stelco's public disclosures. In particular, the second quarter 2022 management's discussion and analysis sections referring to forward-looking information and risks and uncertainties, as well as our filings with securities commissions in Canada. The appendix for our presentation and the non-IFRS performance measures and review of non-IFRS measures of our MD&A provide definitions and reconciliations of the non-IFRS measures that we use today. Please also note that all dollar figures 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 question before re-queuing. With that, I'd now like to turn the call over to Alan.
spk05: Thank you, Trevor, and good morning, everyone. The second quarter of 2022 was very busy and productive for Stelco. We have continued to deliver upon our commitments to shareholders with several major milestones achieved. The first one is the completion of the construction and the startup of our 65-megawatt cogeneration facility at Lake Evie Works. that will see us continue to improve on our industry-leading low-cost structure, avoid to a large extent significant increases in energy costs others are experiencing, and reducing our overall carbon footprint. Additionally, during the quarter, we completed a strategic transaction for Stelco that unlocked the value of the Hamilton land through the $518 million sale of those lands. we entered into a long-term lease that will keep Stelco operating in the community it has called for over 110 years. Operationally, we were able to deliver $464 million in adjusted EBITDA and maintain our place as the industry leader with 45% adjusted EBITDA margin. To show how impressive that is, the combined U.S. and Canadian industry average for all other reporting steelmakers, was below 30% for the quarter. Moreover, it is our sixth consecutive quarter leading the industry in adjusted EBITDA margin. We also saw growth in all of our financial metrics over the previous quarter, including revenue, operating income, and net income, despite a modest reduction in the average selling price in Q2. We have so far in the first six months of this year generated $866 million in adjusted EBITDA, bringing the total adjusted EBITDA for the trailing 12 months to over $2.3 billion. All of these measures have contributed to our business being in a position to continue our tradition of returning capital to our shareholders, with whom our senior management team remains closely aligned. We have demonstrated this with what is now over $1.1 billion of capital return to shareholders since our IPO in 2017. In July, we also announced our offer to return up to an additional $1 billion, $50 million to our shareholders through a substantial issuer bid. Today, we are furthering our commitment by announcing a $0.30 per share dividend for this quarter. This has positioned Stelco as the leader amongst publicly traded steelmakers across North America with respect to capital returns to shareholders relative to market capitalization. The unprecedented alignment of our management team with our shareholder base continues to be a source of unique strength for our company. Unfortunately, however, we live in a world where past success is not what we as management nor our investors gauge us on, but rather our future performance. Early in the second quarter, we experienced and continue to see a significant shift in the market with a sharp reversal in pricing trends, that has seen the benchmark CRU pricing decline by more than 45% from the recent peak in late April. On top of deteriorating pricing and demand, our business is being challenged with strong headwinds, including inflationary pressures on some of our key inputs, such as natural gas, coal, and alloys. We are concerned about this double hit of higher costs and lower prices and are looking at how we can address these challenges. While we have been through troughs before, The particular combination of this double whammy makes this time somewhat different. Also, as I'm sure you are all aware, we are in the midst of labor negotiations with our valued employees. We will not be addressing this on this conference call, nor will we respond to any questions on this topic. We consider these discussions with our employees as confidential, and we respect the financial well-being of both the company and our employees, and we believe that keeping the discussions in the family is in the best interest of both the company and our valued employees. With that, I will turn to Paul and ask that he provide some additional comments regarding our financial performance.
spk06: Thanks, Alan, and good morning, everyone. In spite of the array of challenges that currently face our business, our results for the second quarter were strong. Reported revenue of $1.037 billion was up 14% over the previous quarter and 13% year over year. Once again, we proved our ability to drive revenue through to the bottom line by capitalizing on our industry-leading low-cost position. Layering this on top of what was the most successful first quarter in our company's history, we have generated $866 million in adjusted EBITDA over the first half of the year, an improvement of 46% over the first half of 2021. The continued success has provided the company with substantial liquidity. We ended the quarter with $1.503 billion in cash, and $247 million of availability under our revolving credit facility. As Alan noted, we will be building on our industry leading capital returns as our board has approved the continuation of our 30 cent per share dividend this quarter. This is on top of the substantial issuer bid offer we extended earlier this quarter to purchase up to 30 million outstanding common shares for an aggregate amount of over $1 billion. This utilization of our capital is keeping with our long-standing commitment to return value to our shareholders. Should the SIB offer be fully subscribed, the company will still have sufficient liquidity to fund all of its obligations and pursue additional capital investment opportunities should they arise. Of course, we must take note of the challenging climate that we find ourselves in for the balance of this year. While the second quarter began with the continuation of the pricing and volume recovery we experienced at the end of the first quarter, The market reversed course early in the quarter and we were met with softening demand and substantially deteriorating pricing. Trends that we expect will continue to impact the third and fourth quarters. As a result, it is expected that adjusted EBITDA in Q3 will be materially below the Q2 level and further weakening is expected in our Q4 results. These expectations assumed for lower prices and shorter lead times being experienced currently fully impact results and prevail through the remainder of 2022. While these changes in the market are likely to impact our business, I am confident that the strength we have built through strategic capital investment and the creation of our industry-leading cost structure will see Spelco persevere and succeed. We will continue to take necessary steps to mitigate and overcome the challenges that face our business and stay true to the core principles that have contributed to our success to date. Thank you for taking the time today to join our call.
spk01: Thank you, Alan and Paul. That concludes our prepared remarks for this morning, and I'd now like to turn the call back over to the operator for Q&A, reminding callers that they will be limited to one question and one follow-up question prior to re-queuing. Operator?
spk00: Thank you. If you would like to ask a question, please press Start, followed by 1 on your telephone keypad now. Please note there will be one question and one follow-up permitted per questioner. If you have any further questions, please rejoin the queue. When preparing to ask your question, please ensure you are unmuted locally. If you change your mind, please press star followed by two. Our first question is from David O'Kamper of Commark Securities. Your line is now open. Please go ahead.
spk02: Thank you. Good morning, everyone. Paul, I was wondering, or maybe even Alan could take this. You've typically run a book without any hedging for the last little bit. Does that change now, just given, you know, if you take a look at the futures curve, it's showing, you know, north of 900 into 23. And just given your commentary that, you know, further weakness is expected. Is this something now that you maybe start to change your policies and look to get more aggressive on hedging?
spk05: Look, in the past, the problem with what you're looking at in the futures market is that the basis risk is substantial, meaning that the unwind of this is difficult to do unless you wait until the end of the month and use the CRU average. So the answer is that our cost structure allows us to operate in the trough. And the unwind of these hedges are not easy to do, and so we're going to stay away from hedging. Most likely, that can change if the circumstances I mentioned change. But if you look at the bid-ask on those feature quotes and the liquidity that's there, it's not that useful for us at this time.
spk02: Okay, that's helpful. As my second question, on the distribution of cash, you guys are sitting at $1.5 billion. You do have the ad SIB in place. If you guys don't get a full fill, how should we be thinking about capital allocation? Because I think you guys mentioned in the past that you like to keep around $300 million of dry powder available. Does that change, that $300 million bogey change, just given the uncertainty that you guys are seeing in the marketplace?
spk05: Yeah. You know, we're right now focused on the SIB. We're not, you know, we don't have any other plan right now besides the SIB.
spk00: Our next question is from Seth Rosenfeld of BNP Paribas. Your line is now open. Please go ahead.
spk04: Good morning. Thanks for taking our questions today. Two questions, first on demand and second on price realizations. On the demand side, Some of your peers through earnings season have expressed somewhat more optimistic outlook for demand heading into Q3 with the view that there's been an uptick in order intake over recent weeks as the pace of price decline began to slow. Can you comment on your own commercial activity to what extent you might have witnessed any improvements in parent demand? And then secondly, please, on price realization, given your predominant spot exposure, we know SELCO is often seen maybe higher highs and upturns and lower lows and downturns compared to the CRU benchmark. How big of a risk is that as you look ahead to Q3 price realizations? And where do you see the current market leveling out?
spk05: Thank you. Well, you know, first of all, we don't see, you know, you used the term optimistic. You know, I think some of our peers are always optimistic. You know, at Stelco, we try and be realistic. I don't think it's a surprise to anybody that the interest rates are impacting construction and the auto market. That's widely publicized. So, you know, we're comfortable with the assessment we've given out. We're certainly as good as anybody else in terms of getting orders. But, you know, we shouldn't be surprised to anybody that the macroeconomic things that are going on, specifically impacted by interest rate increases, are having an impact on those key sectors. You know, the one sector that is resilient to that at the moment is energy because of what's going on in the energy space. So, you know, hey, it's great to be optimistic. We try and report things as things are actually happening. It's not a sharp fall off. I want to emphasize that also. There's no disaster in terms of demand itself. It's more of a pricing issue. But, you know, there's no doubt that the key end markets and that pushes back also to the service centers themselves, that that has an impact on order entry. As they see prices fall, they don't want to get stuck holding onto material, especially in the face of weakening economic performance. In terms of pricing, it's hard to tell. We're definitely feeling the impact of our cost inflation. You might have seen yesterday a couple of producers announced price increases, we've always maintained that we're not price leaders. We're not the biggest steel company out there. We've always felt that the steel pricing environment is impacted directly by scrap. And so the fact that one of our EAS competitors decided to raise price, that's probably a good sign from a pricing perspective. And we'll have to see. So we, you know, it just happened yesterday. You know, things have been a really, really sharp decline. We've seen no bottom yet. But, you know, certainly this is a welcome sign that we saw from one of our competitors. And, you know, hopefully the market, you know, market follows.
spk03: Thank you very much.
spk00: Our next question is from Alex Jackson of RBC Capital Markets. Your line is now open. Please go ahead.
spk03: Hey, thanks guys for taking my question. I guess I just wanted to follow up and confirm or re-ask what the sort of minimum cash balance is that you guys would be comfortable carrying going forward after capital returns. Thanks.
spk05: Well, I mean, we clearly have more cash than we need right now. I don't think we think of things in terms of an absolute number like that. A lot of it, it's a moving target. You know, in a period of time where there's a lot of free cash flow generation, the cash on hand is lower, and the opposite is also true. So I think consistent with our remarks, we do think that we are entering a weakening period here, you know, in line with the economic forecasts that are out there that are widely, I think, widely accepted by most people. uh most people and therefore um you know our absolute number that we that we like to keep you know might be a little bit uh higher to uh for two reasons one uh to allow ourselves uh some breathing room in the event things get tougher uh and secondly to be opportunistic if uh if the right things come along i want to emphasize we don't particularly see anything right now that uh that looks exciting to us that we would uh that we would uh uh you'll pursue but uh that that number is not an absolute number it's definitely is related to what we see going on out there. And as I stated before, at the moment, notwithstanding the price increase yesterday that was announced by a different producer, at the moment we're seeing things on the weakening side, and so we'll probably be a little bit more cautious on cash balances than we might be in a period where we're generating hundreds of millions of dollars per quarter.
spk03: Got it. That's helpful. And then I guess just as a follow-up, you guys alluded to doing things to help mitigate some of the cost inflation you're seeing. I'm curious, is that where you're sort of talking to the cost savings program that was mentioned back with Q4 results, or is there other things that you guys are considering as well? Thanks.
spk05: Well, you know, we're always working no matter what's happening on cost savings. Unfortunately, in our business, if you look at the key cost inputs, it's raw materials and energy and labor. And, you know, in all these, you know, there is cost increases and the work that we do to reduce costs cannot possibly offset the types of cost increases that come from those sectors. So, you know, reduction, of course, is a continuing, continuing effort. You know, it's hopeless to try and offset all the other increases that I've mentioned, but that's a continuing effort and stands by itself. You know, we try and do a good job on buying raw materials in troughs and not buying in peaks. We've done that over the last few years. And, you know, you don't always get it right. And so I think we do expect that in line with weaker economic performance, many mills shut down in Europe because of energy issues, that these raw materials will have to find their way at lower levels sooner or later. And that's what we expect. But as you know from being in the commodities business for a long time, you can't always get it exactly right, and you don't always know exactly when it's going to happen. There's not much we can do about things we don't control, like those costs. So we're going to have to do our best to ride it out. Also, of course, our competitors face similar cost pressures, and so you would think that that would result in some of the higher cost producers shutting back some capacity or raising prices or something to upset that. There's no magic wand that we can wave when it comes to higher natural gas prices, for instance. It is what it is. We all know what's going on with that. Some of it is just a waiting game, waiting for things to normalize. And we've seen that already. We've seen some of these energy prices go down. But, of course, we know we're living in a very volatile geopolitical world right now. Anyone can sit there, oh, the worst is behind us. You know, yesterday the market reacted. The inflation is over. And, you know, because July is only, what did they say, 0.5% instead of 9% or whatever it was. I mean, kind of ridiculous. Like the August report could be higher again. And the same thing with natural gas. So I think we're in a period of time now where we'll continue to reduce our costs. and it's challenging for metal producers. You're seeing it around the world. We're better than most because we start from a much lower platform. And so I would think that over time, supply and demand will also impact a correction to allow the front end of the cost curve like us to be able to return to the types of large margins that we've had And, you know, fortunately, we're also able to function in a down market and a drop at a relatively reasonable, profitable way.
spk00: Thank you. We have no further questions, so I'll hand back to Alan Kestenbaum for any closing remarks.
spk05: Okay, well, thank you very much, everyone, for being here today. Again, very, very pleased with some of the things we were able to accomplish in Q2. Q3, as we've told you, has got the work cut out for us, and we're going to get back to work and start digging in and working. So thank you very much, and we'll talk to you next time.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your line.
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