This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Hello and welcome to today's Delco Holdings Inc. second quarter 2023 earnings call. My name is Bailey and I'll be your moderator for today's call. All lines will be muted during the presentation portion with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Trevor Harris, Vice President of Corporate Affairs. Trevor, please go ahead.
spk05: Good morning, everyone, and welcome to Stelco's quarterly earnings conference call. Speaking on the call today to discuss our 2023 second quarter results will be Alan Kastenbaum, 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 second quarter of 2023. 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 would like to inform everyone that comments made on today's call may contain forward-looking statements, which involve assumptions which have inherent risks and uncertainties. Actual results may differ materially from the statements made today, so do not place undue reliance upon them. Stelco management disclaims any obligation to update forward-looking statements except as required by law. With that in mind, I would ask everybody on today's call to read the legal disclaimers on page two of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in Stelco's public disclosures. In particular, the second quarter 2023 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 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 would 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 would now like to turn the call over to Alan.
spk06: Thank you, Trevor, and good morning, everyone. The second quarter of 2023 showed substantial improvement over the first quarter of this year and saw Stelco once again leading the North American steel industry with a 26% adjusted EBITDA margin. The $215 million of adjusted EBITDA that we reported for the quarter represents a 231% increase over the previous quarter. Across the board, our financial metrics for the quarter showed great improvement as the business continued to experience relief from certain inflationary pressures that have impacted our costs for the last several quarters. We also experienced positive shifts in the market with improved pricing and a return to more historically normalized lead times. Those, together with continued resilience in the broader economy, allowed us to take advantage of our industry-leading low-cost position and effectively deploy our tactical flexibility business model to deliver stronger results in the second quarter. As a result, we remain in a position to continue to deploy our capital in the best interests of our shareholders, with whom our management team remains closely aligned. Accordingly, we are once again paying a cash dividend of 42 cents per share. With this dividend, Stelco will have returned $1.9 billion in capital to our shareholders over the past five and a half years. When taken as a percentage of market capitalization, this level of returns to our shareholders leads the entire North American industry over that time period. It also represents a return of more than eight times the equity capital raised from our IPO. I'm very pleased with the efforts of our entire team that led to our success this quarter. In the coming months, I am optimistic that we will realize continued cost reductions as we expect to sell out our production in the third quarter and take advantage of opportunities in the market. I also look forward to further demonstrating our alignment with and a commitment to our valued shareholders by continuing to evaluate means to deploy our capital in a creative manner. Having said that, we do remain cautious about the broader economy sector headwinds, including upcoming auto labor negotiations, and shrinking lead times across our entire industry as we head into the fourth quarter. Thank you for your time this morning. I will now ask Paul Scherzer to detail some of our financial results.
spk00: Thanks, Alan, and good morning, everyone. I am pleased to report that we had a successful second quarter that delivered significant improvement across all of our major financial metrics. Thanks in part to a 27% increase to our average selling price over the first quarter, we were able to grow our revenue to $841 million this quarter. On its own, that would be an excellent accomplishment. However, we take great pride in our ability to drive those dollars through to the bottom line by taking advantage of our low-cost position. We were able to leverage the inherent strength of our business and convert that revenue into $123 million of adjusted net income, which represents over a 1,000% improvement over the previous quarter. As Alan noted, we once again led the North American industry with adjusted EBITDA margin of 26%, and we also saw a 250% improvement in adjusted EBITDA per net ton over the first quarter, reaching $329. These results are further evidence of the power of our tactical flexibility model. It should be noted that this success was achieved in spite of a 6% reduction in shipments through the quarter. Looking forward, we anticipate our shipping volume for Q3 will be approximately 675,000 net tons. Overall, our financial performance allowed the business to generate cash from operations, and we once again ended the period with total liquidity in excess of $1 billion, including $784 million of cash. By continuing to drive our revenue through to the bottom line, we positioned our business to be able to capitalize on market conditions and continue to allocate capital in the best interests of our shareholders, including the $0.42 dividend per share that will be payable this quarter. It is gratifying to see the business we have built respond to the changing dynamics in the market and to capitalize on the opportunities that were presented last quarter. We have invested heavily in our assets to modernize our facilities in order to reduce costs and maximize the efficiency of our operations. These investments and the commitment of our employees have allowed us to demonstrate our ability to navigate challenging periods and emerge to deliver industry-leading results and margins. Going forward, we will not deter from the principles that led to our continued success. We will maintain a strong balance sheet, exercise an unwavering focus on our costs, and ensure that we deploy our capital in a manner that is in the best interest of our shareholders. I remain confident that our commitment to these principles will continue to deliver successful outcomes for our business. Thank you for taking the time today to join our call.
spk05: Thank you, Alan and Paul, and that concludes our prepared remarks for today. I would now like to turn the call back over to the operator for Q&A. Operator?
spk02: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question, and please do ensure that you have unmuted locally. Our first question today comes from a line of Katya Janik from BMO Capital Markets. Please go ahead, Katya. Your line is now open.
spk01: Hi. Thank you for taking my questions. On the cost, can you talk a little bit more about how much you think costs could decline in third quarter? And then looking to 24, what are some of the puts and takes on the cost side we should be thinking about?
spk00: Yeah. Hi, Cat Chats. Paul, good morning, and thank you for the question. Regarding costs, so we were still up in this past quarter. And really, as we look at it, it's the continued coal, which as you know, cycles through our business. It's a fairly long cycle as the coal lands, gets converted to coke, finds its way into steel. So we were up again on our coke costs this past quarter. It looks like we've now hit right around what should be our maximum coke cost, given the way the operations are running on coke making and given our coal buy, which this year was a little bit better than last year. So that shouldn't be going up anymore, but that was the primary driver for the increase in costs. We also, based on having a few fewer tons that we shipped, we saw a little bit less absorption on that. So I'd say that's the biggest driver. One other one on materials, just to point out, we had a little bit more galvanized in the mix this quarter, so our zinc cost was up a bit overall. Going forward, we should see costs really kind of, again, leveling on Coke, so probably moving down a bit overall. We're definitely, as prices have come down, we're in a lower scrap price environment, so we'll see some benefit from that.
spk01: And maybe can you just remind us on the met coal side, are you already contracting for next year?
spk06: Yeah, we don't, you know, get out that kind of information when we contract. We recognize that coal is a commodity. Generally speaking, it's falling right now, has been falling. We expect to continue to see it fall, along with some continued demand slowdowns. But we don't disclose how and when we enter into the market.
spk01: Okay, thank you. I'll hop back into the queue.
spk02: Thank you. Thank you. The next question today comes from the line of Bill Peterson from J.P. Morgan. Please go ahead, Bill. Your line is now open.
spk07: Hi, this is Bennett on for Bill. Thank you for taking my question this morning. I wanted to ask about shipments and utilization, which came in a bit later than expected. Could you provide some color on what contributed to that quarter-over-quarter decline and what gives you conviction in hitting those 675,000 tons next quarter?
spk06: So, you know, as you know, we sell out every quarter, which explains our conviction for that. We did experience in the second quarter a decline in shipments, as you noted, and you can see it in the buildup of our inventory. And that's because of customer pushback on not taking deliveries when they contracted to take it. And a lot of that was pushed into July when it was more convenient for the buyers to take their shipments. So our shipments, I think, are reflective of what's been going on in the broader economy, which is, as I alluded to in my remarks, there is some fear of what happens if the auto industry goes out on strike. Buyers are definitely trying to monitor their own inventories and are cautious about it. And subsequently, they push back shipments, and our shipments declined. When you look at the results that we had, which were lower than forecast, you can see that inventory show up in, you can see the lack of shipments show up in our inventory, and you can also see that if you took those shipments and made them, we'd have hit our forecast. So, you know, at the end of the quarter, some shipments deferred some of the shipments. Well, now, going to your other question about conviction in the third quarter, we have conviction in the sense that we have sold out the material. Where I would add a note of caution is we very likely could see in this current quarter, third quarter, repeat of what's in the second quarter where buyers remain cautious, especially since who knows what's going to happen with the auto industry strikes, potential strikes, labor issues there. And if that happened, you know, us and everybody else would experience a drop in customer offtake from the contracts. So while we have conviction from the sense that we have contracted volume, it's not atypical to see that not be hit because customers last minute decide to defer shipments into the following quarter. And we're seeing that already now. We saw an uptick in July from people who didn't take their June shipments. We very likely could see that in September as well, depending on what goes on in the broader market.
spk07: Great. Thank you for that color. And then if I could have a quick follow-up sticking to the theme of working capital build. Are you seemingly expecting then more of a reversal into the next quarter? And then could you remind us how you're thinking about capital allocation in the back half of the year given minimal CapEx needs and the sound cash balance? In other words, could we assume some buyback similar to what we saw in the back half of last year?
spk06: So, you know, with respect to the working capital buildup, yeah, that's correct. That worked its way down in July. But as I said, you know, we don't, it remains to be seen what's going to happen in September. So while we did see a working capital drawdown in July, We hope that continues through the end of the quarter as anticipated, but if the same thing repeats itself with the reluctance from the customers, we could see it stay steady at the same level as last quarter. You know, with respect to capital allocations, as I mentioned, we're going into a cautious period now. And we're going to be very, very careful in how we spend our money. That's one thing. We like having large cash balances. It gives us opportunities for all kinds of capital allocation decisions and positions as well to do that. Great. Thank you so much, and best of luck.
spk02: Thank you. Thank you. The next question today comes from David Acampo from Cormac Securities. Please go ahead, David. Your line is now open.
spk08: Thanks. I just have two quick questions. The first one on your cash balance. Alan, how are you thinking about your excess cash? I think in the past you quoted $300 million to $400 million as what you like to keep on the balance sheet. But just given the uncertain times, especially with potential auto strike, does that number gravitate higher or are you still comfortable with that $300 million to $400 million range?
spk06: We're still comfortable with that. You know, we're the right size company. We're able to sell out our volume in really the most terrific markets. You recall during the depths of COVID Q2 of 2020, we were the only mill running full out at that time. So we're pretty confident about being able to continue to move the material. As I've mentioned in the prior question, you know, we do have some timing things that occur, but we're not at a point where we would change our view on, you know, on cash balances. Having said that, we've been extremely disciplined on when to spend the cash. As you recall, last year we had a magnificent year on capital allocation in terms of shareholders. And we've got a long view on that, and we'll continue to conduct ourselves similarly on doing Uh, the best thing that we can, which is, um, whether it's a dividend share by that's potential, uh, potential activity, if any appears, you know, we will, we will continue to monitor all that as we decide what the level is. But, you know, all things being equal that 3 to 400Million still gives us a good conference. Because we also have. Tony of liquidity on on on on credit facilities.
spk08: And the second one here, if I take a look at the cash flow statement, it does look like there is a pretty sizable employee benefit commitment that went out, and it does look like commitments for the year are another $78 million to go. Paul, can you tell us the timing on that and if that relates primarily to the free cash flow sweep from 22?
spk00: Yeah, it's two elements, David. So we've got the regular, well, I guess three elements. We've got the regular scheduled payments throughout the year. And then we have the cash flow, I don't want to call it a sweep, but the excess cash flow payment based on last year's success. That is the biggest component of that. And then we also, if you recall, we had a long delayed payment related to the 21 tax savings benefits. And that was related to some administrative matters that just took some time to pay so that half of that went out in the quarter, half of that is going out this quarter. Of that remaining $78 million, most of that is going to go this quarter. The benefit of where we are in all that is, remember, we have a maximum pension payment over time of $400 million. By the time we get to the end of this year, it's going to be a very limited amount to go. And if we make any excess cash flow payment next year, that'll be done by the middle of next year. In a worse case, it's early in 2025.
spk08: Okay, so if I look at kind of your payments due by 26, 27 time period, it looks like it's 72 million for those two years. Is that kind of the ballpark where you guys think the benefit payments level out?
spk00: Lower at that point. It should be lower at that point.
spk08: Okay, got it. Thanks, guys.
spk02: Thank you. The next question today comes from the line of James McGregor from RBC Capital Markets. Please go ahead, James. Your line is now open.
spk03: Hey, good morning and thanks for taking my question. I just wanted to ask a question on the inorganic opportunities that you'd highlighted on the last call. I know you'd mentioned you're going to be cautious in the current environment. You have about $400 million of cash available. but would you be comfortable borrowing in the current environment, potentially raising equity in the current environment if the right opportunity were to prevent itself?
spk06: No, I don't think we'd be raising equity or issuing debt.
spk03: And on some of those inorganic opportunities, do you see any potentially a need or... any opportunity potentially from expanding into EIF furnaces, whether or not that would be through an organic investment or potentially buying another EIF competitor, as we've seen a few of your US peers do?
spk06: Look, from our perspective, the EIF business is not part of our strategy at the moment. We've discussed this on several occasions. We continue to be concerned about raw material supply. Others have different views. That's my particular view. And so, you know, we're not planning on moving in that direction. But, you know, obviously, there's plenty of choices for investors to choose which strategy they like. Our strategy does not involve moving towards the EAS at this time. Having said that, we're opportunistic buyers. We're commodity people. If things become available and they're cheap and they make sense, we're not religiously opposed to anything, whether it's EAF or otherwise. But we would need to see really, really excellent value in our company and accretion. And most of that has to do with purchase price, less to do with strategy. So never rule it out. But right now, that wouldn't be the direction we'd likely go in.
spk03: And then I wanted to ask, you know, see if you had any thoughts on some of the ongoing negotiations between the U.S. and the EU under the carbon tax structure. You know, I'm not sure if they're going to meet that October deadline that they had previously set. So, you know, any thoughts on there and, you know, any potential impact on your business one way or another?
spk06: We're not in those discussions, so I don't have any insight on that.
spk03: Okay. And lastly, one of your competitors was talking about kind of some initiatives around hydrogen as a way to potentially reduce some CO2 emissions from some of its furnaces. Is that something your team's in discussion with or something you're keeping an eye on?
spk06: Yeah, absolutely. We've got a whole host of decarbonization projects initiatives that are being worked on right now. Hydrogen is one of them. We've got a whole suite of things that we're working on to help change the carbon footprint of our facility. Super exciting area for us that remains in a working phase. We've got excellent cooperation from all kinds of providers, financial providers, technology providers, but hydrogen definitely is one of the areas that we're looking at.
spk03: Awesome. I appreciate you taking the time, and I'll turn the line over. Thank you. Thank you.
spk02: Thank you. The next question today comes from the line of Kurt Woodworth from Credit Suisse. Please go ahead, Kurt. Your line is now open.
spk04: Hey, good morning, Alan and Paul. I was wondering if you could give us an update on kind of capital spending expectations for the rest of this year and next year, and if you have any updated views on the battery recycling plan that you guys are planning.
spk06: Yes. So on capital, I think you can look for us to be kind of flat for the rest of this year and next year. A lot of that is driven by our expectations for business performance, which we think was going to be kind of consistent with how things are this year. So we're going to be very mindful of our CapEx spend. I think that puts us in the vicinity of about 150 million for next year and about half of that remaining for this year. And we also, as I mentioned to the previous caller, we're very, very focused now on our decarbonization efforts, which is something that it's hard to pinpoint because there's a lot of availability of alternative financing for that. And so how we spend and where we get the sources of funding may or may not be in our CapEx budget, depending on what the sources are. So, but anyway, I think you can look for the balance of this year to remain as projected about 100, the balance of whatever we haven't spent of the 150 for this year and also the same for next year. What was the second question you had?
spk04: Just an update on the battery recycling. Battery recycling, yeah. The lithium from the cars, yeah.
spk06: Yeah. So, you know, where that stands, that's been delayed significantly. The reason why it's been delayed is that the technology provider that we have partnered with, while they're excellent and have done tremendous, tremendous work, they haven't – like, frankly, all of the battery recycling companies that are out there today are still working to get the right specifications on the output provided – to provide to the to the anode makers. And so we're sitting in a wait-and-see position right now, not spending money, waiting to see the company actually produce the quality that's needed for the anode. Those tests are ongoing. They're expensive. And the anode makers themselves are not really certain what they need. So there's an ongoing dialogue of making things match. I have to say that I just met with these folks the other day. I think they're at or ahead of any of their competitors. I'm glad that we're doing this quietly so that they have the time to take all resources and put it into development. As you remember, there's two parts to this. It's the black mass creation that's easy. We can do that. Anyone can do that. But the question is, what do you do with the black mass? And that's converting it to a hydrometallurgical process into finished goods, whether it's lithium, cobalt, nickel. And those products themselves is where there's still a lot of dialogue back and forth with anode makers as to hitting the exact specifications. So our perspective is no reason to build a black mass site and start processing something unless we can actually recycle it into the full final product. And that development is ongoing. The pilot plant in Germany continues to operate, works with big counterparties to achieve those results and once those results are achieved, we expect to break ground. Now, just to give you kind of a sense of timing, we should have been there already based on the initial schedule or not. And so it remains difficult for me to project like when, but we're pretty comfortable. End-of-life batteries aren't really going to start coming out in any kind of large numbers for another three or four years. So we still have plenty of time to do this, but it is unclear because from a technology perspective, virtually every one of its competitors, they're not quite there yet in delivering a product pure enough to go into a nanomaker. Great. Thank you very much.
spk02: Thank you. There are no additional questions waiting at this time, so I'd like to pass the conference over to Alan Kirstenbaum for any closing remarks.
spk06: Thank you, everyone, very much for your attention today. And we will get back to work and continue to really try and drill down and lower our costs as we move into this environment that we think might be ahead of us. And we look forward to speak to you next quarter. Thank you.
spk02: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
Disclaimer