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spk03: year to expand our already impressive industry-leading margins by increasing utilization of our downstream value-added capacity at the Hamilton Works in a way that enhances and diversifies the product mix and also increases our profit margins even further. While we continue to explore all options to grow our business, whether through organic M&A opportunities, we remain patient and disciplined. Our interest is in creating value for our shareholders. While we invest in all our assets, we will pursue those potential opportunities that have both attractive valuations and significant synergies. Thank you for your time this morning. I'll now ask Paul Scherzler to detail some of our financial results.
spk01: Thanks, Alan, and good morning, everyone. The first quarter of 2024 was demonstrative of the true strength of our business and our ability to take advantage of opportunities in the market. While we did see an increase in revenue of 22% over the previous quarter that was largely driven by a comparable increase in our average selling price, our industry-leading low-cost structure and our relentless focus on cost controls saw us drive that revenue to the bottom line. The 200% increase to adjusted EBITDA and the 187% increase to adjusted EBITDA per net ton are representative of our capability to convert these market opportunities into value for shareholders. These results are in line with the guidance we provided last quarter, guidance that we were able to provide because of the confidence we have in our tactical flexibility business model and in our management team's ability to seize upon market opportunities. These results once again allowed us to deploy capital in a manner that benefits our shareholders through the payment of our recently increased ordinary dividend and the repurchase of approximately 162,000 shares under our normal course issuer bid. We have also preserved optionality for the future deployment of capital by being conservative in our approach to liquidity. For the second quarter in a row, we ended the period with $645 million in cash and with no borrowings on our revolving credit facility. As noted by Alan, this flexibility will afford Stellco the opportunity to pursue both organic and accretive growth opportunities as they emerge without risk of compromising our commitment to our shareholders. While these metrics certainly paint a picture of our success during the first quarter of 2024, we also see optimism for the period ahead. In Q1, we realized an increase in shipping volume of 4% for a total of 636,000 net tons. For the second quarter, we anticipate shipping volume to be in the range of 625,000 to 650,000 net tons. We believe this relative stability in the market will afford our business the opportunity to leverage our relentless focus on cost and continue our strong record of generating cash from operations. This of course is central to our commitment to shareholders as we strive to generate value within our business and create opportunities to deploy capital in a strategic manner. As we move through the second quarter, we will continue to pursue measures that reduce our operating costs while maintaining a clean balance sheet. These principles have created a foundation of our business that has returned substantial benefits to all of our stakeholders and we will not deviate from our commitments. Overall, the first quarter was a positive start to our year and we are optimistic about our ability to continue building upon our success throughout 2024. Thank you for taking the time today to join our call.
spk02: Thank you to Alan and Paul. That concludes our prepared remarks for today. I would now like to turn the call back over to the operator for questions and answers. Operator.
spk08: My pleasure. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. In the interest of time, we ask that everyone limit to one question and one follow-up question to ensure everyone has the opportunity to speak. Our first question today will come from the line of Katya Jankic with BMO Capital Markets. Katya, your line is now open.
spk07: Hi. Thank you for taking my questions. Maybe starting on the margin, you delivered a solid first quarter margin, but now prices have moved lower. Can you talk a bit about how we should think about margin in the second quarter or near term?
spk03: Yeah. Let me first correct something. Prices have actually not moved lower with respect to second quarter because as we've discussed on multiple occasions, the cycle since 2021 has gone up and down with the same type of buyer behavior, buyer strikes, prices drop, buyers come rush in, prices shoot up. That's what we experienced at the end of 2023 when we saw that November, prices started to shoot up in December because we booked in December and we had already been booked halfway through the quarter. At that point, when prices started to move, you really only started to see the benefit of some of those price increases occur late February into March and into April and into May. Some recent markdowns in futures and CRU and other price indicators really only started to impact June. Therefore, we have the benefit already. We're predominantly sold down for the quarter. We've got a little bit left. Some of the recent softness
spk00: may
spk03: impact some of our competition, should have less of an impact on us. We do see the same cycle happening again. History has been repeating itself consistently since 2021 and we do expect prices which have, as you've correctly pointed out, been falling of late. A, not to impact us that much, but certainly as we get through the next quarter, I think you're going to continue to see very good results from us as a result of the pricing cycle and booking cycle that we have. That may not be the case in June. We might see some softness in June, but as I said, we did a very good job of selling out as much as we could. We're expecting to have a pretty similar looking quarter. Then as we get into the next quarter, I think we're going to see it again. The unboiled economy is good. Order patterns are such that buyers will probably come rushing in again all of once and we'll have yet another spike in the next quarter. That's what we're anticipating. Again, to repeat, the softness that you're referring to is very, very recent over the last couple of weeks. Fortunately for us, we've done a good job of selling ahead to the quarter as much as we could. That will impact to some degree in towards the end of this quarter, but I expect we'll chip balance out into the third quarter as well as prices start moving up again.
spk07: Okay. Maybe as a follow up on the product mix, since you're trying to increase utilization of the value outside, how should we think about the mix going forward?
spk03: This is a dramatic major and important shift to this company. If you recall, when we talked about this last quarter, we remain almost 50% underutilized on our cold mill coating lines and painting lines. Each one of those facilities have different amounts. This is essentially a capex free opportunity for us to go and expand that. We're being modest in our expectations. We do expect on an annualized basis to see an increase in that part of the business by over 15% as we get through this year and even much more next year. Very, very focused on making sure we keep our top rated performance that we have enjoyed in the hot rolled part of the business. Also make sure we deploy that in the downstream part of the business. These are customers that are much more used to just in time delivery, reliable deliveries, and we want to make sure that we're able to service these customers in a right way. It's an incremental growth. We're going to see a nice bit of bump up this year to the tune of about 15% on an annualized basis. We're starting to see it be reflected in this coming quarter, the current quarter that we're in right now, and even much more. We've got pretty ambitious plans. We have a three-phase plan that's going to roll in over the next two years. The output of this company, the footprint of the company, the way this company is viewed in terms of a full top to bottom supplier, never sacrificing margins is going to be apparent over the next couple of years. Look for about 15% annualized basis as we get to this year. We'll update you for next year, but we're expecting a pretty sizable increase. Keep in mind, we've got the ability to, we've got about 50% capacity utilization available in that part of the business, and we're working very, very hard at this new initiative to accomplish this. Just to remind everybody who may not have heard the source of this initiative, when we saw in December that Nippon was paying nine times for a U.S. deal, I look at our multiple today. We're at 2.54. 2.54. That's six and a half turns less than U.S. deal. It's unbelievable. We look at our business and say, wow, what are we doing wrong? What can we do better? We've got the highest margins in the industry. We return the capital of any company, and yet we've traded a paltry 2.54 multiple. That calculation is very simple. You take our market cap, you deduct our cash because we have no debt, 645 million of cash, and you come to an enterprise value of 1.525, and you annualize our current quarter of about 150 million, that's 600, and you come to about 2.54. It's a lot of multiple take-up. One of the things we did after the last quarter, and I mentioned this on the last call for those of you who missed it, I'm sorry, and I'll explain it now for those of you who've heard it, I'll update you. We've seen this, what does U.S. deal do right that we can do better at? One of the things that we know Nippon is very, very attracted by and some of the things we can do in terms of its penetration into key and core markets on the downstream. That's something that we have the ability to do. We believe that this is not only going to result in higher profitability, and again, we're sitting in a leading profit margin position. Ten out of the last 14 quarters has had the highest profit margin, including this very quarter, and based on what you've heard from others, we'll probably do it again this quarter. If we can get from 21 percent margins in a mediocre quarter and bump another five or 10 percent out of that by shifting to higher value-add products. When I say higher value-add products, I'm talking about higher value-add to the customer and higher value to our shareholders where we make more profits. We're going to have a machine here that's not only going to make more money, but get re-rated on a multiple basis or something a lot closer to what Nippon put forward for U.S. deals. That's the plan. We're on our way. We're very, very determined, and we expect that we're going to be successful at it. We're being modest. As I said, 15 percent annualized basis for 2024. I hope to double that for 2025, and that's what you guys posted on that.
spk08: Perfect. Thank you. Thank you for your question. Our next question comes in the line of Bill Peterson with JP Morgan. Bill, your line is now open.
spk05: Good morning, Alan and Paul. This is Bennett on Tribil. I was hoping we could get a little more color on what you're seeing on customer demand from your different end markets, which are the strongest and weakest, and how the order book's looking so far for the second quarter, please.
spk03: The order book, as I just mentioned in the prior question, the order book's looking very good. We did a good job selling out early. We're in June right now, the latter part of June. We have a little bit left that we expect to fill out, and fortunately did most of our selling when prices were higher. The demand has been steady in all areas, key markets, energy, construction, autos, service centers. It's really been steady. Everyone predicted the certain reactions to interest rates, to construction and auto sales, but we're seeing steady demand from our customers. The ebbs and flows that we see is pricing related. I think that the downstream customers have become much smarter, as they should, to what's going on in the steel market, and so they try and do their order patterns tied to when they think prices have bottomed out. When they tend to come rushing in, but we follow very closely our customer inventories. The customer inventories are rising, yet once again, as the prices drop, and we expect those customers to rush back in and give us another leg up on pricing. But underlying demand is really the key point, and you're asking the actual, really most important question. What does the underlying demand look like in those key markets? I would say it's from the top. Construction, very good demand for products that go into things like data centers, and warehouses, and things like that. Same with the residue, seeing good construction numbers there. We're getting good orders for our galvanized encoded products. A lot of it goes into residential. Then wood always steady. You guys have seen the SAR numbers. Those are pretty steady. Oil and gas remains good, particularly on the oil side. So really across the board, we're seeing demand steady.
spk05: Great. Thanks for that color, Alan. Then real quick, given your leverage to spot pricing, I was hoping to get your thoughts on the recent spot pricing now being put in the market by two of your US peers. What impact do you perceive this having on the market and or potentially easing pricing volatility through the cycle?
spk03: Really too early for me to give you projection on how that's going to impact the market. There is a CRU number that's published every week. Now, this is yet another number, another data point. We have several data points. We have the two producers that are putting out weekly prices. We have the future prices, and we have the CRU. Don't really see much of an impact just yet. Probably be happy to answer question if we have a little bit of experience three to six months down the road. Certainly, I don't see much of an impact, positive or negative, to our business.
spk05: Understood. Thanks so much. Best of luck looking forward.
spk03: Thank you.
spk08: Thank you for your question. Our next question comes from the line of James McGarrigle with RBC. James, your line is now open.
spk04: Thanks for having me on and congrats on the industry leading margin. I just wanted to ask a question on the new coal contract. We've seen lower gas, natural gas prices and the impact on costs. Looking ahead, so Cleveland Cliffs flagged around a $20 to $30 per ton decrease in cost, mainly on the back of their lower coal contracts and natural gas prices. Is that the right way to think about it for your business? Are we expecting those to start flow through costs in Q2 or is that more of a Q3 story?
spk03: Thanks. Yes. We will start to see some of those costs drop in Q2 and Q3. Those are the right ingredients. It's natural gas. It's coal. We will definitely see some of those costs start to positively impact our costs. We're already seeing that in Q2 and it should continue to accelerate end of Q2 and Q3 as well. And Q4 for that matter. We're anticipating to have some lower costs. Pricing can stay on average through the year. As we've been seeing it, we should be having a pretty good year and hope to be able to achieve all of our capital and investment initiatives and goals. Thanks. Just
spk04: follow up for me on some of the recent infrastructure announcements. We saw a big pickup in investment from the government of Canada into the budget. We had that new Honda EV plant, as an example. On one hand, steel pricing is going to be driven by what happens in the US market, but on the other hand, having some big projects in your backyard is probably going to be pretty good for business. What type of impact do you see from these projects having on your business if you look a little longer term into 2025 and 2026? The
spk03: impacts are excellent. There's been a lot of growth in Canada. There's the ones that you mentioned, the big infrastructure projects that definitely consume a lot of steel. We're right at the forefront to be able to service into that. That's really good. In addition to that, Canada continues to have an acute housing shortage. You drive around Canada and the construction, despite higher inter-trade environment, is strong. That's also very, very good for us. The other thing, since you mentioned the budget, there are a number of budgetary allotments that directly will impact us in terms of certain investments that we want to make that are working their way through. I'm really, really very excited in all of that. The Canadian environment is very, very positive. You're right, we think a lot about the US and really focus on the US, but we're in Canada and predominantly more than 80% of our world. While the impact of pricing is very much related to what goes on in the US, the local demand in Canada is excellent. Economic planning that's taken place, especially on a provincial level in our home court in Ontario, has really been wonderful. We speak to these guys all the time. They're traveling around the world getting guys like Hans that have come in and invest. These are all really, really exciting opportunities for us, along with the other things that are in the budget. Not enough time to go through them right now, a lot of very positive aspects in that budget that will impact us in a very positive way. Appreciate it, and I'll turn the line over. Thank you.
spk08: Thank you for your question. Our next question comes from the line of Adam Schneider with Cormark Securities. Adam, your line is now open.
spk06: Good morning. I'm just filling in for David today. I have a couple of questions about the free cash flow. Given your strong cash balance of $645 million, what are your plans for that cash this year? Is it NCIBs, growth capex, or acquisitions?
spk03: In terms of capital allocations, we break it down into three buckets. There's investment back in the facility. One thing we've learned, and I've learned over the course of my 30-year career, the importance of investing back into the facility. We put in over a billion dollars of capital back into the facility, and we intend to continue to allocate additional cash accumulation into the facility to make sure we maintain reliability and our cost competitiveness. That's one aspect of use of cash. Other is, as you pointed out, I mentioned in a prior call that we have three capital initiatives this year. We've got share buybacks, special dividends, and ordinary dividends. Then, of course, investments back in the facility. With the way business is looking this year, without cash balance, we should be able to hit on all of them. Let me just remind everybody, we paid last year a $3 special dividend. That's in addition to the annualized current ordinary dividend of $2, $5 is a 12% return on the stock, just on dividends. We hope to be able to do that. We expect to be able to do more share buybacks. We just started them at the beginning of March, and we intend to capital investments back in the facility, share buybacks, dividends. Then, of opportunities, we try to be really, really smart and really long term. Because we've got industry leading metrics, we want to make sure that whatever we buy has enormous synergies. Nobody has the core structure we have. There's nothing we can buy that's going to have the same profit margin we have. We know with our capability and our know how and synergies, we can actually make acquisitions and participate in M&A that could be extremely, extremely meaningful to the company. Very, very focused on that. There are not a lot of players out there that have the financial flexibility, know how, experience, skill to go and actually execute a very successful M&A transaction. We remain very, very focused on that. M&A is something that's unpredictable. It's opportunistic. We're not like Starbucks. We're going to go and build 200 stores this year or whatever it is. This is a company that lives by being able to exploit opportunities. We have very, very flexible balance sheets that enable us to do that. When you think about capital allocation, think about CapEx, share buybacks, dividends. When M&A is available to us, we will be in position to execute it in a way that's extremely creative to shareholders.
spk06: Great. That's very helpful. Thanks. Just a quick follow-up. With regards to your inventory monetization arrangement, is the expectation to use that less now given the high interest rate environment?
spk03: We have an internal rate of return on our investments of 25 percent. The answer is no. We believe we can take our capital and invest it, and we don't need to sit and put it into working capital. When we get to a place with interest rate where we have no better opportunity for it and we've been in our own inventory, we'll do that. Just look at our numbers. $2.1 billion of shareholder returns. We are so efficient in our working capital management, and even with the higher interest rates, we're able to continue to do that. Just look at our dividends, our share buybacks, our special dividends, we've been able to do that. We always look at what can we do with our capital? As I mentioned on your prior question, these are more than the interest we pay. We're going to continue to be really, really smart and efficient with our working capital. We, of course, always have the ability to pay that down if we thought that was the most efficient thing to do, but we're always looking at efficiency and how do we make the best use and value out of our assets?
spk06: Okay, great. Thank you. Sorry, just one quick one. I know you mentioned the cyclicality earlier of the steel price, but just wondering quickly what your expectation is for cost per ton this year. They're going to go down.
spk09: Thank you, Adam, for your
spk08: question. Our next question comes from the line of Bill Peterson with JP Morgan. Bill, your line is open.
spk05: Thanks. Ben, head on again here. I just wanted to squeeze one more in. Alan, you've done a great job outlining the capital allocation framework as it relates to the buyback dividends, capex. It's good to see the strategy unfolding with greater leverage downstream, but I wanted to focus a little bit more on decarbonization. In the past, you've spoken about a potential investment on this front, so wondering if there's any updates there on what opportunities are for potential government support?
spk03: Yes, on the government support and decarbonization, we've had major advancements on all fronts, both in terms of technology, government support, and otherwise. The government will dictate the timing of those announcements, so I'm not in liberty to give you precise programs that have been awarded to us, but that will come out soon. Everything we planned on, we alluded to in prior conversation is happening.
spk05: All right. We'll look forward to the update. Thank you.
spk08: Thank you for your question. There are no additional questions waiting at this time, so I will pass back to Alan Kestenbaum for any closing remarks. Thank you.
spk03: Thank you very much, everyone, for your participation today. As always, we always remain available to all of our analysts, shareholders, everybody. I think we pride ourselves on being open, being available, and we look forward to any questions that anyone has. Please feel free to reach out to me or Paul or anybody else with any questions, ideas, concerns, and always happy to address them in any format. Wish everyone a good day, and we'll speak to you next quarter.
spk08: This concludes today's STELCO First Quarter 2024 Earnings Conference Call. Thank you for participation. You may now disconnect your
spk09: line. 24 Earnings Conference Call. Thank you for your participation. You may now disconnect your line.
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