Stelco Holdings Inc.

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 growth or creative 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 Scherzer to detail some of our financial results.

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 through 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, have 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 facilities. As noted by Alan, this flexibility will afford Stelco 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 responsible and strategic manner. 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.

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.

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 speakerphone, 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 Katia Jankic with BMO Capital Markets. Katia, your line is now open.

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?

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 rushing, prices shoot up. And that's what we experienced at the end of 2023. When you saw that in November, then 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. So some recent markdowns in futures and CRU and other price indicators are really only starting to impact June. And so therefore, we have the benefit already. We're predominantly sold out for the quarter. We've got a little bit left. So some of the recent softness may 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. um 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 uh selling out as much as we could and um so we're we're expecting to have a um you know pretty similar looking uh uh quarter uh and uh and then as we get into the next quarter i think we're gonna see it again the underlying economy is good um order patterns are such that uh buyers will probably come rushing in again all of us and we'll have yet another spike in the next quarter that's what we're So, 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, and that will impact to some degree towards the end of this quarter, but I expect we should balance out into the third quarter as well as parts of the stock moving up again.

Okay, and 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?

So this is a dramatic, major, and important shift to this company. And if you recall, Akasha, when we talked about this last quarter, we remain almost 50% underutilized on our cold mill, coating lines, and painting lines. You know, each one of those facilities have different amounts. This is essentially, you know, 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 take our top-rated performance that we have enjoyed in the hot role part of the business to 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. So it's an incremental growth. um we're going to see a nice bit of bump up uh this year to the tune of about 15 on an annualized basis we're starting to see it already now a little bit of that is even going to be reflected in this coming quarter with a current quarter that we're in right now and um and even much more so we've got pretty ambitious plans we have a three-phase plan that's going to roll in over the next two years and the output of this company the footprint of the company the way this company is viewed in terms of a uh full top to bottom supplier never sacrificing margins um is is going to be apparent over the next couple years so look for about 15 annualized basis as we get to this year we'll update you uh for next year but we're expecting a pretty sizable increase keep in mind we've got the ability to um we've got about 50 capacity utilization available in uh in that part of the business and uh you know we're working very very hard at this new initiative to um 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. And we look at our business and say, like, wow. What are we doing wrong? What can we do better? We've got the highest margins in the industry. We return the most capital of any company, and yet we've traded a paltry 2.54 multiple. And 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. And it's really a lot of multiple takeoff. And 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. But what we've seen is, what did U.S. Steel do right that we could do better at? And one of the things that we know Nippon was very, very attracted by, and some things we could do, you know, in terms of its penetration into key and core markets on the downstream. That's something that we have the ability to do. So we believe that this is not only going to result in higher profitability. And again, we're sitting in a leading profit margin position. You know, 10 out of the last 14 quarters have 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% margins in a mediocre quarter and bump another 5% or 10% out of that by shifting to higher value-added products. And when I say higher value-added products, I'm talking about higher value-added 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 sales. but a multiple basis to something a lot closer to what Nippon put forward for U.S. deals. So 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. And we're being modest. As I said, 15% annualized basis for 24. Hope to double that for 2025. And that's what you guys posted on that.

Perfect. Thank you. Thank you for your question. Our next question comes from the line of Bill Peterson with JP Morgan. Bill, your line is now open.

Good morning, Alan and Paul. This is Bennett on for Bill. 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.

The order book, as I just mentioned in the prior question, the order book's looking very good. We did a good job of 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. um it's really been studied uh everyone uh everyone predicted the certain uh reactions to interest rates uh to hurt construction and auto sales uh but we're we're seeing uh 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 and uh as they should uh to to what's going on in the steel market and so they try and do their order patterns time to when they see prices um When they think prices have bottomed out, that's when they tend to come rushing in. But we follow very, 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, 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? And I would say from the top, construction. Very good demand for products that go into things like data centers and warehouses and things like that. Same with resi, seeing good construction numbers there. We're getting good orders for our galvanized and coated products. A lot of it goes into residential. Then we're 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.

Great. Thanks for that color, Alan. And 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?

Really too early for me to give you a projection on how that's going to impact the market. There is a CRU number that's published every week. This is yet another number, another data point. So 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. And probably be happy to answer that question if we have a little bit of experience three to six months down the road. And certainly, you know, I don't see much of an impact, you know, positive or negative to our business.

Understood. Thanks so much. Best of luck looking forward.

Thank you.

Thank you for your question. Our next question comes from the line of James McGaringle with RBC. James, your line is now open.

Yeah, thanks for having me on and congrats on the industry-leading margins. I just wanted to ask a question on the new coal contract. You know, we've seen lower gas, natural gas prices and the impact on costs. Looking ahead, you know, so Cleveland Cliffs flagged, you know, around a $20 to $30 per ton decrease in costs, mainly on the back of their local coal contracts and natural gas prices. Is that the right way to think about it for your business? And are we expecting those to start flow through costs in Q2 or is that more of a Q3 story? 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. So 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. So we're anticipating to have some lower costs. Pricing can stay, you know, 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. Hey, thanks.

And just a follow-up for me on some of the recent infrastructure announcements. You know, we saw a big pickup in investment from the Government of Canada into the budget. You know, we have that new Honda EV plant as an example. Yeah, so on one hand, you know, steel pricing is going to be driven by what happens in the U.S. market. But on the other hand, having some big projects in your backyard is probably going to be pretty good for business. So, you know, 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? Yeah, the 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, and we're right at the forefront to be able to service into that, and so that's really good. And then, in addition to that, Canada continues to have an acute housing shortage. You drive around Canada, and the construction is, despite higher inter-trade environment, is strong. And so that's also very, very good for us. And 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. And really, really very excited in all of that. So the Canadian environment is very, very positive. You're right. We think a lot about the U.S. and really focus on the U.S., but we're in Canada and predominantly more than 80% of our shipments stay in Canada. And while the impact of pricing is very much related to what goes on in the U.S., 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. And we speak to these guys all the time. They're traveling around the world, getting guys like Honda to come in and and invest, and 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, but a lot of very positive aspects in that budget that will impact us in a very positive way. I appreciate it, and I'll turn the line over.

Thank you.

Thank you for your question. Our next question comes from the line of Adam Schneider with Cormark Securities. Adam, your line is now open.

Hey, good morning. I'm just filling in for David today. I have a couple 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?

So, 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 cost competitiveness. So that's one aspect of use of cash. Other is, as you pointed out, I mentioned in the prior call, that we have three capital initiatives this year. We've got share buybacks, special dividends, and ordinary dividends. And then, of course, investments back in the facility. With the way business is looking this year with our 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. In addition to the annualized current ordinary dividend of $2, $5 is a 12% return on this stock just on dividends. So we hope to be able to do that. We hope to be able to, we expect to be able to do more share bets, share buy bets. We just started them at the beginning of March, and we intend to capital investments back from the facility, share buybacks, dividends. And then of course, when you look at M&A opportunities, we try to be really, really smart and really long-term. And because we've got industry leading metrics, we wanna make sure that whatever we buy has enormous energy. Nobody has the cost structure we have. There's nothing we can buy that's gonna have the same profit margin we have. But 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 shareholders of this company. So 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. And so we remain very, very focused on that. But, you know, M&A is something that's unpredictable. It's opportunistic. We're not like, you know, Starbucks. We're going to go and, you know, build, you know, 200 stores this year or whatever it is. This is a company that lives by being able to exploit opportunities. We have a very, very flexible balance sheet to enable us to do that. So when you think about capital allocation, think about CapEx, share buybacks, dividends, And when M&A is available to us, we will be in position to execute it on a way that's, you know, extremely creative to shareholders.

Okay, great. That's very helpful. Thanks. And 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?

Look, we have an internal rate of return on our investments of 25%. So 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. So, you know, when we get to a place where we have no better opportunity for it and, you know, it's better to own inventory, we'll do that. But, you know, we've become, just look at our numbers. $2.1 billion of shareholder returns. I mean, 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. So we always look at what can we do with our capital. And as I mentioned on your prior question, These are investments in the facility. We have a minimum threshold of 25%. That's a heck of a lot more than the interest we pay. And so 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.

Mike SanClements, Okay, great Thank you and sorry just one quick one, I know you mentioned the six cyclicality earlier of the steel price, but just wondering quickly what your expectation is for cost per ton this year. Mike SanClements, they're going to go down.

Thank you, Adam, for your question. Our next question comes from the line of Bill Peterson with JP Morgan. Bill, your line is open.

Thanks. Bennett on again here. 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 the opportunities are for potential government support.

Yes, on the government support and decarbonization, we've had major, 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 at liberty to give you precise programs that have been awarded to us, but that will come out soon. And everything we planned on, we alluded to in prior conversation is happening, and then some.

All right. We'll look forward to the update. Thank you.

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.

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 really 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. So wish everyone a good day, and we'll speak to you next quarter.

This concludes today's SELCO First Quarter 2024 Earnings Conference Call. Thank you for your participation. You may now disconnect your line. 24 earnings conference call. Thank you for your participation. You may now disconnect your line.