CA - Stelco Holdings Inc. (STZHF) Q1 2023 Earnings Call Transcript
2023-05-11 14:53:11 ET
Stelco Holdings Inc. (STZHF)
Q1 2023 Earnings Conference Call
May 11, 2023, 09:00 AM ET
Company Participants
Trevor Harris - VP Corporate Affairs
Alan Kestenbaum - Executive Chairman and CEO
Paul Scherzer - CFO
Conference Call Participants
Katja Jancic - BMO Capital Markets
David Ocampo - Cormark Capital
James McGarragle - RBC
Anoop Prihar - Eight Capital
Presentation
Operator
Hello, good morning, and welcome to Stelco Holdings Inc. First Quarter 2023 Earnings Call. All lines will be muted. During the presentation portion of the call with an opportunity to questions and answers at the end.
I would now like to pass the conference over to your host, Trevor Harris to begin. Please go ahead.
Trevor Harris
Good morning, everyone, and welcome to Stelco's quarterly earnings conference call. Speaking on the call today to discuss our 2023 first quarter results will be Alan Kestenbaum, our Executive Chairman and Chief Executive Officer; and Paul Scherzer, our Chief Financial Officer.
Yesterday, after the market closed, we issued a press release overviewing Stelco's Financial Results for the First Quarter of 2023. This press release, along with the company's financial statements and management's discussion and analysis have been posted on SEDAR and on our Investor Relations website at investors.stelco.com. We have provided a link to the presentation referenced on today's call on our website as well.
I'd like to inform everyone that comments made on today's call may contain forward-looking statements, which involve assumptions, which have inherent risks and uncertainties. Actual results may differ materially from the statements made today, so do not place undue reliance on them. Stelco management disclaims any obligation to update forward-looking statements, except as required by law.
With that in mind, I would ask everyone on today's call to read the legal disclaimers on Page 2 of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in Stelco's public disclosures, in particular, the first quarter 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 of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our MD&A provide definitions and reconciliations of the non-IFRS measures that we use today. Please 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 re-queuing.
With that, I would now like to turn the call over to Alan.
Alan Kestenbaum
Thank you, Trevor, and good morning, everyone.
The first quarter of 2023 was shaped by macroeconomic and market challenges that negatively impacted our financial performance, as well as lower sales prices and higher input costs due to inflationary pressures.
Despite that, we increased our shipments by 4% over the previous quarter. The even better news is we emerged from Q1 optimistic about the path forward as prices being realized now in the second quarter have improved to far more favorable levels.
Lead times have normalized and costs are dropping. Despite broad macroeconomic headwinds, we continue to see and hear from our customers solid business conditions in all of the end markets we service. As a result, we anticipate a significantly more robust level of earnings in the second quarter and a continued buildup in cash so that we can continue to effectively deploy our industry-leading capital allocation strategy.
On that note, we are once again announcing a quarterly dividend of $0.42 per share. That will add to the more than $1.8 billion we have returned to our shareholders since our IPO in 2017. We are extremely proud of our track record on return of capital to our shareholders and are pleased to be able to continue this trend of positive returns.
Thank you for your time this morning. I will now ask Paul Scherzer to detail some of our financial results.
Paul Scherzer
Thanks, Alan, and good morning, everyone.
As Alan indicated, we did face another challenging quarter in Q1 with our average selling price dipping slightly from the prior quarter, but down 36% year-over-year. While we are pleased with our ability to ship 695,000 net tons, the resulting financial performance was negatively impacted by continued cost pressures that have persisted since mid-2022.
Our adjusted EBITDA of $65 million and the resulting adjusted EBITDA margin of 9% were down 21% and 3% respectively when compared to the previous quarter. While the inflationary pressures and low pricing combined with lead times that increase but pricing begins an upward trajectory have contributed to weaker performance in recent quarters. We have seen some reversal of those trends and see opportunity in coming periods to improve our financial performance.
We look forward to achieving stronger adjusted EBITDA margins in the second quarter as our average selling prices increased significantly from the low levels of Q1. Of course, that will require diligence and focus on controlling our costs and ensuring all employees are focused on driving every dollar incremental revenue through to the bottom line.
We also expect that our shipping volume during the second quarter of 2023 will be approximately in line with the average of our trailing fourth quarter's realized levels. Despite the challenges we faced through Q1, once again, we were able to close out the quarter with an excess of $800 million of cash and over $1 billion of total liquidity.
This is a positive achievement that preserves substantial financial flexibility and will afford us the opportunity to strategically allocate our capital in a manner that continues to strengthen our business and is in the interest of our shareholders including through the continued payment as Alan noted of our $0.42 per share of quarterly dividend.
We know that the fundamentals of our business are strong and that we have the ability to deploy our tactical flexibility model to capitalize on opportunities that are presented by the market. By doing so, we will continue to generate the necessary cash to support future capital deployment opportunities when they arise.
We have a proven track record of being able to navigate challenging periods to deliver industry-leading results. And we look forward to once again demonstrating the strength of our business in the second quarter and through the balance of 2023.
Thank you for taking the time today to join our call.
Trevor Harris
Thank you, Alan, and Paul. That concludes our prepared remarks for today. Now, I would like to turn the call back over to the operator for questions and answers. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] The first question we have comes from Katja Jancic from BMO Capital Markets. Please go ahead.
Katja Jancic
Good morning. Thank you for taking my question. Now looking to second quarter specifically at the prices, I see U.S. spot HRC prices up somewhere between $350 to $400 per ton sequentially and I think in the past it was said that each $100 per ton increase should translate to about $400 million in incremental annual EBITDA, which means, this implies a pretty sequential -- a pretty meaningful sequential increase in earnings. So my question is, is that fair, or what are some of the puts and takes we should be thinking about?
Trevor Harris
Sorry, I think we're having a technical difficulty.
Alan Kestenbaum
Okay, sorry about that. So, yes, your math is correct. It works like this. Basically, $100 was $130 per ton Canadian tons approximately 3 million tons takes you about $390 million annualized. And so each $100 gets us to about $390 million of EBITDA. And so, as you noted, there has been a significant increase in price in Q2 and therefore we expect significantly better results.
Katja Jancic
And maybe just as a follow-up, what should we -- how should we think about the cost side? How much improvement could we see?
Alan Kestenbaum
On the cost side, I think we can see probably somewhere close to about $20 per ton reduction cost.
Katja Jancic
Perfect. Thank you so much. I'll go back in queue.
Operator
The next question we have comes from David Ocampo from Cormark Capital. Please go ahead.
David Ocampo
Thanks. Good morning, guys.
Alan Kestenbaum
Good morning
David Ocampo
In your commentary and even on the release you guys talked about a Q2 cash build that will support your capital allocation strategy. Can you update what your priorities are as it relates to that strategy? Are you thinking more shareholder returns or internal capital projects?
Alan Kestenbaum
I was thinking more on the shareholder returns front. We've largely completed our large internal capital expenditures. So it's really more on the shareholder front. But if you look at last year, we had a similar type situation where we built up a lot of cash in the beginning of the year and then went very, very aggressively into two share buybacks taking up about 29% of our stock plus a very large special dividend.
So as we look at this year, there is that we anticipate doing things that are meaningful for the shareholders that can take the form of any of share buybacks to take the form of dividends and also we're starting to see some potential growth opportunities. As you know from our history, I don't grow in strong markets, I grow in weaker markets, and we're seeing now for the first time in many, many years, potentially interesting growth opportunities.
So unlike last year where everything went into share buybacks and dividends, so we may have a trifecta. Trifecta consisting of share buybacks, dividends, potential growth opportunities. When I say growth, I mean inorganic growth opportunities.
David Ocampo
Got it. And then maybe for Paul, if I take a look at the CapEx in the quarter it was $48 million. You annualize that number, it's quite a bit higher than what you guys are in terms of maintenance, at least what you've disclosed in the past. How should we be thinking about the CapEx for this year?
Paul Scherzer
Okay. CapEx for this year, the first quarter definitely ran high relative to where we'll be for the year. So I wouldn't annualize that number, David. We won't be quite at that maintenance level that we've talked about in the past because we do have a number of small projects. But it's certainly not 4x Q1. So you'll see that come down in subsequent quarters.
David Ocampo
Okay, that's it from me. I'll hop back in the queue.
Operator
The next question we have coming from James McGarragle from RBC. Please go ahead.
James McGarragle
Hi, good morning, Paul, and Alan. Hi, just regarding the market outlook and maybe looking a little bit beyond the second quarter, it seems that prices as of late, kind of, spotlighting, lead times are -- it might be coming down a little bit. So how do you see beyond the second quarter for prices? I mean, demand is so strong right now. But it does seem that different pricing signals that suggest we potentially may have reached the peak and maybe things might come down a little bit from here?
Alan Kestenbaum
Yes. So, if you see it, when you look at how Q2 looked, Q2 was booked basically at the beginning of the first quarter, throughout the first quarter as lead times start to grow. So when you finish the blend of what Q2 is going to look like, which as we indicated, it's going to be significantly better than Q1. Prices have come down, but they haven't come down low enough to be worse than the average of Q2, so it really all depends.
I think it's pretty remarkable that we're seeing in most of our end markets continued strength in demand. We are seeing scrap come down, which is definitely a major contributor to prices having recently fallen. And so it depends on what level they go, but if they stay at the levels that they're at right now, which is down already quite a bit from the hikes, we're going to be in really good shape for Q3 and beyond.
So it really depends what goes on afterwards. But as we look at it, it's not just the performance of the company, it's the market conditions overall, and they're very, very, really very perfect. As I said before, we have a -- instead of a two-pronged approach to growth this year, we've got a trifecta of growth. It's really getting to a situation like that.
We're sitting on very large pile of cash, no debt, plenty of liquidity, price is still pretty decent for us to have a good strong Q3 as well to continue to build up cash, equity markets definitely have come down. I mean just opened up all kinds of doors for us. Opens up doors for us on share buybacks, opens up doors for us on very good dividend policy, especially taken as a percentage of the share price for those investors that like fixed income type instrument
And as I said before, inorganic growth opportunities that those of you know my track record that really very disciplined, and I just sit and wait for market conditions to come right. Now sitting in a situation of high-interest rates, of course, it helps us really because we have a lot of cash. It hurts people with significant debt obligations and you have a tightening of credit throughout the market.
And so that's created for us another leg of shareholder growth, which we did not have for several years, which is the potential in organic growth and I don't want to make any -- give any one question like we're on the verge of doing anything, we're not.
But we are seeing valuations come down to a level that makes things interesting for us and because we're tactically flexible in our business model and how we make products and how we make profits, we're equally flexible on how we deploy our capital.
And if you look at what we did last year, it all happened in the second half of the year because we like to be very conservative. We'd like to see the cash in the bank and then go and do what we need to do. And this year, without making any promises of anything, for this year it's shaping up to a similar type of year. So as I sit here today, pretty confident about continuing to build cash as we go through the remainder of the year as well.
James McGarragle
Yes. Appreciate the color. And then another question on how you kind of see the scrap market evolving here? We look at the last year, we saw some excess scrap inventories that were built by some other steel companies kind of in response to the war in Ukraine. They were ultimately drawn down which obviously had an impact on our scrap prices, but with some of these new electric arc furnaces coming online, obviously, you're going to have a big impact on demand for scrap and a big source of these imports before was Russia, Ukraine. So when you're looking at a little longer term, what's your outlook on the scrap side of things? And any opportunities for Stelco to kind of capitalize on these dynamics a little longer term?
Alan Kestenbaum
Yes. Let me kind of break that down a little bit into two buckets. So when we look at scrap, the -- what you're referring to with Ukraine and Russia, really has less to do with scrap and more to do with pig iron. So we break this scrap down into separate buckets. I think you look at pig iron, and then you look at scrap, and you look at lower grades of scrap. So the prime scrap in the lower-grade scraps are domestically sourced. It's the pig iron that comes in from -- it was coming in from Ukraine and Russia, and you're absolutely correct.
People built up an enormous amount of stocks of that and then the prices came down. We benefited from that because as a side product, we make pig iron. We're the only North American merchant producer of pig iron to that end, so we took advantage of that at that time.
But you're absolutely correct about the longer-term impact of scrap because scrap doesn't travel that well and most of it is sourced domestically, and there's no doubt that the increasing demand on the scrap supply will over the long term and we've seen it already, so it's not long-term. It's actually right there where we see demands on scrap as scrap prices go up to levels that nobody would have predicted several years ago.
We've seen them as high as $600 plus per ton which means that the cost of production of your typical electric arc furnace producer is $900 to $1,000 at a time. So that's a great situation for us because our costs are relatively flat. So that's the long-term trend. Let's say a view that we've had for a very, very long time, something we've invested heavily and starting from 2018 has really served us well.
We've had the highest earnings EBITDA earnings in the industry on our steel business compared to everybody else. And so that trend will continue to happen. So right, but bringing the things back to the short-term price of scrap - prices of scrap have fallen and that is as a result of reduction in demand from the steel mill.
We saw at the end of last year, we're seeing that again now to some extent. You're seeing steel scrap fall but still at very heavy levels and healthy levels of over $400 a ton, levels that's going back five plus years ago, comparatively very, very high level.
So overall, the scrap market is very, very healthy and it self-corrects very quickly because if prices drop, collections dry up and scrap prices immediately rebound. The other thing that happened is industrial production start to slow down, that also impacts the supply side of scrap. So we view this as a very good existing and long-term factor for Stelco, we relies us on scrap.
So, as it enough, we actually like to see higher scrap prices even though something we will do we buy scrap and that impacts us our costs, but compared to electric arc furnace, our costs are impacted by that 15% whereas that costs were impacted by about 115% on a ton-per-ton basis.
So you're absolutely right, longer term and even not just longer-term but even in recent history, that has been the case. Pickup in demand of scrap units has raised the scrap prices and therefore raise steel prices, which are good for us. As I mentioned before in the first question that came in, when $100 per ton comes in, in the market like it pretty much all goes to our bottom line which is pretty amazing because of how little scrap we actually use.
So that's the longer-term trend. And it's another thing that's odd about this business. I'll give you another example. When we went through COVID in 2020 like March-April everything shut down. Well, when everything shut down, industrial production shut down, a shortage of scrap showed up and the steel prices actually went up when the industry was operating at only 50% of capacity. Just a very, very interesting dynamic in the steel industry that I suggest our investors always watch. I think a very good predictor about where things are headed and where they're headed in immediate and long term is in a very positive direction for us.
James McGarragle
I appreciate that. And just one more for me before I turn the line over. Again, another longer-term type of question. So as an example, I know some in the electrical vehicles manufacturing process. There are some U.S. producers that are kind of investing in some capability for some very thin steels that are used in electric vehicles. Now longer term, this is going to be important driver of demand.
And my question isn't just about that specific type of steel, but kind of more generally with all the U.S. infrastructure spending and the types of steel that will be required to support that demand longer term. Anything that your team is kind of looking at potentially investing in to be able to capitalize on that demand? Or are you kind of happy with your internal process is now to be able to kind of capture all the benefit from that demand going forward? And I'll turn the line over for that. Thank you very much.
Alan Kestenbaum
Yes. Well, thank you for that question. We're never satisfied with where we are. We're always looking to grow, always looking to get better. And we make thin steels right now and supply right now to the auto industry is very steels, but you're correct, those steels are going to continue to get lighter, and we have to stay on the forefront of that. And we will.
And you mentioned a few drivers in the U.S. in terms of infrastructure spending, in terms of EV growth. But I think the most exciting thing going on in North America is what's going on actually in Canada. There have been major, major oil factories, battery factories being announced in Canada.
This is driven really by two things, one, the government of Canada and Ontarian, the province of Ontario have gone out aggressively all over the world. You've got to hardly get these guys. They're always traveling in Asia and in Europe, and trying to bring in foreign windle makers to come and locate in Canada. I don't know if you guys have seen this major announcement by Volvo to locate in Ontario. It's going to be the largest auto plant in North America.
he guy was telling me, he's building this, the distance from the furthest car in the parking lot of the factory is going to be 1.5 kilometers. This is going to be an enormous, enormous driver. And the reason why these companies are locating in Canada, it's for two reasons. One, it's part of the USMCA free market for auto products and auto components and autos for the USMCA market.
In terms of producing, Canada is out promoting the following three factors: One, we have battery metals in Canada, like no other country in the world. It's a huge risk, right, whether it's lithium, whether it's cobalt, whether it's nickel, whether it's graphite, it's all located in Canada. There is not another part or place in the world with the rules where rule of law applies that has all these battery metals right there. That's one. Two, you've got recycling projects like Telco is announced the battery recycling, cutting-edge battery recycling capabilities. Three, the government is actively bringing in these auto components.
And one of the major things that they're promoting to get these auto companies in is green steel in Canada. Our government is investing in incredible amounts in the three major steel producers to produce green steel. And all these auto companies are pushing for green steel content. And that's what we have here in Canada, driven by the government's investment. It's a major, major selling point, and we happen to be a beneficiary of that policy.
So when you talk about thin steels, auto making, there is no better opportunity than I've ever seen than what's going in Canada right now. And we're right in the center, right in the eye of this massive boom that's here for those reasons. We got the -- we have the raw materials in terms of battery metals.
We had the green steel production of the automakers like we have a brilliant and available labor force in Canada, and therefore, absolutely driving very, very strong work by us to try and continuously stay ahead of the curve and improve the qualities of our steel to make sure we can service these guys in addition to the battery recycling facility that we will build to handle the batteries and provide a whole holistic solution to automakers who want to give us end-of-life cars, we can generate more battery metals for battery makers who are also located in Canada and process of steel and return green steel back to these automakers.
Operator
The next question half comes from Anoop Prihar from Eight Capital. Please go ahead.
Anoop Prihar
Yes, good morning. The cost per ton were up during the quarter, which you alluded to, the MD&A makes reference to the impact of coal. I'm wondering, are there any other components of the input costs that were significant contributors to that increase in the per ton costs during Q1?
Alan Kestenbaum
Yes. The major contributor is for coal, which was the absolute worst. And the reason for that is that the coal prices last year when the war came out, all the -- a lot of metallurgical cohorts being diverted into thermal coal, which never happens. The lowest grade of coal, the High-Vol B, actually traded at a premium low vol because low vol to be used for power production, high-Vol B can. So it was a crazy and same market.
Our long-term contract ended. And we were [indiscernible] in that market. Those since then prices are down by about 30% and the end that coal those coal purchases that were done about a year ago flowing to -- or it did flow through during Q1, and we're starting to see those gradually abate as we get through Q2 and beyond. So that was by far and away the worst.
The other big impact was natural gas. Natural gas went also crazy last year, but since then has dropped to near all-time lows right now. And so we're definitely seeing a huge benefit in lower natural gas prices and scrap prices were high. But as I mentioned earlier, we actually like high scrap prices. So I'm not going to complain about high scrap prices because it means steel prices are up as well. But in fact, scrap prices have dropped in April and May, and therefore, we're seeing some benefit from there, too. So those are the main drivers that you'll see in Q2 start to reduce our cost. And we expect as we get through the remainder of the year, that costs will continue to drop.
Anoop Prihar
So just a point of clarification then. Earlier on, you made a comment that you thought the per ton cost would be down about $2 sequentially in Q2. Are you basically assuming that the levels we're at now prevail for the balance of the quarter? Or are you being a little more optimistic in terms of what you're anticipating?
Alan Kestenbaum
Well, we're in Q2, and that's what you referenced and what I answered before was related to the Q2 costs. We do anticipate cost to continue to drop beyond Q2 as we get to the rest of the year. Undetermined at this point and clear how much, but we do expect to see cost continue to drop. By the way, I should also say, it's not just the raw material. You asked me the major impact is and that is the major impact is.
The other part of this is our team lead by our Chief Operating Officer, Sujit Sanyal they have a continuous improvement program to reduce operational costs. And as far it work. Like $1, $2 at a ton, but it adds up, and we've got a massive program pushing on every single lever possible, whether it includes bringing in more full time workers and taking out some contractors. Some of it involves how we handle materials, some minor CapEx investments to increase automation, things like that.
So we have a continuous push to try and do that. But the major drivers for this particular year are raw materials, and we're seeing it in Q2, we expect continued improvements as we get through the rest of the year as well.
Anoop Prihar
Thank you.
Alan Kestenbaum
Welcome.
Operator
We have no further questions.
Alan Kestenbaum
All right. We're out of time folks. Yes, we're out of time folks and I think we have no further questions, right? I would like to pull that perfect timing. So thank you, everyone, for joining the call. I wish everyone a fantastic day, and we look forward to speak to you soon. And as always, we're always available to you guys. Anyone needs to contact us, we're always reachable. Take care. Bye, bye.
Operator
This concludes the conference call. Thank you all for your participation and enjoy the rest of your day. You may now disconnect your lines.
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Stelco Holdings Inc. (STZHF) Q1 2023 Earnings Call Transcript