Stelco Holdings Inc. (OTCPK:STZHF) This autumn 2021 Earnings Convention Name February 24, 2022 9:00 AM ET
Firm Members
Trevor Harris – Investor Relations
Alan Kestenbaum – Government Chairman and Chief Government Officer
Paul Scherzer – Chief Monetary Officer
Convention Name Members
David Gagliano – BMO Capital Markets
David Ocampo – Cormark Securities
Alex Jackson – RBC Capital Markets
Michael Doumet – Scotiabank
Seth Rosenfeld – BNP Paribas
Operator
Good morning. Thanks for attending at present’s Stelco Holdings Fourth Quarter 2021 Earnings Name. My identify is Quida. I shall be your moderator for at present’s name. [Operator Instructions] I’d now wish to go the convention over to your host, Trevor Harris with Stelco. Trevor, please go forward.
Trevor Harris
Good morning, everybody and welcome to Stelco’s quarterly earnings convention name. Talking on the decision at present to debate our fourth quarter and full 12 months outcomes for 2021 shall be Alan Kestenbaum, our Government Chairman and Chief Government Officer and Paul Scherzer, our Chief Monetary Officer.
Yesterday, after the market closed, we issued a press launch overviewing Stelco’s monetary outcomes for the fourth quarter and full 12 months of 2021. This press launch together with the corporate’s monetary statements and administration’s dialogue and evaluation have been posted on SEDAR and on our Investor Relations web site at traders.stelco.com. We’ve supplied a hyperlink to the presentation referenced on at present’s name on our web site as nicely. I’d like to tell everybody that the feedback made on at present’s name could include forward-looking statements, which contain assumptions, which have inherent dangers and uncertainties. Precise outcomes could differ materially from the statements made at present, so don’t place undue reliance upon them. Stelco administration disclaims any obligation to replace forward-looking statements, besides as required by legislation.
With that in thoughts, I’d ask everybody on at present’s name to learn the authorized disclaimers on Web page 2 of the accompanying earnings presentation and in addition seek advice from the dangers and assumptions outlined in Stelco’s public disclosures, specifically, the 2021 Administration’s Dialogue and Evaluation sections referring to forward-looking data and dangers and uncertainties in addition to our filings with Securities Commissions in Canada. The appendix of our presentation and the non-IFRS efficiency measures and evaluation of non-IFRS measures of our MD&A present definitions and reconciliations of the non-IFRS measures that we use at present. Please additionally word that every one greenback figures referred to on at present’s name shall be in Canadian {dollars}, except in any other case famous.
Following at present’s ready remarks, Alan and Paul shall be taking questions. To maximise effectivity, we’d ask that every one individuals wish to ask a query, please restrict themselves to at least one query and one follow-up earlier than re-queuing.
With that, I’d now like to show the decision over to Alan.
Alan Kestenbaum
Thanks, Trevor and good morning everybody. I’m extraordinarily happy with our staff for main Stelco to our most profitable 12 months on report. Over the previous 4.5 years, we now have labored across the clock to scale back and management our prices whereas additionally investing strategically in our enterprise. At present, I’m happy to report that our tireless efforts to construct the enterprise with an {industry} main low price place, has delivered these outstanding outcomes. We’ve taken full benefit of the chance introduced by favorable market circumstances all through nearly all of 2021 and proceed to allocate our capital in the way in which to profit our shareholders with whom we’re straight and uniquely aligned. Because of our continued success, we now have continued to return capital to our fellow shareholders, together with $562 million through share repurchases simply within the final 6 months, bringing our whole capital return to shareholders to virtually $1 billion since our IPO in 2017.
Relative to our market cap, we now have returned by far, the biggest quantity of capital to our shareholders of any reporting steelmaker or downstream metal firm in North America and greater than 4x the quantity raised in our IPO. We’re very happy with this return of capital report. We ended the 2021 calendar 12 months with over $2 billion of adjusted EBITDA, leading to an {industry} main adjusted EBITDA margin of fifty% and a money stability of $955 million. This achievement goes past profiting from the distinctive value ranges we noticed by a lot of the 12 months and speaks on to our capability to make use of our mannequin of tactical flexibility and make the most of our low-cost construction to drive income by to the underside line.
So far, for the second consecutive quarter, we have been capable of generate adjusted EBITDA of greater than $1,000 per ton. Moreover, we proceed to transform virtually 80% of our EBITDA into web earnings within the fourth quarter and we transformed 83% of our EBITDA into web earnings total of 2021. Nonetheless, like the complete {industry}, we now have seen our prices creep up because of inflationary pressures. In consequence, for 2022, we’re dedicated to decreasing our prices and attacking the influence of those inflationary pressures. First, we are going to full the ultimate phases of our $700 million strategic capital plan that commenced in 2018 with the completion of our Lake Erie Works coke battery, rehabilitation improve and the commissioning of our new 65-megawatt electrical energy cogeneration facility. Moreover, we now have recognized further important price financial savings of roughly $75 million, which is able to come from operational modifications and different initiatives that don’t require capital expenditures.
Per our philosophy of low to no debt, I wish to remind everybody that every one of those investments and big return of capital have been made whereas maintaining our dedication to a robust stability sheet and using our free money circulation and with out incurring any restrictive long-term debt or fairness issuances. In 2022, we count on to see downward strain on margins because of decrease metal pricing, softer demand and the beforehand talked about inflationary pressures. Our key considerations relate to the shortage of visibility and in addition uncertainty evidenced by the latest important shortening of lead occasions industry-wide and the falling benchmark CRU hot-rolled coil value index.
Till the auto sector begins to once more produce to its capability, we anticipate continued weak visibility of the supply-demand stability within the flat-rolled metal {industry}. These latest poor dynamics of the metal market will solely deepen our resolve and make us extra relentless in managing our prices. Our staff has confirmed that they’re able to responding and adapting to altering market circumstances and deploying the total energy of our tactical flexibility technique, deepening our core aggressive benefit and attaining our aim of remaining worthwhile by each level of the market cycle.
Furthermore, it underscores the significance of our rules of avoiding friction creating exterior forces such because the influence of restrictive debt and endless legacy prices. As we chart our course by the subsequent 12 months, a 12 months which has began with oversupply and weak demand, we are going to in fact stay dedicated to our core rules by maintaining our stability sheet sturdy. By pursuing alternatives to enhance our {industry} main price place and by deploying our capital in a way that affords as a lot upside as attainable for our traders contemplating present market circumstances.
With that, I’d ask Paul to offer some further feedback relating to our monetary efficiency.
Paul Scherzer
Thanks, Alan and good morning everybody. Whereas the third quarter of 2021 was the excessive level of what was a report 12 months for our enterprise, the fourth quarter, though sturdy on a relative historic foundation was impacted by declining market circumstances beginning in November, which accelerated all through the fourth quarter and continued by to at present. Nonetheless, trying again on 2021, we exceeded $4 billion in income for the 12 months and generated adjusted EBITDA of greater than $2 billion.
As Alan talked about in his remarks, the 50% adjusted EBITDA margin we achieved over the total 12 months of 2021, was the best margin of any of our reporting friends in North America. Any such continued success is testomony to each worker’s deal with controlling our prices and maximizing our productiveness. Regardless of the decreased shipments that we famous in our steering issued in early January, we did profit from a modest improve in promoting costs quarter-over-quarter and generated virtually $1.2 billion in income within the fourth quarter. Our delivery quantity for the total 12 months of just below 2.7 million tons is the best quantity we now have seen since buying the enterprise in 2017 and is a transparent demonstration of the worth we’re extracting from the improve of our sensible blast furnace and different strategic capital investments.
Trying ahead to the primary quarter, we proceed to imagine that the weaker demand circumstances being skilled presently in addition to elevated COVID-19-related disruptions with respect to labor pressure availability, which has impacted this quarter’s manufacturing, logistics and buyer demand, will end in shipments which are even decrease than these of the fourth quarter. An extra problem we face is the latest decline in pricing. For the reason that begin of the fourth quarter, we now have seen hot-rolled pricing fall by roughly USD 900 from historic highs achieved final 12 months. Nonetheless, we’re assured in our strategic method and in our capability to maintain our prices low and compete at each level out there cycle. Our enterprise is structurally sound, and we’re ready to answer no matter challenges the market brings.
Our investments so far and additional price reductions that we anticipate from our coke battery rehabilitation and improve and our electrical energy cogeneration facility will definitely help in reaching that aim. Along with the virtually $1 billion we now have returned to shareholders since 2017, which incorporates the $164 million deployed for share buyback by the just lately closed substantial issuer bid, we now have additionally strategically invested $700 million into our enterprise with out incurring any restrictive long-term debt. On the finish of 2021, we proceed to take care of an undrawn revolving credit score facility with $240 million of availability and we closed the 12 months with $955 million in money.
Persevering with that stellar monitor report of capital returns, our Board has approved a continuation of our $0.30 per share quarterly dividend and approved additional share repurchases through a newly filed regular course issuer bid for as much as an extra 4.4 million shares, representing 6% of the entire shares excellent presently. We are going to repurchase these shares opportunistically over the subsequent 12 months if and after we see the share value commerce at a degree that we predict is advantageous for the corporate to execute on.
We’re actually happy with our total outcomes for 2021. Whereas we acknowledge we benefited significantly from a strong market and distinctive pricing, our capability to transform that chance EBITDA after which to the underside line validate our dedication to the basics and kind the spine of our enterprise. Going ahead, we is not going to deviate from these fundamentals. As a administration staff, we stay very intently aligned with the curiosity of our traders, and that alignment will serve our enterprise nicely as we navigate no matter challenges we face within the upcoming 12 months.
Thanks all for taking the time to affix our name.
Trevor Harris
Thanks, Alan and Paul. That concludes our ready remarks for at present. And I’d now like to show the decision again over to the operator for Q&A. Operator?
Query-and-Reply Session
Operator
Actually. [Operator Instructions] The primary query is from David Gagliano with BMO Capital Markets. You could proceed.
David Gagliano
Hello. Nice, thanks for taking my questions. So I respect the ready remarks however they went fairly rapidly. So I apologize if I missed a few of these issues that have been lined. However simply to start with, on the near-term outlook commentary, I didn’t fairly catch. I do know you stated down quarter-over-quarter in shipments. What are you seeing out of your prospects and when it comes to nature of those continued weak point into the primary quarter one volumes? Is it destocking or is it finish market demand being weak? After which once more – that is my first query. After which when you can speak somewhat bit about, clearly, spot value is down $900 a ton. What does that translate to a realized value decline within the first quarter for you given lags are in every single place and factoring in that it’s principally two-thirds of the way in which by the quarter. So I’m assuming you already know what the value is for the tip of this quarter? That’s my first query.
Alan Kestenbaum
Certain. With respect to the tip markets, we will go one by one. However as everybody is aware of, the auto sector stays extraordinarily weak. So when it comes to – due to the chip scarcity and different forms of points there, there was the latest border points. And in order that pushes up the complete provide chain. It goes all through the Tier 1s, the service facilities, and so these corporations which have been within the midst of destocking now for a number of months proceed to destock with no sign of ending. OEM orders that we now have, once more, similar factor. As they reduce manufacturing, these orders get pushed again. So that you’re seeing a really important chunk of the demand facet of issues be impacted by the auto {industry}.
And the identical with the development {industry}, there are quite a few development websites which are down due to employee absences because of COVID, that may change quickly. Rates of interest are going up. I believe persons are getting somewhat bit leery about holding an excessive amount of stock, anticipating rate of interest will increase, which has a direct influence at all times on the actual property market. So we’re seeing that. The oil market and drilling somewhat little bit of sign gentle over there, however not a lot, and has additionally been gradual, and I believe there’s additionally a big quantity of stock within the pipeline. By means of instance, my son is a pipe distributor. And he’s sitting on stock and his suppliers are sitting on stock of many, many months. So what we’re seeing here’s a dramatic destocking and only a wait and see from the shoppers. And in addition, frankly, quite a lot of panic from metal mills, together with us to a point, I believe when you return a couple of months in the past on the time I alerted the market to what was taking place, at the moment, CRU is quoted at $1,490 at present, it’s a bit over $1,000. And at the moment, individuals have been saying, no, it didn’t – it’s probably not falling that a lot. Effectively, it did. It fell by over 35%. The CRU is on the market proper now. At the moment, CRU was most likely 20% over the actual market and that has not modified. It doesn’t truly mirror the actual market that’s happening proper now. So, there’s quite a lot of oversupply, overcapacity. The previous couple of days, we’ve seen somewhat little bit of retrenchment there, however it doesn’t actually transfer the needle. And so we’re enjoying it actually cautious. You requested about value realizations. Frankly, we’re not bought out for the quarter but. So I can’t even offer you a great steering on value utilizations as a result of like each mill, our lead occasions, we nonetheless have loads of availability for March. So to provide you some type of an actual kind of view on the place costs are going to be, we simply don’t have that visibility simply but.
David Gagliano
Okay. That’s useful. Thanks. After which on the capital return, the commentary there, clearly, issues have modified fairly a bit. The corporate did generate, I believe, what, $570 million of free money circulation simply within the fourth quarter alone, that’s 23% of the fairness market cap, I believe. So nonetheless fairly a bit of money. So are you able to speak by somewhat bit extra about your present pondering on how you intend to deploy the capital within the near-term, the money within the near-term when you do plan to deploy it? And when you may additionally touch upon the stock monetization which I imagine is coming due in 4 days or 5 days, it’s a $400 million quantity. What’s the plan there? Thanks.
Alan Kestenbaum
So a few issues. Simply so with respect to capital return, I imply, we’ve made two bulletins at present that must be reflective of our capital return insurance policies, that are to proceed the dividend. And in addition, we introduced the NCIB, which is a continuation of share buybacks. In order that’s attentive to the capital deployment query. And when it comes to the stock monetization settlement that shall be – that can proceed, it’s a really, excellent association for us and that can proceed.
David Gagliano
Okay, thanks.
Alan Kestenbaum
You’re welcome.
Operator
Thanks. The subsequent query is from David Ocampo with Cormark Securities. You could proceed.
David Ocampo
Thanks. Good morning, everybody.
Alan Kestenbaum
Good morning.
David Ocampo
After we check out your price per ton for the stability of the 12 months and even into subsequent quarter, ought to we count on this to development decrease with scrap costs coming off their highs and all the interior initiatives that you just guys cited on the decision just like the coke battery have and your cogen facility or will inflationary pressures maintain a lid on any of these enhancements?
Alan Kestenbaum
Sure. I imply there’s quite a lot of cross currents. To begin with, we’re probably not seeing scrap costs drop all that a lot but. And with the latest tensions abroad, we’re unsure that scrap costs actually going to retreat, so not too assured about seeing any sort of dramatic change in scrap costs. While you take a look at among the different prices, whether or not it’s alloys, ferroalloys, like ferrosilicon and stuff like that. I imply that stuff has been going up in value. And we actually don’t see that altering, once more, turning in direction of occasions abroad simply this morning that probably may worsen. So not seeing a pure fuel value is one other one. We noticed somewhat little bit of aid a few months in the past. Once more, world occasions could push that increased as nicely. So we’re combating. There are particular issues we will’t management, the gadgets like I’ve simply talked about, the issues we will’t management. The issues that we do have in our management, I believe we’ve bought the very best COO within the enterprise. I imply this man is – simply is relentless, discovering each single greenback to take down. So we’re going to battle like hell to attempt to offset these inflationary pressures. However I don’t see the enter facet of issues altering very a lot. If something, with world occasions, it may probably worsen. However as I discussed, we do have – we now have recognized $75 million in price financial savings that don’t contain discount in price of uncooked supplies. And so we predict that – we predict we’re going to have the ability to go after these and get these because the 12 months attracts on. In order I discussed in my remarks, these inflationary pressures are undoubtedly there and can have an effect on our price construction within the near-term, and we have to maintain combating it. We face it like everyone within the {industry}. We’re not totally different. We purchased the identical stuff everybody else buys. So we are going to most likely have, I believe, proven and demonstrated to our margins that we’ve bought much more room earlier than it begins hurting us. And so I believe I’m fairly assured that we can do a great job offsetting a part of the inflationary pressures, however a part of it’s merely out of our management.
David Ocampo
That is sensible. After which as a follow-up, are you able to remind us how a lot the cogen and the coke batteries take out of your price construction? After which the time line on the $75 million when that flows by to the earnings assertion?
Alan Kestenbaum
So I believe you’ll be able to take a look at that coming in fairly evenly over the course of the 12 months, the $75 million. So far as the cogen, we imagine we’re going to avoid wasting about $18 million a 12 months. And that $18 million a 12 months is just not within the $75 million, in order that’s additive. And so far as the coke battery, it’s about $7 a ton. We count on to have the ability to save on that, additionally not within the $75 million.
David Ocampo
Good. I’ll hand the road over. Thanks a lot, guys.
Alan Kestenbaum
Thanks.
Operator
Thanks. The subsequent query is from Alex Jackson with RBC Capital Markets. You could proceed.
Alex Jackson
Sure. Thanks for taking my query, guys. I suppose simply when it comes to working prices, the influence of inflation, can you quantify a few of that perhaps on a quarter-over-quarter foundation from This autumn into Q1 right here?
Alan Kestenbaum
I can’t. I don’t know, Paul, do you could have any perception on that?
Paul Scherzer
Sure. Alex, I imply as you recognize, we sometimes don’t give steering, which – and I believe that’s beginning to get fairly near it. However as Alan stated, we’re undoubtedly seeing inflationary price pressures in Q1.
Alex Jackson
Okay, bought it. Thanks guys. That’s all for me.
Operator
Thanks. The subsequent query is from Michael Doumet with Scotiabank. You could proceed.
Michael Doumet
Hello, good morning guys. Simply a few follow-ups to among the questions. I suppose for the Q1 shipments, what I’m making an attempt to determine here’s what the primary driver can be for the shipments there to get somewhat bit extra near the This autumn shipments, that $625 or how far behind it may fall if my interpretation of the primary driver there being demand or different points? And simply any type of approach to consider how shipments may bounce again by the 12 months can be useful as nicely.
Alan Kestenbaum
So, after we put out steering a few months in the past, and we stated that we anticipated Q1 to be degree with This autumn that was underneath the idea – that was primarily based on manufacturing functionality. So, the manufacturing functionality is again to the place we’d like it to be. We did get to a few of these outages that we accelerated into Q1. So, these are going nicely. It’s all demand proper now. We’re in a state of affairs the place in an effort to ship on this quarter, we’d like orders within the subsequent week or two weeks. So, loads’s going to rely. We aren’t seeing the order circulation like we’d count on in an effort to get to This autumn cargo ranges. And that’s why, as Paul indicated, they’ll most likely be somewhat decrease than Q1. So far as the outlook, I’ve been saying this now for a few months. I imply what we lack proper now could be visibility, which signifies that we run our enterprise. We’ve a tactical flexibility mannequin. We reply immediately to modifications in demand, each up and down. And proper now, visibility is our greatest problem, and we’re combating a battle every single day to get what we will get. However we simply don’t – we don’t – we aren’t ready at this level to make any predictions. And so I believe that’s the place our tactical flexibility mannequin actually works as a result of we don’t sit and construct stock. We don’t sit in with our arms up and saying, however what will we do subsequent, we exit, we battle, we transfer rapidly. We get orders as a lot as we will. And I believe we now have bought the good thing about a low-cost place and the wholesome stability sheet to hold us by. However I imply I actually want I may offer you some higher view on if and when issues may flip round, we simply don’t see it.
Michael Doumet
That’s useful, Alan. And I suppose the second query, again to the price per ton, the price per ton and the way in which I calculated is about $100 extra in 2021 when in comparison with 2018 and 2019. And clearly, it’s comprehensible and also you commented on among the inflation and the place that’s coming from. But when I begin to consider the price per ton long run, what can be the primary drivers to lowering prices in direction of the historic common and presumably even under the historic common given a few of Stelco’s structural price enhancements.
Alan Kestenbaum
Sure. I imply, so a few issues. Within the quantity that you’ve cited, there’s a few issues happening. Does the inflationary pressures together with will increase of value of scrap, we by no means – we like will increase in value of scrap as a result of it raises the price for everyone else. So, we by no means take a look at that as a foul factor. So – however in that quantity is a few will increase in prices and among the inflationary pressures that you just cited. And – however the different factor that you just don’t get actually is combine. I believe when you look on a brighter word, we now have continued to enhance our proportion of value-added merchandise, downstream merchandise. Quite a lot of that has to do with our continued penetration into the auto {industry} and different industries. And in order you see combine shift, that’s additionally going to influence the price per ton. So, these are the components that go in it. And so, a few of it’s excellent news just like the scrap value going up, like our elevated penetration into downstream markets and a few of it’s unhealthy information just like the inflationary pressures. The issues that we will management on the issues the place we’re centered proper now when it comes to operational enhancements and once you take a look at the efficiencies of our blast furnaces, we’re tops within the {industry}. So, if scrap costs do go down, then you will note that influence after which the implementation of our price reductions. That’s the one greatest factor we will do. It’s promoting product, being fast on our ft to our prospects and having the ability to decrease our prices. And that’s the place we – we’re actually good at that. However you’re appropriate, our prices have gone up and quite a lot of it has to do with the inflationary pressures which are persevering with.
Michael Doumet
Thanks and useful feedback.
Operator
Thanks. The subsequent query is from Seth Rosenfeld with BNP Paribas. You could proceed.
Seth Rosenfeld
Good afternoon. A few questions, please, beginning out with pricing technique after which secondly, on pig iron. With regards to our gross sales and pricing technique, your remark strike me as being far more cautious we now have heard from lots of your friends by earnings season. With that in thoughts, and given the historical past of hedging, why has Stelco determined to not hedge within the present pricing atmosphere? I believe you commented earlier that even CRU benchmark is maybe 20% above the actual market. Why is not a great time to be hedging? I’ll begin there, please.
Alan Kestenbaum
Sure. I imply when you take a look at the technical – my background is buying and selling, and we went the route of hedging a couple of 12 months in the past, and hedging is a whole idiot’s sport, why, as a result of when you take a look at the CRU, and I don’t know why this occurs, however it does occur. The CRU is considerably increased than the ahead curve, which implies when you hedge after which it’s important to purchase again underneath your place primarily based on the CRU, I imply simply take it proper now, when you wished to hedge ahead, you’d be hedging it like $900 a ton. And if you wish to purchase CRU, it’s 10 no matter. And this has been constant in tray down, anybody that hedged bought completely screwed. It’s – I don’t know who’s enjoying round with it, however the CRU is the benchmark, however you undo the hedges. And we don’t really feel like giving up a few hundred bucks a ton as a result of a couple of merchants wish to mess around with this market.
Seth Rosenfeld
Okay. Understood. Simply to make clear on that time with regard to the disparity, are you able to touch upon the hole between present CRU and the place you see volumes being transacted within the spot market, please?
Alan Kestenbaum
Constantly, it’s been over 20%, and that has not modified. And these are historic gaps. I imply it was $50 a ton. However in fact, that’s when CRU is at $500, $600. When at $1,490, it was outrageous. It was 25% off. Now, it’s perhaps the opposite facet of 20%, however it’s important.
Seth Rosenfeld
Okay. Very fascinating. I suppose one final query with reference to product combine. Inventory is sort of nicely positioned proper now from a combination or optionality perspective, given the pig iron caster. I believe you latterly accomplished constructing, however I don’t imagine it’s been truly absolutely ramped up or utilized with the priority over pig iron provide out of Russia and Ukraine now. Below what value or demand atmosphere would you think about promoting pig fairly than metal? Clearly, spot HRC following an important deal, however with the spot HRC value north of $900, is pig enticing, or would you favor to stay with completed metal grade for now?
Alan Kestenbaum
Hear, the state of affairs simply broke this morning. It’s actually too early for us to see what the influence. I believe we now have seen over time these sanctions that come out, individuals count on every kind of issues. I’ll take the oil value, for example, the oil value shot up this morning. I don’t know, Russia has bought quite a lot of borders, and why wouldn’t they put extra oil into the market break with OPEC or no matter. Nobody is aware of what’s going to occur. It’s approach too early for us to make selections which are long run. We’ve prospects that we have to serve, and we now have to see. However I imply we simply spoke this morning. We’re simply not ready but to make selections like that simply on a win.
Seth Rosenfeld
Okay. Thanks very a lot.
Alan Kestenbaum
Thanks.
Operator
Thanks. There are not any questions ready right now. I wish to go the convention again to the administration staff for closing remarks.
Alan Kestenbaum
Go for it, Trevor.
Trevor Harris
I wish to thanks all for becoming a member of the decision at present. It’s very appreciative for you taking the time and everyone have an important day. Thanks.
Alan Kestenbaum
Thanks. Bye.
Operator
That concludes the Stelco Holdings fourth quarter 2021 earnings name. Thanks in your participation. You could now disconnect your traces.