Stelco Holdings Inc. Reports Second Quarter 2023 Results

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Stelco Holdings Inc. second quarter highlights include:

• Revenue of $841 million for the quarter, down 19% from Q2 2022 and up 22% from Q1 2023
• Operating income of $186 million for the quarter, down 58% from Q2 2022 and up 933% from Q1 2023, representing a 22% margin
• Adjusted EBITDA* of $215 million, down 54% from Q2 2022 and up 231% from Q1 2023, representing a 26% margin
• Adjusted Net Income* of $123 million and Adjusted Net Income* per share of $2.23, down 65% from Q2 2022 and up 1,130% from Q1 2023
• Shipping Volume* of 653 thousand tons, down 4% from Q2 2022 and 6% from Q1 2023
• Average Selling Price* per net ton of $1,217, down 16% from Q2 2022 and up 27% from Q1 2023
• Declared quarterly dividend of $0.42 per share payable on August 24, 2023

Stelco Holdings Inc. (“Stelco Holdings” or the “Company”), (TSX: STLC), a low cost, integrated and independent steelmaker with one of the newest and most technologically advanced integrated steelmaking facilities in North America, today announced financial results of the Company for the three and six months ended June 30, 2023. Stelco Holdings is the 100% owner of Stelco Inc. (“Stelco”), the operating company.

Selected Financial Information:

* See "Non-IFRS measures" for a description of certain Non-IFRS measures used in this Press Release and “Non-IFRS Measures Reconciliation” below.
NM - Not Meaningful

“I am pleased to report substantial improvement in our results quarter over quarter with significant growth in all our key financial metrics including $215 million in Adjusted EBITDA representing a 231% increase over the first quarter,” said Alan Kestenbaum, Executive Chairman and Chief Executive Officer. “The improvement over last quarter is a direct result of our ability to take advantage of our industry leading low-cost position and to effectively deploy our tactical flexibility business model, and our 26% Adjusted EBITDA margin in the quarter again leads the North American industry.”

“During the second quarter we experienced relief from certain of the inflationary pressures that have impacted our costs over the last several quarters and benefited from a more normalized market with stabilized price levels and lead times,” continued Kestenbaum. “In the coming months I am optimistic that we will realize continued cost reduction as we take advantage of opportunities in the market and look forward to furthering our commitment to our investors by deploying our capital in a manner that benefits our shareholders.”

“The $123 million in Adjusted Net Income for the second quarter was a substantial improvement from the $10 million we generated in the first quarter,” said Paul Scherzer, Chief Financial Officer. “Our financial performance allowed the business to generate cash from operations and we once again ended the period with total liquidity in excess of $1 billion, including $784 million of cash. By continuing to drive our revenue through to the bottom line, we have positioned our business to be able to capitalize on favourable market conditions and continue to allocate capital in the best interests of our shareholders. Looking forward, we anticipate our Shipping Volume for Q3 will be approximately 675,000 net tons.”

“Based on these strong results, we have declared a cash dividend of $0.42 per share for this quarter bringing the total to $1.9 billion in capital that has been returned to our valued investors over the past five and a half years,” continued Scherzer. “We are extremely proud of this track record as it represents a return of more than eight times the equity capital raised from our IPO in 2017.”

Second Quarter 2023 Financial Review

Compared to Q2 2022

Q2 2023 revenue decreased $196 million, or 19%, from $1,037 million in Q2 2022, primarily due to a 16% decrease in Average Selling Price per net ton and a 4% decrease in Shipping Volume. The Average Selling Price per net ton of our steel products decreased from $1,453 per nt in Q2 2022 to $1,217 per nt in Q2 2023. Our Shipping Volume decreased 24 thousand nt to 653 thousand nt from 677 thousand nt in Q2 2022. Also impacting revenue were non-steel sales which decreased to $46 million in Q2 2023, from $53 million in Q2 2022.

The Company realized operating income of $186 million for the quarter, compared to $440 million in Q2 2022, a decrease of $254 million consisting of a decline in revenue of $196 million and an increase in cost of goods sold of $58 million.

Finance costs increased by $23 million, from $8 million in Q2 2022 to $31 million in Q2 2023, due to the following: $11 million connected to the period-over-period impact of foreign exchange translation on U.S. dollar denominated working capital, $5 million higher accretion expense related to lease and other related obligations, $5 million remeasurement charge related to a lease related obligation, and a $5 million increase in interest on loans and borrowings, partly offset by $4 million lower accretion expense associated with our employee benefit commitment obligation.

The Company realized net income of $117 million for the quarter, compared to $554 million in the second quarter of 2022, a change of $437 million primarily due to the following: $260 million gain on sale of land buildings in Q2 2022, $254 million decrease in operating income, $23 million higher finance costs, and a $1 million increase in other costs, partly offset by $67 million decrease in current tax expense, $21 million change in finance income and other losses, and a $13 million decrease in deferred taxes. Adjusted Net Income totaled $123 million in Q2 2023, a change of $233 million from $356 million in Q2 2022.

Adjusted EBITDA in Q2 2023 totaled $215 million, a decrease of $249 million from $464 million in Q2 2022, which mostly reflects a decrease in Average Selling Price per net ton, the impact of lower Shipping Volume, increased cost of goods sold and lower non-steel sales gross margin realized in the period.

Compared to Q1 2023

Q2 2023 revenue increased $154 million, or 22%, from $687 million in Q1 2023, primarily due to a 27% increase in Average Selling Price per net ton, partly offset by a 6% decrease in Shipping Volume. The Average Selling Price per net ton of our steel products increased from $960 per nt in Q1 2023 to $1,217 per nt in Q2 2023. Our Shipping Volume decreased from 695 thousand nt in Q1 2023 to 653 thousand nt in Q2 2023. Non-steel sales increased by $26 million, from $20 million in Q1 2023 to $46 million during Q2 2023.

The Company realized operating income of $186 million in Q2 2023 compared to $18 million in Q1 2023, and Adjusted EBITDA of $215 million compared to $65 million during Q1 2023, which mostly reflects an increase in Average Selling Price per net ton in the period.

Summary of Net Tons Shipped by Product

(in thousands of nt)

(1) Other steel products include pig iron and non-prime steel sales.

Statement of Financial Position and Liquidity

On a consolidated basis, the Company ended the period with total liquidity in excess of $1 billion, comprised of cash of $784 million and $258 million of availability under its revolving credit facility as at June 30, 2023. The following table shows selected information regarding the consolidated balance sheet as at the noted dates:

Stelco Holdings and its subsidiaries ended Q2 2023 with current assets of $1,774 million, which exceeded current liabilities of $837 million by $937 million. Non-current assets include the derivative asset representing the fair value of Stelco's option to purchase a 25% ownership interest in the Minntac mine. Stelco Holdings' liabilities include $402 million of obligations to independent pension and OPEB trusts, which includes $297 million of employee benefit commitments and $105 million under a mortgage note payable associated with the June 2018 land purchase. Non-current liabilities of $816 million as at June 30, 2023 include $298 million of the aforementioned obligations to independent pension and OPEB trusts, as well as property and power generating equipment lease and other related liabilities. Stelco Holdings' consolidated equity totaled $1,465 million at June 30, 2023. Total equity is calculated after giving effect to $46 million of common share dividends paid and $106 million comprehensive income for the six months ended June 30, 2023.

Declaration of Quarterly Dividend

Stelco Holdings' Board of Directors approved the payment of a regular quarterly dividend of $0.42 per share which will be paid on August 24, 2023, to shareholders of record as of the close of business on August 18, 2023.

The regular quarterly dividend has been designated as an "eligible dividend" for purposes of the Income Tax Act (Canada).

Quarterly Results Conference Call

Stelco management will host a conference call to discuss its results on Thursday, August 10, 2023 at 9:00 a.m. ET. To access the call, please dial 1-833-470-1428 or 1-404-975-4839 and use access code 749727. The conference call will also be webcasted live on the Investor Relations section of Stelco’s web site at http://investors.stelco.com. A presentation that will accompany the conference call will also be available on the website prior to the conference call. Following the conclusion of the live call, a replay of the webcast will be available on the Investor Relations section of the Company's website for at least 90 days. A telephonic replay of the conference call will also be available from 12:00 p.m. ET on August 10, 2023 until 11:59 p.m. ET on August 24, 2023 by dialing 1-866-813-9403 or 1-226-828-7578 and using the access code 102817.

Consolidated Financial Statements and Management’s Discussion and Analysis

The Company’s consolidated financial statements for the three and six months ended June 30, 2023, and Management’s Discussion & Analysis thereon are available under the Company’s profile on SEDAR at www.sedar.com.

About Stelco

Stelco is a low cost, integrated and independent steelmaker with one of the newest and most technologically advanced integrated steelmaking facilities in North America. Stelco produces flat-rolled value-added steels, including premium-quality coated, cold-rolled and hot-rolled steel products, as well as pig iron and metallurgical coke. With first-rate gauge, crown, and shape control, as well as uniform through-coil mechanical properties, our steel products are supplied to customers in the construction, automotive, energy, appliance, and pipe and tube industries across Canada and the United States as well as to a variety of steel service centres, which are distributors of steel products. At Stelco, we understand the importance of our business reflecting the communities we serve and are committed to diversity and inclusion as a core part of our workplace culture, in part, through active participation in the BlackNorth Initiative.

Non-IFRS Measures

This press release refers to certain non-IFRS measures that are not recognized under International Financial Reporting Standards ("IFRS"), do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including "Adjusted Net Income", "Adjusted Net Income per common share", ''Adjusted EBITDA'', ''Adjusted EBITDA per nt'', ''Average Selling Price per nt'', and ''Shipping Volume'' to provide supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Our management uses these non-IFRS financial measures to facilitate operating performance comparisons from period-to-period, to prepare annual operating budgets and forecasts, and drive performance through our management compensation program. For a reconciliation of these non-IFRS measures, refer to the Company's "Non-IFRS Measures Reconciliation" section below. For a definition of these non-IFRS measures, refer to the Company’s MD&A for the three and six months ended June 30, 2023 available under the Company’s profile on SEDAR at www.sedar.com.

Forward-Looking Information

This release contains "forward-looking information" within the meaning of applicable securities laws. Forward-looking information may relate to our future outlook and anticipated events or results and may include information regarding our financial position, business strategy, growth strategy, acquisitions, opportunities, budgets, operations, financial results, taxes, dividend policy, Average Selling Prices, Shipping Volumes, Adjusted EBITDA margins, plans and objectives of our Company. Particularly, information regarding our expectations of future results, performance, achievements, prospects or opportunities is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "budget", "goal", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "does not anticipate", "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will", "will be taken", "occur" or "be achieved". In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances may be forward looking statements. Forward-looking statements are not historical facts but instead represent management's expectations, estimates and projections regarding future events or circumstances. The forward-looking statements contained herein are presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes.

Forward-looking information in this press release includes: statements regarding expected continued cost reductions; statements regarding taking advantage of opportunities in the market; statements regarding an effective deployment of our capital allocation strategy; expectations regarding expected Shipping Volumes in the third quarter; statements regarding our dividend policy; statements regarding capitalizing on favorable market conditions; and statements regarding capital deployment opportunities.

Undue reliance should not be placed on forward-looking information. The forward-looking information in this press release is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying opinions, estimates and assumptions will prove to be correct. Certain assumptions in respect of the utilization of and access to our production capacity; capital expenditures associated with accessing such production capacity; the ongoing impact of the conflict in eastern Europe and elsewhere on the international supply chain and economy overall; the impact of China's economic recovery following its reopening after the COVID-19 pandemic; the impact from a trend towards increased government spending; the impact of central bank policy response to global price inflation; the impact from inflationary cost pressures from energy prices and certain other high demand commodities; upgrades to our facilities and equipment; our research and development activities associated with advanced steel grades; impacts from higher interest rates; our ability to manage future costs relating to environmental compliance without such costs having a material adverse effect on our financial position; expectations that any increase in production capacity will not be affected by applicable environmental requirements, including air emissions requirements; our ability to source raw materials and other inputs at competitive rates; our ability to supply to new and existing customers and markets; our ability to effectively manage costs; our ability to attract and retain key personnel and skilled labour; our ability to obtain and maintain existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; changes in laws, rules, and regulations, including environmental and international trade regulations; our ability to effectively negotiate labour agreements and mitigate the impact of any labour disputes; and growth in steel markets and industry trends, as well as those set out in this press release, are material factors made in preparing the forward-looking information and management's expectations contained in this press release.

Key Assumptions Underlying our Q3 2023 Shipping Volume

The estimates with respect to our Shipping Volume during the third quarter of 2023 referenced in this press release are based on a number of assumptions in addition to the foregoing assumptions, including, but not limited to, the following material assumptions: the Company’s ability to continue to access the U.S. market without any adverse trade restrictions; no significant legal or regulatory developments, no adverse changes in economic conditions, or macro changes in the competitive environment affecting our business activities; upgrades and maintenance of existing facilities remaining on schedule and on budget and their anticipated effect on revenue and costs being fully realized; the Company’s ability to attract new customers and further develop and maintain existing customers; currency exchange and interest rates not having an adverse impact on steel demand; the impact of competition; and growth in steel markets and industry trends.

We believe that our performance and our ability to achieve these shipments during the third quarter of 2023 depend on a number of material factors including: (i) sustained global demand growth; (ii) continued steel production capacity curtailments in China; (iii) continued fair trade practices, particularly with respect to the North American market; (iv) higher interest rates and inflation not having an adverse impact on steel demand; and (v) stable supply and demand fundamentals in the rest of the world. These factors are also subject to a number of inherent risks, challenges and assumptions.

There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance on forward looking information, which speaks only as of the date made. The forward-looking information contained in this press release represents our expectations as of the date of this press release and are subject to change after such date. Stelco Holdings disclaims any intention or obligation or undertaking to update publicly or revise any forward-looking statements, whether written or oral, whether as a result of new information, future events or otherwise, except as required by law.

Selected Financial Information

The following includes financial information prepared by management in accordance with IFRS. This financial information does not contain all disclosures required by IFRS, and accordingly should be read in conjunction with Stelco Holdings Inc.’s Consolidated Financial Statements and MD&A for the three and six months ended June 30, 2023, which is available on the Company’s website and on SEDAR (www.sedar.com).

Non-IFRS Measures Reconciliation

The following table provides a reconciliation of net income to Adjusted Net Income for the periods indicated:

The following table provides a reconciliation of net income to Adjusted EBITDA for the periods indicated:

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