Mr. David Cheney reports
STELCO HOLDINGS INC. REPORTS SECOND QUARTER 2019 RESULTS
Stelco Holdings Inc. has released its financial results for the three months ended June 30, 2019. Stelco Holdings is the 100-per-cent owner of Stelco Inc. (Stelco), the operating company.
Stelco Holdings second quarter 2019 highlights include:
Q2 2019 revenue of $431-million;
Q2 2019 operating income of $3-million;
Q2 2019 adjusted EBITDA* (earnings before interest, taxes, depreciation and amortization) (a non-IFRS (international financial reporting standards) measure) of $32-million and adjusted EBITDA per net ton* of $59;
Q2 2019 steel shipping volumes* of 545,000 net tons;
Company declares a regular quarterly dividend of 10 cents per share payable on Aug. 30, 2019, to shareholders of record as of the close of business on Aug. 23, 2019;
Balance sheet continues to strengthen, with total liquidity of $515-million** at the end of Q2 2019 and current cash balance of $455-million** in August, 2019.
SELECTED FINANCIAL INFORMATION
(in millions, except volume, per-share and per-net-ton (nt) figures)
Q2 2019 Q2 2018 Q1 2019 YTD 2019 YTD 2018
Revenue ($) $ 431 $ 711 $ 517 $ 948 $1,193
Operating income ($) 3 162 44 47 220
Net income (loss) ($) 1 (11) 43 44 18
Adjusted net income ($)* 6 165 60 66 215
Net income (loss) per common share (diluted) ($) 0.01 (0.12) 0.48 0.50 0.20
Adjusted net income per common share (diluted) ($)* 0.07 1.86 0.68 0.74 2.42
Average selling price per nt ($)* 761 898 827 796 837
Shipping volume* (in thousands of nt) 545 748 612 1,157 1,361
Adjusted EBITDA ($)* 32 185 76 108 254
Adjusted EBITDA per nt ($)* 59 247 124 93 187
* During Q2 2019, with the repeal of tariffs on U.S. bound sales of steel, the company has amended the definitions of adjusted net income and adjusted EBTIDA to remove tariff related costs, and has restated the prior periods to reflect this change in presentation.
** The June 30, 2019, total liquidity of $515-million includes $277-million of cash and $238-million of capacity under Stelco's ABL (asset-backed loan) revolver. Current cash position of $455-million represents cash in the company's bank accounts at the close of business on Aug. 12, 2019 (U.S.-dollar balances translated to Canadian dollars at an exchange rate of 1.3234).
"I am very proud of our organization and our results this quarter. We faced a number of strong headwinds, including destocking, falling market prices and continued 232 tariffs, that impacted us throughout the quarter," said David Cheney, Stelco Holdings' chief executive officer. "Despite these headwinds, we lowered our cost per ton, we remained profitable and we generated positive cash flow. Further, as the quarter concluded, many of the previously mentioned headwinds ceased and were replaced with tailwinds: customer demand is strong, reflected in a robust order book and extended lead times; steel prices have rallied; 232 tariffs have been eliminated; and we are aggressively pursuing further cost reductions. Looking forward, starting with the third quarter, we expect volumes should be more closely aligned with our historical customer demand, and we are targeting a further annualized $25-million [to] $50-million of cost reductions in the second half of the year.
"In June, 2019, Stelco accomplished two important goals that it committed to since our IPO less than two years ago. First, we completed the construction of a state-of-the-art batch annealing facility and commenced shipments of fully processed, annealed, cold-rolled steel sheet during the period. The restart of a modernized and upgraded temper mill, along with installation of new annealing furnaces, will allow Stelco to add a full range of up to 200,000 net tons of fully processed cold-rolled steel to its product mix. With completion of this project, Stelco will now be able to increase service to markets that demand these high-quality products, such as the automotive, appliance and service centre markets, as well as the prepainted steel market for architectural applications. These products have historically realized higher prices than the full-hard cold-rolled products that we continue to offer and represent a continued expansion of product capabilities to enhance tactical flexibility and meet the needs of our customers. Second, we announced a strategic partnership with DTE Energy to advance our cogeneration power plant project at Lake Erie. We expect this project will require a relatively limited capital investment by Stelco and, upon completion, we expect to save at least $20-million annually through lower power costs.
"We also continue to return value to our shareholders as our board has approved the regular quarterly dividend of 10 cents per share. We ended the quarter with no financial debt, $277-million in cash and $515-million in total liquidity. Since the end of the quarter, our current cash has grown to $455-million. Over all, we are optimistic for the future as Stelco is extremely well positioned to deliver attractive organic and inorganic growth," continued Mr. Cheney.
"On the land, we executed a lease on a 125,000-square-foot building with a net present value in excess of $20-million, with one of our key customers. We continue to be actively engaged with potential tenants for additional unused buildings at attractive market rents. Activity in the greater Toronto and Hamilton area (GTHA) remains robust and we will continue to build shareholder value as we extract value from this important asset.
"In closing, we have continued to build our liquidity and cash in anticipation of exceptional emerging market opportunities to grow our business inorganically at attractive acquisition costs. We are excited to be in a uniquely strong position to execute on this aspect of our business plan and to deliver excellent returns to our shareholders," concluded Mr. Cheney.
Second quarter 2019 financial review
Compared with Q2 2018
Q2 2019 revenue decreased $280-million, or 39 per cent, from $711-million in Q2 2018, primarily due a 27-per-cent decrease in steel shipping volumes, 15-per-cent decrease in average steel selling prices and lower non-steel sales of $23-million. Shipping volumes decreased 203,000 net tons from 748,000 net tons in Q2 2018 to 545,000 net tons in Q2 2019. The average selling price of the company's steel products decreased from $898 per net ton in Q2 2018 to $761 per net ton in Q2 2019.
Operating income decreased by $159-million, or 98 per cent, from $162-million in Q2 2018, mainly due to lower revenue of $280-million, partly offset by lower cost of sales of $118-million and selling, general and administrative expenses of $3-million during Q2 2019. Cost of sales includes raw material and conversion costs, depreciation, freight and tariffs associated with inventory sold during the period.
Finance costs decreased by $167-million, or 98 per cent, from $170-million in Q2 2018, due to a $166-million gross remeasurement recovery on the company's employee benefit commitment and $5-million related to the period-over-period impact of foreign exchange translation on U.S.-dollar-denominated working capital, partly offset by $3-million increase in interest on loans and borrowings and $1-million higher accretion expense associated with the company's employee benefit commitment obligation.
During the second quarter of 2018, Stelco incurred a remeasurement charge of $157-million in connection with an amended other postemployment benefit financing agreement that reduced Stelco's exposure to future variable funding requirements and provided the independent employee life and health trusts established as part of Stelco Companies' Creditors Arrangement Act (CCAA) reorganization, with an increased fixed financing commitment over a 25-year term.
Net income for the quarter was $1-million, an improvement from a net loss of $11-million in the second quarter of 2018, which benefited from $167-million lower finance costs, $2-million gross increase in finance and other income, $2-million less restructuring costs, and lower selling, general and administrative expenses of $3-million, partly offset by lower gross profit of $162-million. Adjusted net income1 decreased $159-million year over year from $165-million in Q2 2018 to an adjusted net income of $6-million in Q2 2019.
Adjusted EBITDA in Q2 2019 totalled $32-million, a decrease of $153-million from adjusted EBITDA of $185-million in Q2 2018, which reflects the decrease in revenue from lower market average price of steel and shipping volumes as well as less non-steel sales, partly offset by lower cost of sales.
Compared with Q1 2019
Revenue decreased 17 per cent from $517-million in Q1 2019 to $431-million in Q2 2019, which reflects an 11-per-cent decrease in steel shipping volumes from 612,000 net tons in Q1 2019 to 545,000 net tons in Q2 2019 and an 8-per-cent decrease in average selling price from $827 per net ton in Q1 2019 to $761 per net ton in Q2 2019, partly offset by higher non-steel sales. Operating income decreased to $3-million in Q2 2019, down 93 per cent from Q1 2019 operating income of $44-million. Adjusted EBITDA decreased to $32-million, down 58 per cent from Q1 2019 adjusted EBITDA of $76-million, primarily due to lower average selling prices and shipping volumes realized, partially offset by lower cost of sales and higher non-steel sales.
SUMMARY OF NET TONS SHIPPED BY PRODUCT
(in thousands of net tons)
Q2 2019 Q2 2018 Q1 2019 YTD 2019 YTD 2018
Tons shipped by product
Hot rolled 375 590 517 892 1,081
Coated 67 93 66 133 177
Cold rolled 19 33 4 23 48
Other (1) 84 32 25 109 55
Total 545 748 612 1,157 1,361
Shipments by product (%)
Hot rolled 69% 79% 84% 77% 79%
Coated 12% 12% 11% 11% 13%
Cold rolled 4% 5% 1% 2% 4%
Other (1) 15% 4% 4% 10% 4%
Total 100% 100% 100% 100% 100%
(1) Includes other steel products: slabs, painted steel products and
non-prime steel inventory.
Statement of financial position and liquidity
On a consolidated basis, Stelco Holdings ended Q2 2019 with cash and cash equivalents of $277-million and $238-million of capacity under the ABL revolver, which remains completely undrawn.
Stelco Holdings and its subsidiaries ended Q2 2019 with current assets of $933-million, which exceeded current liabilities of $521-million by $412-million. Stelco Holdings' liabilities include $552-million of obligations to independent pension and OPEB trusts, including $439-million of employee benefit commitments and $113-million under a mortgage note payable associated with the June, 2018, land purchase. Long-term liabilities of $498-million as at June 30, 2019, include $470-million of obligations to independent pension and OPEB trusts. Stelco Holdings' consolidated equity totalled $494-million as at June 30, 2019.
Receivables purchase agreement (RPA)
During June, 2019, Stelco entered into a receivables purchase agreement (RPA) with a Schedule II bank (the purchaser), enabling Stelco, from time to time, to sell certain customers' trade receivables to the purchaser on a non-recourse, uncommitted revolving basis. Under the terms of the RPA, the aggregate maximum purchase limit under this arrangement is $108-million and requires that Stelco continue to administer and process in the collection of receivables and remit those collections to the purchaser. Stelco has derecognized the trade receivables sold under the RPA from the consolidated balance sheet as substantially all of the risks and rewards have been transferred to the purchaser.
Acquisition of land and buildings
On May 8, 2019, Stelco completed the acquisition of certain land parcels and buildings (collectively the remaining lands) adjacent to Stelco's Hamilton Works operation for total cash consideration of $21-million, which includes $500,000 in transaction costs. The acquisition of the remaining lands completes the company's repurchase of all Hamilton Works lands, which were previously sold to Legacy Lands LP prior to Stelco emergence from the Companies' Creditors Arrangement Act (CCAA) reorganization on June 30, 2017.
The company continues to receive the benefit of the environmental release in respect of the Hamilton Works lands that was granted by the Ministry of the Environment, Conservation and Parks on closing of the CCAA reorganization.
Declaration of quarterly dividend
Stelco Holding's board of directors approved the payment of a regular quarterly dividend of 10 cents per share, which will be paid on Aug. 30, 2019, to shareholders of record as of the close of business on Aug. 23, 2019.
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 tomorrow, Wednesday, Aug. 14, 2019, at 9 a.m. ET. To access the call, please dial 1-888-390-0605 or 1-416-764-8609 and reference Stelco. The conference call will also be webcast live on the investor relations section of Stelco's website. 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 p.m. ET on Aug. 14, 2019, until 11:59 p.m. ET on Aug. 28, 2019, by dialling 1-888-390-0541 or 1-416-764-8677 and using the PIN 299077 followed by the pound key.
Consolidated financial statements and management's discussion and analysis
The company's unaudited interim condensed consolidated financial statements for the period ended June 30, 2019, and the MD&A thereon are available under the company's profile on SEDAR.
Stelco Holdings is a low-cost, integrated and independent steelmaker with one of the newest and most technologically advanced integrated steelmaking facilities in North America. Stelco Holdings produces flat-rolled value-added steels, including premium-quality coated, cold-rolled and hot-rolled steel products. With first-rate gauge, crown and shape control, as well as reliable uniformity of mechanical properties, the company's steel products are supplied to customers in the construction, automotive and energy industries across Canada and the United States, as well as to a variety of steel services centres, which are regional distributers of steel products.
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars)
Three months ended June 30, Six months ended June 30,
2019 2018 2019 2018
Revenue from sale of goods $ 431 $ 711 $ 948 $ 1,193
Cost of goods sold 416 534 875 946
Gross profit 15 177 73 247
Selling, general and administrative expenses 12 15 26 27
Operating income 3 162 47 220
Other income (loss) and (expenses)
Finance costs (3) (170) (6) (186)
Finance and other income (loss) 2 - 5 (10)
Restructuring and other costs - (2) - (5)
Share of loss from joint ventures (1) (1) (2) (1)
Income (loss) before income taxes 1 (11) 44 18
Income tax expense - - - -
Net income (loss) 1 (11) 44 18
We seek Safe Harbor.
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